Thin Margins, Big Opportunities: How Restaurants Can Boost Profits with Smart Strategies

As a restaurant owner or manager, you may be experiencing the common complaint about “thin margins.” And it’s likely to be a valid concern. According to most industry reports, the average restaurant profit margin typically ranges from 3-5% for full-service restaurants to 6-9% for fast-casual spots. That doesn’t leave a lot of room for rising food and labor costs or other fixed expenses.

But it is also not that simple. Let’s consider each of the major expense categories as a percentage of overall restaurant expenses.

Food Costs

Myth: “My margins are already thin. When food costs rise it further cuts into my profits.”

Reality: In a table-service type of restaurant, the margins appear to be quite significant, particularly when it comes to beverages:

• A fountain drink is purchased for 25 cents and sold for $3.
• A bottle of Crown Royal or Titos is purchased for $30 and one cocktail might sell for $15 to $25. 

The key is not to confuse “markup” with “margin.” The markup is a calculation of the amount added to the cost price of goods to cover overhead and allow for profit.

The margin, or profit margin, is the amount that revenue exceeds costs and expenses. In other words, the bottom line. Many restaurants have healthy markups but are struggling when it comes to profit margins due to the perception of high food costs, high labor costs, and high fixed costs. Which brings us to the next two myths.

Labor Costs

Myth: “Restaurants don’t have high labor costs. Servers earn wages through tips, which are paid by the consumer.”

Reality: While individual hourly wages for restaurant workers may seem low, labor costs can still represent a significant percentage of a restaurant's overall expenses, around 30%.

This can be attributed to several factors:

• The restaurant industry is notorious for high turnover rates, around 75%! Every time an employee leaves a restaurant, the operator has to invest time, money, and resources in finding and training a new person.
• While servers are compensated through tips–yes, paid by the consumer–there are many other roles needed to run a restaurant that may not be included in the tip pool: kitchen staff, managers, host/hostess, events personnel, cleaning staff, accounting, and more.
• Labor costs don’t stop at actual wages. The employer still has to pay health insurance, payroll taxes, and worker’s compensation. And in counter service restaurants there is less opportunity for tips to supplement wages.
• When it comes to scheduling and staffing, it can be challenging to adequately staff for peak time periods while avoiding too many employees (and labor costs) during slower times.

Fixed Costs

Myth: “I can’t do anything about my fixed costs. They’re fixed.”

Reality: While fixed costs are generally true to their name, that doesn’t mean that there are no opportunities to negotiate or revisit certain costs. Some ways to manage these expenses:

• Regularly review lease terms, insurance policies, and other contracts to see if there is room for discounts or more attractive terms.
• Optimize your space to get more revenue per square foot.
• As with labor costs, work towards the most efficient staffing, avoiding too many employees during slower periods.

So, what is the solution to “thin margins”? Simply put, increase sales. Driving top line revenue can solve for all three of these concerns. And it can be as simple as increasing the visit frequency of even a small percentage of your guests. 

Customer retention is vital for a restaurant's success for several reasons. Notably, the repeat customer base tends to spend more over time. A study by Bain & Company, along with Harvard Business School, found that in the restaurant industry, a 5% increase in customer retention correlates with at least a 25% increase in profits, sometimes as high as 90%. This is because repeat customers are more likely to try more menu items and recommend your restaurant to others, leading to increased revenue without the significant costs associated with attracting new customers.

Even a small bump in revenue can lead to a dramatic boost in profit margins. For instance, imagine a restaurant with $1 million in annual revenue and $900,000 in total expenses. That leaves $100,000 in profit—a 10% margin. If revenue increases by just 15% to $1.15 million, and fixed costs remain relatively unchanged, nearly all of that extra $150,000 flows directly to profit. This small increase nearly doubles the profit margin from 10% to 17%. The power of small revenue gains is undeniable.

All that from increasing the visit frequency of a small percentage of your guests.

Today’s marketing automation technology is making it possible for restaurants to up their game when it comes to customer retention by automating personalized, targeted marketing. And restaurants are taking note.  59% of restaurants say improving digital customer engagement is a top strategic goal for tech investment, according to HT's 2024 Restaurant Technology Study.

That gets customers in the door. And when front line staff are empowered to create VIP experiences, it keeps guests returning for more. 

The math is clear: thin margins may be a challenge, but driving sales is the key to unlocking growth and profitability. The real question is, what are you doing today to increase your restaurant's sales and drive top line revenue tomorrow?

About the Author

Hamed Mazrouei is founder and CEO, Milagro. Hamed is a technology entrepreneur who began his journey in 2010 with Improving Restaurants—a turnkey restaurant marketing solution. This technology would lead to today’s Milagro, founded in 2019.  Hamed focuses on simplifying technologies for mid-market multi-unit companies in the restaurant industry. He starts with connectivity services as a solid foundation for solving more complex problems such as increasing top-line revenue. He stands at the forefront of technology innovation, serving as the CEO for the Vivant, Milagro, and Utiliko family of companies.   Outside of his core businesses, Hamed is an active investor and enjoys mountain biking. He lives in the Dallas/Ft. Worth Metroplex.