You don’t need an MBA to optimize restaurant profits and reduce costs. With these pro tips, anyone can grow restaurant revenues to scale their business.
How to Increase Restaurant Margins in 2021 and Beyond
The restaurant industry has some pretty tight margins. Anything you can do as a restaurant owner to increase those margins is a huge benefit—especially during difficult times.
And, let’s face it—it’s been an interesting year for hospitality businesses in the Philippines (as well as around the globe).
The shift in demand from dine-in to takeout forced restaurant owners to pivot their strategies virtually overnight, but many met this challenge head-on and have continued to thrive, even during lockdowns. In Manila, the typical dine-in restaurant now earns roughly 60-80% of its revenue from delivery and takeout service.
But offering delivery isn’t the only way to boost profit margins. There are lots of things you can do to increase profits and reduce expenses for your restaurant, without sacrificing the quality of your products or service.
Let’s take a look at seven ways to do just that.
1. Optimize your prime cost ratio
A restaurant’s profitability lies in its prime cost ratio. You can use this simple formula to compute yours:
[(Total Product Cost + Total Labor Cost) / Sales]*100 = Prime Cost Ratio (%)
Total product costs include fresh produce, packaging for takeout, and other food-related supplies. This is also known as your “cost of goods sold” (or COGS). Total labor costs, on the other hand, are the salaries of your employees, along with the taxes and benefits associated with maintaining your team.
Most big-name restaurants target a prime cost ratio of 55%-65% or lower, while independent restaurants will most probably have a ratio somewhat higher than this.
You want to run this calculation often to have an accurate, up-to-date picture of how your business is faring financially. If you only check your prime cost ratio every quarter, you won’t see the full picture, limiting your ability to identify and implement cost efficiencies quickly, like when you need to react to product price fluctuations.
You can use a restaurant management software to make it easier to track your prime cost ratio. These tools help you track sales trends, keep an eye on costs, and monitor inventory levels, all in one place. Using this data, it becomes much simpler to find ways to optimize your prime cost ratio.
2. Maximize your inventory
Responsible restaurant owners should be mindful of food waste. Up to 10% of the food a restaurant buys will go to waste, and in addition to having a huge impact on your profit margins, food waste is also a big environmental and social concern in the Philippines.
You can reduce the amount of losses your restaurant experiences due to food waste and increase overall profits by maximizing your inventory, menu planning, and ordering.
Here are some tips:
- Dedicate staff members to track inventory and identify inconsistencies.
- Maintain a schedule and follow the First In, First Out (FIFO) method to minimize food spoilage.
- Use surplus ingredients whenever possible to minimize food waste.
Most importantly, you need to keep track of your average daily inventory cost as part of your COGS:
Beginning Inventory + Purchased Inventory – Ending inventory = COGS
Knowing your COGS is crucial to determining your net profit:
Gross Profit (total sales – COGS) – Labor Cost – Total Operating Cost = Net Profit
A lower COGS means that fewer expenses will have to be deducted from your total sales, therefore increasing your net profit. If you look at this formula, you can see that there’s a direct connection between restaurant inventory management and your bottom line.
If you’re struggling with managing your inventory, you can use technology to automate the tracking of your inventory costs. This will help you identify ways to reduce losses caused by inventory discrepancies.
3. Manage your labor costs
Labor costs are one of the single biggest factors that impact your prime cost ratio. Labor costs can account for anywhere from 20-40% of a restaurant’s gross revenue, although this varies depending on the type of restaurant and menu selection:
- Fast food: 25%.
- Table service: 30%-40%.
- Fine dining: 40%+
With employee salaries taking up such a huge chunk of your restaurant expenses, anything you can do as a business owner to increase efficiency and reduce labor costs can go a long way towards boosting profit margins overall.
Here are some ways you can manage and monitor your team to save on restaurant labor costs:
1. Divide your staff into groups for greater clarity. You can lump employees into groups, such as front-of-house, kitchen, and management staff. You can also segregate by hourly salary paid. Both will help you see more clearly where the most resources are being allocated, so you can find ways to optimize.
2. Have systems in place that check employees’ schedule, timesheets, and attendance. Keep an eye on employees who clock in late, as well as those who clock in early, but start their shift late. Implementing stricter clock-in/clock-out procedures could save you hours of labor time each week.
3. Collect data and turn them into visual reports to pinpoint where your labor costs could improve. For example, if bartenders cost significantly more than servers, try replacing bartenders with two servers during off-peak hours.
Lastly, it’s always a good investment to train your staff well. Doing so will reduce employee turnover, and empower your staff to be more productive and feel more satisfied with their job. Keep in mind:
Happy and well-trained workers = higher productivity = lower labor costs!
4. Have good purchasing practices
Choosing the right suppliers can dramatically impact the profitability and reputation of your restaurant.
