Restaurant Profitability: Everything You Need to Know

Managing a restaurant requires asking the right questions in order to control its profitability as well as possible. Melba has the ultimate guide to improve the profitability of your establishment!

Published on 08/07/2021

Managing a restaurant requires asking the right questions in order to control its profitability as well as possible. The prosperity of an establishment depends on its profitability. In order to optimize the latter, it is necessary to work on all the components of your restaurant. Discover the motions that can be put in place without further delay.

1. Better Analyze Your Performance

If there is one thing to always keep in mind, its that the most expensive thing in planning are mistakes. To avoid embarking on optimizing profitability headlong, start by analyzing your performance .

Once you have succeeded in gaining a more in-depth understanding of your business, you will then be able to activate the right levers to optimize the profitability of your establishment.

Adjust Flows According to the Inventory

Inventory is a necessary for catering professionals. It must be done regularly in order to establish a reliable balance sheet of the business. It allows to:

Analyze the Large Quantities and Their Monthly Usage

We can analyze the profitability dish by dish = (price of the dish - cost of the dish) / price of the dish

We can also analyze profitability overall = (total sales - total costs) / total sales

  • the total sales correspond to an increase in the cash register software
  • the total costs correspond to inventory N + 1 = inventory N + purchases - consumption (+ losses)

Understand Where the Losses Are

In catering, losses and thefts and delivery anomalies are qualified as leaks. Traditionally, it's estimated that pouring represents about 2% of the turnover of an establishment . Not negligible. Thanks to the inventory, you will be able to know the products in stock as well as their DLC and therefore, not to lose products unnecessarily.

The inventory also allows you to differentiate between your purchases and sales so you can know more precisely where your losses are.

If the total of the difference between inventories (Inventory N + 1 - inventory N) is exactly equal to the difference between purchases and consumption (purchases - consumption), then there are no losses. This is particularly the case when there are no stocks (often the practice in collective catering = we consume everything we buy, the surplus is thrown away).

However, often there are losses that we cannot explain at the end of the month. You should therefore have a strong interest in checking them out gradually. Identify inventory movements that do not correspond to the receipt of raw materials or their consumption in production.

Prevent Too Much Cash Flow

If we don't have stock, we take a business risk. For example, not having enough material to produce what customers want to consume.

Conversely, if we have too much stock, we take the risk:

  • to have losses: perishable and discarded ingredients because DLC exceeded
  • to immobilize the cash flow: to block the money useful to the financing of other positions which participate if necessary in working capital *

* The WCR (working capital requirement) corresponds to what makes it possible to finance short-term debts: small equipment, recurring costs, cash flow accident, end-of-month salaries.

2. Understand Where the Margin Comes From

Pricing consists of choosing the best price for your products: that will cover all of your expenses, that will allow you to free up the margin and, of course, what your customers will be ready to pay. Here are three main principles to know to be successful in setting your prices:

Gross margin

In order to get an idea of ​​the profitability of your product, the gross margin is an essential indicator.

The gross margin takes into account your turnover, excluding tax, as well as your raw material costs.

It's calculated as follows:

Gross margin = (turnover VAT excluded - raw material costs) / turnover VAT excl. (TVE)

The lower the gross margin, the less money you earn from the product. A product with a high margin would thus be put more favored. For low margin products, it would be necessary to identify the reason.

To understand what the issues are with your product gross margins, ask yourself these questions:

  • Compare costs to each other: does it make sense? Should we substitute one ingredient for another to reduce the cost?
  • Compare prices to each other: does it make sense? Does a product deserve a higher price?

To analyze the material cost of a product in detail, go back to its recipe database to understand why the margins diverge.

The Margin on Labor Costs

One of the main expense items in your production is the share of labor. As with raw material costs, it's not the same for all of your products, and fluctuates depending on the amount of work required.

To have a better understanding of the structure of your prices, it's interesting to calculate for each product what labor costs you, and ultimately your margin on those labor costs.

To simplify, imagine a business with a manager who works 180 hours per month, and a baker who works 150 hours. This bakery, therefore, totals 330 hours of paid work per month.

Add up all salaries including employer contributions, and divide by the total amount of hours worked.

In our case, the total salaries charged is 6000 €.

This gives us an average hourly cost:

6000/330 = € 18.18

Take the time to manufacture your product and multiply it by the average hourly cost - you will get the labor cost!

Using a stopwatch, the manager calculated that a product requires 5 minutes of work to be manufactured:

5/60 x 18.18 = 0.41 €

We can therefore calculate the margin on labor costs:

Margin on labor costs = (TVE - Cost of labor) / TVE

The longer a product takes to be make, the higher its labor cost and the lower the margin on labor costs.

