Actionable strategies to maximise profit margins for small restaurants. Learn how to optimise operations, reduce costs, and boost revenue.
Introduction
Prices in the non-financial corporate sector have risen at an annualised rate of 6.1% since Q2 of 2020. (source: Bureau of Economic Analysis). If prices keep going up, how does a small restaurant maintain and grow profit margins? Is the only way out to cut costs?
We’ll explore some strategies to optimise your operations, reduce costs, and boost revenue. 🤓 If you’re the reading kind, I recommend the book Restaurant Success by the Numbers.
Today we’ll discuss:
- Understanding Profit Margins
- Optimising Operations
- Reducing Costs
- Boosting Revenue
- Common Challenges
1. Understanding Profit Margins
First let’s understand what profit margins are and why they matter.
Profit margins = % of revenue - costs of running your business
In the F&B industry, profit margins can be slim due to high operating costs. These include ingredients, labour, and overhead expenses. When you understand the components of profit margins, you can identify areas for improvement. And put in place strategies to build up profitability.
Types of Profit Margins
There are three main types of profit margins:
- gross profit margin,
- operating profit margin, and
- net profit margin.
You get gross profit margin by subtracting the cost of goods sold (COGS) from total revenue, and dividing the result by total revenue.
(Total revenue - COGS) / Total revenue
Operating profit margin takes into account operating expenses. While net profit margin includes all expenses, taxes, and interest.
Understanding these helps in analysing the financial health of your restaurant.
Importance of Profit Margins
Profit margins are a key indicator of a restaurant’s financial performance. Higher profit margins means you keep more money from each dollar of sales. You can reinvest this into the business for growth and improvement, or staff bonuses. Additionally, healthy profit margins provide a buffer against economic downturns. As well as unexpected expenses, ensuring the long-term sustainability of the business.
2. Optimising Operations
Efficient operations are the backbone of a profitable restaurant. For instance, streamlining processes and reducing waste.
Inventory Management
How to minimise waste and control costs? By implementing an inventory tracking system. You can do this on paper, use a spreadsheet, or invest in software. The important thing is that whatever tool you use should help you:
- track stock levels,
- identify slow-moving items, and
- preventing over-ordering.
Review these inventory reports once a week. Use them to make informed purchasing decisions and negotiate better deals with suppliers.
Staff Training
Ever had staff who don’t know how to upsell? Or end up destroying expensive equipment? This is why you need staff training.
Invest in proper training programmes. You could outsource it or conduct them yourself. The reward is your employees are:
- knowledgeable about menu items,
- proficient in using equipment, and
- adept at providing excellent customer service.
You may also want to consider cross-training staff to handle more than one role. For example, a front-of-house staff can learn how to do mise en place. And vice versa. You’ll have operational (and scheduling) flexibility, and reduce labour costs.
Technology Integration
Leverage technology that can streamline various aspects of restaurant operations. A good online ordering system, for instance, can do the following:
- automate order processing
- track sales data
- manage customer relationships
Systems that offer delivery and takeaway can also expand your customer base.
3. Reducing Costs
First thing to do - identify and address areas of excessive spending. We’ll discuss strategies like energy efficiency, supplier negotiations, and portion control.
Energy Efficiency
Take a walk around your restaurant and try to think of what is gobbling up your energy. Then consider the following:
- Invest in energy-efficient appliances (saves you ~20%!)
- Put in place regular maintenance schedules
- Optimise heating / cooling systems to lower utility bills
Additionally, train your staff to follow energy-saving practices. For example, turning off equipment when not in use. All these are “common sense” practices, but sometimes people need a reminder.
Supplier Negotiations
Building strong relationships with suppliers can result in better pricing and terms. Start by reviewing your supplier contracts. Then negotiate for bulk discounts or extended payment terms.
There’s no harm eploring alternative suppliers and comparing prices. New suppliers pop up all the time with better terms. This is how you can make sure you are getting the best deals on ingredients and supplies.
Also consider using seasonal ingredients. They are usually cheaper and you can create seasonal specials out of them.
Portion Control
Implementing portion control measures can cut food waste and control costs. Sometimes cooks get a little over-zealous and end up dishing too-large food portions. Standardise your portion sizes, using measuring tools. For example, a kitchen scale at every station. Fixed-size scoops and ladles. Measuring jugs. The list goes on.
But don’t just leave the equipment there and expect your staff to know what to do. Create a SOP document, put it in a folder that’s easy to find. Train your staff on proper portioning techniques. This way you’ll ensure consistency and reduce over-serving.
