# Profitability of a restaurant



## gd2000 (3 Jul 2007)

Apologies if this is in the wrong forum - it seemed the most appropriate to me!

I was interested to know if anyone was aware of any research (or had any knowledge) about the profitability of a restaurant.  I've read that the average net profit margin is around 5%, and from that I might be able to project (based on number of sittings / turnover) what the net profit is.  I'd prefer to rely on a more accurate source though!

So - does anyone know of any research, or is anyone willing to share the average level of profit for a restaurant?


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## ClubMan (3 Jul 2007)

maybe?


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## gd2000 (3 Jul 2007)

Tried google (that's where I got the 5% figure from) -  but it's not quite coming back with what I'm looking for...

I'm more interested in understanding the average profit amount and deviations around it...


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## HorseBox (3 Jul 2007)

Hi DG2000,

It depends on the type of restaurant. Fast food restaurants are the most profitable by far, upscale are the least profitable, unless you own more than one of them and can achieve certain economies of scale. That's a very general rule of thumb, there are exceptions.

A net margin of 5% would be typical of most midscale restaurants, some make less, some more - depending on location. But to get more than 5% will be difficult.

If a restaurant sells more drink - i.e. it goes afor a bistro/foodie-winebar type of operation, it can raise its profitability substantially. When pricing menu items, you should usually aim for a gross profit per item of between 60% and 70%, depending on competition levels. Drink prices will usually sustain gross profits of 70% or higher - they are much less elastic.

If you are thinking of opening a restaurant, expect labour costs to be at least 35%-40% of your turnover. You should be able to project your turnover on a euros per square foot basis, or an average spend per cover basis.

Are you thinking of opening up a place?


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## gd2000 (3 Jul 2007)

Cheers HorseBox - interesting post...

I'm not thinking of opening something now - but may be interested in it at some stage in the future.

My interest stems from being a frequent diner!  I booked into Saba and while on their website noticed that the owner is 32 and is the ex-co-owner of Diep Le Shaker.  That led me to wonder what absolute profit levels are plausible for various sectors of the market.

Do you have any insight into the difference in amount of profit between a fast-food restaurant and mid-upscale restaurants is?


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## HorseBox (3 Jul 2007)

Fast food restaurants are much more profitable. Obviously, they benefit from higher volumes, their trade levels are more predictable, and their cost base is substantially lower....

Anecdotally, in the trade it is believed that one of the most profitable restaurant businesses in the state is a particular company which owns three or four McDonalds franchises in North Dublin.

An average chipper could make a net profit of 10% (maybe higher in a good footfall location). That's very general, though. I'm sure some of those in bad locations make losses.

A fine dining restaurant has to absorb phenonenal costs: labour costs are massive, and wastage is very high due to the unpredictability of demand coupled with the complexity of the menu (a couple of quiet nights, and you have to feck out loads of expensive ingredients). They usually need large premises in top class locations (high rent) and competition is intense. If a standalone fine dining restaurant makes 5% NP, it is a well-run ship. Many restaurants make their money on drinks and wine, and scrape by on grub.

To put it in figures for you - a busy city-centre upscale restaurant (somewhere of the style and size of of Eden, or similar) could conceivabley turn over more than €1.5m in a busy year. A €75k net profit on that would be a good achievement.

Your average "chipper" in a good footfall location might turn over well over €500k or more, and could still make nearly the same €75k....

Top range fine dining is even more hit and miss. Most of them make losses....


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## starlite68 (3 Jul 2007)

so what would your net profit on a fast food restaurant be?


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## woods (3 Jul 2007)

Like all business a lot of it is going to be down to the skill of the operator. If it was a standard profit margin thenthere would not be good ones and bad ones.
A good operator can add a lot to the bottom line.
You must remember that a lot of your charges will be fixed. This includes finance, electricity, rates, gas advertising and to a large extent wages. They will remain the same if you are turning 10K or 15K so most of your profit is in the extra 5K.
I have no doubt that there are many restaurants that are just breaking even and some even loosing but the better run ones are making the money.
A well run middle of the road restaurant can make 10% and a well run chipper can make 25% to 30%


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## gd2000 (4 Jul 2007)

The figure of €75k is pretty much what I've been after.  While margins are important, absolute numbers are more so!