The Margin on Production Costs

In addition to raw material costs, the margin on production costs includes labor costs.

Here's how it's calculated:

Margin on production costs = (TVE - (Raw material costs + cost of labor) / TVE

You now know more about the indicators and the concept of underlying pricing: gross margin, cost price, margin on production costs and margin on labor costs.

There's still much more! Find out more on the operating margin, the net margin by product and the concept of breaking down expenses, visit this blog post devoted to the price strategy!

3. Improve Performance According to the Balance Sheet

An essential document of a company, the balance sheet accounts for the economic and financial situation of a company at any given moment. This balance sheet is divided into two parts:

  • Assets: i.e. everything you own (cash, stocks, fixed assets, etc.)
  • Liabilities: these are all the resources at your disposal that must be returned to third parties (financial debts, supplier debts, tax debts, etc.)

This document reports on the financial health of your establishment, but that's not all. You can use the balance sheet to improve your performance and profitability.

An Increased Profitability
Discover the different ratios and indicators to know
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2. How to Reduce the Costs of Your Restaurant?

1 - Buy Cheaper from Suppliers

List several suppliers and put them in competition

You definitely don't want to have just one supplier. The latter could inadvertently fail you, which could impact your budget and force you to find a last-minute solution.

Listing only one supplier also deprives you of the possibility of comparing prices and negotiating with your main supplier if you find that the difference between these prices and that of its competitors is too great. Be sure to regularly monitor price changes to ensure your dishes' margin levels .

Showcase Your Bargaining Power

Do you know the Bargaining Power?

Bargaining Power is a notion borrowed from the theory of 5 forces of Michaël E. Porter. It relates to the pressure that customers can put on their suppliers to obtain better quality products, better customer service, or lower prices.

The power of buyers allows them to put pressure on suppliers in order to reduce their margins and therefore inevitably increase theirs.

For Porter, there are 4 major factors to consider in the negotiation process:

  1. The number of buyers compared to suppliers: If the number of buyers is small compared to the number of suppliers, the power of the buyer will be stronger.
  2. Buyer's dependence on a particular supplier : If a buyer is able to have similar products / services from other suppliers, the buyer is much less dependent on a particular supplier. The power of the buyer will therefore be greater.
  3. Change costs: If there are hardly any alternative suppliers available, the pay out is high. The power of buyers will therefore be less.
  4. Upstream integration: If the buyer is able to integrate suppliers into their organization, they have greater negotiating power over existing suppliers.

What should be remembered is that as a buyer, you have significant negotiating power, which you will need to exercise in order to reduce your purchasing costs.

To do this, start by tracking your orders. You will have transparency on your past purchases and the means to negotiate with suppliers. Then promote the volume of business generated to your suppliers.

Make Group Purchases

Volume is a fundamental parameter in trading. Ordering large quantities is very often the guarantee of obtaining lower prices. Bulk purchasing of commodities is obviously an option to consider.

However, there are other options to consider. Certain purchasing platforms offer group orders for indirect purchases (telephony, cleaning products, small kitchen equipment, etc.), which often generates additional costs for professionals in the sector.

2 - Reduce Your Losses to Improve Your Profitability

Food waste is a key issue for restaurateurs. This is not only a problem for the environment, but also for restaurant managers who cut their profitability every month.

Paying attention to food waste is an effective way, for any catering professional, to rebalance their margin levels by reducing their losses.

Here are tips to put in place to reduce your food waste:

Order According to Your Needs

If there is one thing you don't want, it's ordering more than you need to. To do this, prepare your production plan for the coming week and place your orders accordingly. If you are rigorous in your orders, you will drastically reduce your losses.

Fewer Production Errors:

One of the reasons for losses in restaurants is production errors in the kitchen. To avoid this, be sure to give the kitchen clear instructions.

Better Calibrate Your Recipes

Above all, do not leave the quantities served to chance . All of this needs to be written down and validated somewhere and this information needs to be shared with the kitchen team.

Also use precise utensils to calibrate your production. If you don't make the effort to calibrate your recipes, your losses over a year will be considerable. For utensils, you can for example, make containers dedicated to recipes (bowls, yoghurt pots).

Reduce the Quantities Served

Start by distinguishing between portion sizes and favoring a higher margin on small portions. It's not mandatory to decrease the price linearly. Also analyze the type of customers in your restaurant. Try to identify the personas (who eats a lot, who eats little...) and analyze the leftovers on plates in order to modify your dishes.

3 - Increase the Prices of Your Dishes

1. What is Willingness to Pay in Catering?

Willingness to pay is the maximum price up to which a customer is willing to pay for a product or service. Different consumers have different willingness to pay for the same good or service. Understanding your customers' willingness to pay helps build your pricing and make it more profitable.