Here are a couple of best practices you can follow to optimize your restaurant purchasing process and reduce your overall COGS:
- Balance cost and quality to find the sweet spot—suppliers who can give good deals on products that are also of high-enough quality to meet your standards.
- Choose reliable suppliers that will ship your orders on time and without error. They should also maintain safety and health standards, as well as be available to resolve any issues when there’s an emergency.
- Prepare and check the contract, especially for large-scale operations. Put all quality standards, operational procedures, and prices on paper to avoid unexpected surprises later on.
- Have a stock replacement procedure included in the contract to clarify how and when the supplier needs to replenish your stocks.
- Leverage new technologies to streamline your food product tracking. You want a software that provides an overview of all your current products, automates processes, sets up a customer approval process, manages transfers and requisitions between outlets, and allows for fast communication with suppliers.
At the end of the day, it’s important that you remain adaptable when it comes to purchasing.
Many restaurants will want to stick to their go-to suppliers for quality continuity; however, your business might need to update its purchasing policies and suppliers multiple times to find a good fit in the new normal, so don’t be afraid to shop around for the best option.
5. Find new revenue streams
Identify new ways to drive revenue, thinking outside the box to bring value to your guests and promote your business in a creative way.
The goal here is to drive traffic (both foot traffic and online), increase customer spend in your locations, and add new revenue streams to your business.
Here are some options to consider:
- List on delivery platforms. Shifts in consumer trends and the explosion of delivery apps, like Grab and FoodPanda, have made the industry boom since last year, so listing on one can significantly increase your restaurant’s reach.
- Partner with other restaurants in a way that benefits you both. For example, if you’re a coffee roaster, you can team up with the neighborhood donut shop to offer a special “breakfast set” of coffee and donuts.
- Sell retail products, if your restaurant is known for something that can be bottled or packaged. You could even sell kits for customers to make their own meals and cocktails at home. Find a source to package them properly, then sell them in-house, in local retail stores, or online using Lazada, Shopee, or Shopify.
- Offer catering services, if you have the resources to cater for small events. With COVID-19 restrictions slowly easing, people are yearning to have the celebrations they missed out on in 2020, meaning the demand for catering services is likely to rise.
6. Use a reliable POS System
When purchasing a point-of-sale (POS) system for your restaurant, the biggest mistake you can make is buying a POS intended for retailers, instead of restaurants. While they have overlapping features, restaurants face distinct operational challenges that are completely different from retail businesses.
You need a POS system that can help your restaurant overcome these challenges. To find one that works for you, ask yourself the following questions:
- How much food do we prepare for each day?
- How much product do we order?
- How many guests will come through the doors?
The answers to these questions will help you figure out which features you need to look for in a restaurant POS system. But, in general, a good POS system will let you:
- Make changes remotely (e.g., push menu, pricing, and promotions out to all locations)
- Receive real-time reporting with insights into best-selling items at both a brand and outlet level
- Integrate all front and back-of-house systems
- Track customer spending trends
- Carry out data forecasting using accurate analytics and real-time data
- Facilitate tableside ordering with a simple user interface
Most importantly, a good restaurant POS system will track, record, and analyze data over long periods of time—this helps you see patterns month-on-month or even YOY, and make reliable forecasts for your business.
7. Promote your restaurant
Never stop promoting your restaurant!
While most businesses snip their marketing budgets when margins are tight, sales will only drop further if you don’t invest in marketing your hospitality business.
Here are a couple of ideas to adapt your marketing efforts to the current times:
- Host online cooking classes with your restaurant’s signature chef or dish.
- Switch up your social ads to cater to people stuck at home.
- Add donated meals to your menu (e.g., percentage of proceeds will go to frontliners).
It may seem counterintuitive to spend money on marketing in order to make money, but excellent marketing can have a serious impact on profits.
On average, restaurants earn a 200-500% return on investment (ROI) for their marketing campaigns, so ramping up your promotional efforts is one of the single best ways of increasing profits for your restaurant.
Final Thoughts—Using Technology to Improve Restaurant Margins
Keeping an eye on your inventory, labor costs, purchasing practices, sales, and revenue-generating opportunities sounds like a lot of work, but it’s essential to manage all of these aspects simultaneously if you want to ensure you’re maximizing profit margins at your restaurant.
Fortunately, you don’t have to comb through spreadsheets or count inventory by hand to do this. There are powerful systems, built just for F&B businesses, which can help you track and improve nearly every aspect of your restaurant, letting you easily find new ways to increase profits and reduce expenses.
Mosaic Solutions offers a restaurant POS system, inventory management system, purchasing system, and analytics dashboard all in a single platform. By using one or all of these systems together, restaurant owners can have a clear view of how and where to make improvements at every stage of their business, helping you continuously grow your margins, month after month.
Ready to start making your restaurant more profitable? Get in touch with us today to find out how our industry-leading tools can help.