Just to confirm - is the €75k after the owner's salary (i.e. €75k to be either reinvested or taken from the business)?  If so - what level of salary could an owner expect?  I'd imagine it'd be higher than €75k for all the hours and risks invovled!!


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## HorseBox (4 Jul 2007)

woods said:


> Like all business a lot of it is going to be down to the skill of the operator. If it was a standard profit margin thenthere would not be good ones and bad ones.
> A good operator can add a lot to the bottom line.
> You must remember that a lot of your charges will be fixed. This includes finance, electricity, rates, gas advertising and to a large extent wages. They will remain the same if you are turning 10K or 15K so most of your profit is in the extra 5K.
> I have no doubt that there are many restaurants that are just breaking even and some even loosing but the better run ones are making the money.
> A well run middle of the road restaurant can make 10% and a well run chipper can make 25% to 30%


 

Show me a chippers' accounts on vision-net where the net margin is 30%, and I'm buying it! Anyone in the industry will tell you that 5% is the benchmark norm for most restaurants, and its a little higher for fast food. But 25-30%!? No way, I don't care how well it's run.

For gd2000, there is no rule for absolute or cash numbers - it depends on a load of things, location, size, chain or family run, competition etc....

That €75k figure is just an example, and you shouldn't infer that all chippers will make a profit like this.

As for the owner's salary - no chipper owner in their right mind would pay themselves a salary of 75k or anything like it. Madness if they are, no matter what the risk. In start-up phase, I'd be surprised if they paid themselves anything at all.....


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## gd2000 (4 Jul 2007)

I fully appreciate that there isn't a rule - there are loads of enterprises that fail and few that are incredibly successful!  I was just trying to get a sense of the possible profits in the area!

I really appreciate the insights so far...

Apologies for not being clearer - although I felt that a salary of €75k would not be unreasonable, I was thinking in terms of a salary from an ongoing (successful) venture!

Out of curiosity - if someone doesn't pay themselves a salary in start-up, how do they afford to pay the mortgage?  Not a facetious comment - I'm genuinely naive!

Finally, while I appreciate that it's really difficult to give an approximate level of profitability across an industry, would you be able to hazard a guess (e.g. 50k - 150k before owners salary)?  There'll clearly be a lot at the 0 (or negative) end and some at the 250k (quite rare I'd imagine), but I'm literally trying to get some ball-park numbers/understanding.

Thanks for all the comments to date!


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## ubiquitous (4 Jul 2007)

Most start-up entrepreneurs must rely on spouse's income and accumulated savings to pay mortgage and other expenses in the early years of a new business. 

Most restaurant ventures fail, and of the ones who ultimately succeed, almost all make significant losses in the early years of the business. 

It is utterly unrealistic for a beginner to expect to make €75k from a restaurant business within a medium-term timeframe, unless of course they are willing to shell out significant capital to buy an existing, prosperous business.

Running a restaurant is probably the most stressful, pressurised and financially unreliable business there is. Sad to say, it has more than its fair share of casualties, in both financial and personal terms.

If you're interested in starting up your own restaurant, you could do worse than work in another person's restaurant (and maybe manage it) for a while, so you can get some idea of what to expect.


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## woods (4 Jul 2007)

HorseBox said:


> Show me a chippers' accounts where the net margin is 30%, and I'm buying it! ....


I could but I want to keep it. Why should I let you buy it.


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## gd2000 (5 Jul 2007)

My only interest at the moment is to understand the business - I don't think I'll be setting up shop any time soon!

I have always been aware that the restaurant game is a difficult one, which is why I felt that €75k wouldn't reward most people for the risk and effort they put in.

I am in consultancy and frequently review business plans (although none in the services sector), so although I have some familiarity with how a business plan works, I have no idea about realistic assumptions for a restaurant.  As I said though - my original question is just one of curiosity!

I'm intrigued by woods though - net margins as high as 10-25% seem quite attractive! (although I still won't be making any moves towards opening a restaurant for at least a decade!).


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