In many restaurants, there are often prices that one could consider varying too little. For example, all the entrees are almost the same price. If you want to capture every customer's willingness to pay, this is not a strategy you want to adopt. Vary the prices to make sure you can reach all your customers.

2. What is Price Elasticity in Restaurants?

Price elasticity corresponds to the moment when the change in the price of a product will cause a change in the desire to purchase it. In general, the desire to buy a product decreases when its price increases.

However there are products for which this rule does not apply and would even tend to be reversed. This phenomenon is called the Veblen Effect, named after economist and sociologist Thorstein Veblen. Indeed, there are products that when their prices increase, they also see an increase in the interest of consumers. Individuals tend to desire certain products in high value more.

It's easier to increase the price of products with a low sales volume: we are generally less sensitive to the price of Paris-Brest than to that of mayonnaise eggs.

The least sold products should become the most profitable. 

The best-selling products are leading products.

  • Their price is frequently compared to the competition
  • The price elasticity is high: if the price increases, the sales volume decreases sharply
  • If they do not contribute to the margin as much as others, they nevertheless have the merit of making it possible to absorb fixed costs

The least sold products are also products of choice - slow-movers:

  • Their price matters less as customers have a greater willingness to pay because of the peculiarities of the product
  • The price elasticity is low: a price increase of € 2 on a rum baba results in little variation in sales volume compared to a price increase of € 2 on a baguette
  • They contribute strongly to the margin and we can easily increase their price

Here are some measures you can put in place:

  • Increase the price of all under-sold products to achieve increasing profitability when the sales volume decreases. This is possible because customers are less sensitive to the prices of these products, especially if they contain noble ingredients AND the volume of business on which we take a risk is lower.
  • Stop producing certain products because they are not profitable, because little is sold (do not cover fixed costs) and there is no potential for price increases
  • Make very profitable products even more profitable! It is very common to forget this opportunity. Luxury brands increase their prices very easily!

3. Use the Art of Copywriting to Sell for More

Copywriting is a writing technique that aims to persuade clients to take action. If you want to sell your dishes more expensive and stand out, it's very important to take care of the writing of your menu.

Talk about the "How"

There's one mistake that should not be made: using a quantity of adjectives to season your menu. According to a First Monday study, it seems that the improper use of adjectives such as "delicious" can affect the effectiveness of your copywriting and have the opposite effect on your customers.

Try to replace these adjectives with a concrete explanation of the transformation of your products. For example, if you offer a "delicious boeuf bourguignon", change to "Boeuf bourguignon simmered for 14 hours".

You don't have to tell your customers that something is good. Instead, suggest it by highlighting your know-how and the characteristics of your dishes.

Write As If You Were Hungry

If you are not the chef of your establishment, I strongly recommend that you spend several hours in the kitchen before writing anything. Watch the chef cook, smell the smells, taste the preparations little by little, take notes.

You must be able to talk about the ingredients of each dish, to know their origins and their specificities. At that point, everything will become crystal clear for you. Think about what makes each dish unique. In short, put yourself in the shoes of a food critic whose mission would be to transcribe his taste experiences.

Why not discover our best tips to improve the profitability of your menu?

4. Improve Your Marketing Mix

Use the BCG Matrix

Have you heard of the BCG Matrix ? It was created in the late 1960s by the Boston Consulting Group. Did you know that this matrix can be applied to your restaurant menu?

Thanks to them, you will be able to define if the allocation of your resources is efficient and balanced.

The BCG Matrix defines 4 main criteria:

  • The Stars

These products are both the most popular and the most profitable. These are often house specials and are the menu items you want to sell most frequently due to their high margin.

  • Milking cows

These are the products whose popularity is above average, but not profitable. Overall, these items generate profits, but are not the stars because their margins are below average.

  • Dilemmas

The opposite of cows. These products are very profitable, but not very popular.

  • Dead Weights

Items that are neither popular nor profitable, compared to your other dishes. Serious thought should be given to removing these dishes from the menu.

An exercise to do to use the BCG Matrix:

  1. Calculate the average turnover
  2. Calculate the margin for each product as well as the average margin.
  3. Check if your product sales are above or below average (high or low popularity)
  4. Check if each product's margin is above or below the average margin (high or low profitability)
  5. Place menu items on the BCG matrix according to their rank

Once this work is done, sort it in your plan. If one of your dishes sells poorly, remove it from the menu or revise its price upwards.

Conversely, focus on selling your more expensive dishes. When you present your menu to your customers, highlight these products by emphasizing their quality and presenting them as your favorites.

Also work on the generosity of your offer! If you have high pricing points, this will have the effect of pulling consumption up.

A profitable business
Calculation of margins, comparison of dishes, identification of optimization levers...
Increase your profitability