Also monitor portion sizes and adjust them based on customer feedback. You may want to be generous but turns out you’re over-feeding your guests, and that leads to wastage. Reducing food waste can save up to 10% on food costs.
4. Boosting Revenue
Other than “marketing”, what else do you think you could do to grow revenue? Clue: enhancing the customer experience, and expanding service offerings.
Marketing Strategies
Use social media platforms to create awareness and show what you offer. Here’s a guide to Instagram marketing for small restaurants.
Since Instagram and Facebook are both owned by Meta, it’s easier now to run ads than ever. Create advertising campaigns to attract new customers and keep existing ones.
See Maynuu’s guide to effective brand promotion tactics for small restaurants. We talk about how to leverage social media, optimise your website, use SEO and influencers. As well as loyalty programmes and community events.
Enhancing Customer Experience
Providing exceptional customer experience can lead to
- positive reviews,
- word-of-mouth referrals, and
- increased customer loyalty.
Focus on elements such as ambiance, service quality, and menu variety. Also consider collecting customer feedback. It’ll help identify areas for improvement that you can act on.
Expanding Service Offerings
Diversifying service offerings can attract a broader customer base and increase revenue. Some ideas:
- Introduce delivery and takeaway options
- Offer catering services
- Host special events
Do anything you can to create extra revenue streams. During Lunar New Year, my business partner and I baked our own pineapple tarts. We made them in the shapes of the year's zodiac animal and used only all-natural ingredients.
Consider leveraging technology to offer online ordering and reservations.
Offering online ordering can boost revenue by 30%
– Business Insider
5. Common Challenges
We’re no stranger to challenges that come with the industry. So let’s discuss and think of how we can address them.
High Operating Costs
This is one of our biggest challenges. Labour, ingredients, utilities, rental… these expenses all add up. A few things you can do are
- optimise staff schedules
- cross-train staff
- negotiate with suppliers
- reduce energy consumption
Staff Turnover
High staff turnover can disrupt operations and increase training costs. To mitigate this issue, restaurant owners should focus on:
- creating a positive work environment,
- offering competitive wages and benefits, and
- providing opportunities for career growth.
Also think about tweaking your hiring and onboarding processes. What I’ve found to be helpful is to document everything in black & white. When you make things clear, it helps to attract and keep quality employees.
Customer Retention
We go a lot deeper in our guide Proven Restaurant Customer Retention Strategies That Work, but in a nutshell:
- Make exceptional service a priority.
- Maintain consistent quality (document SOPs, train staff on etiquette, equipment use, etc).
- Engage with customers through loyalty programmes and personalised marketing.
- Collect and act on customer feedback to identify areas for improvement.
Do not wait to strike till the iron is hot; but make it hot by striking.
- William Butler Yeats
Conclusion
Maximising profit margins for small restaurants requires a multifaceted approach. While challenges may arise, we hope you’ll try out some of the strategies discussed in this guide. And that you’ll overcome obstacles to ensure long-term profitability.
For more insights to improve your restaurant’s performance, visit the Maynuu blog.
FAQs
What are the key components of profit margins?
The key components of profit margins include
- gross profit margin,
- operating profit margin, and
- net profit margin.
Gross profit margin is (Total revenue - COGS) / Total revenue. Operating profit margin takes into account operating expenses. Net profit margin includes all expenses, taxes, and interest.
How can I reduce costs in my restaurant?
To reduce costs in your restaurant, consider
- implementing energy-efficient practices
- negotiating better deals with suppliers
- standardising portion sizes
- reviewing expenses and identifying areas of excessive spending
What strategies can boost my restaurant’s revenue?
Effective strategies to boost your restaurant’s revenue include
- social media marketing
- enhancing the customer experience
- expanding service offerings such as delivery, takeaway, and catering services.
- leveraging technology for online ordering and reservations
How can I improve customer retention in my restaurant?
To improve customer retention, focus on
- delivering exceptional service
- maintaining consistent quality
- engaging with customers through loyalty programmes and personalised marketing
- collecting and acting on customer feedback
Are there any good resources on how to maximise restaurant profit margins?
Yes. Read the book Restaurant Success by the Numbers: A Money-Guy’s Guide to Opening the Next New Hot Spot.
Here is the table of contents:
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We use the term 'restaurant' throughout the article for consistency. However this guide can be generally applied to any type of food shop, including but not limited to: bakeries, bars, bistrots, boulangeries, butcheries, cafés, cantinas, caterers, coffeeshops, delis, diners, eateries, food trucks, grocers, patisseries, pubs, and more.
