Profit Margins for Restaurants Growing: Will this Increase Continue?

Steve O'ConnorBusiness Operations, Marketing, Restaurant, Restaurant Business, Small Business Marketing, Small Business TrendsLeave a Comment

Since 2008, profit margins in restaurants have grown consistently, but this increase is never guaranteed. With food and labor costs on the rise, how can you prevent your margins from eroding without losing your customer base?

Since 2008, profit margins in restaurants have grown consistently, but this increase is never guaranteed. Forbes cites a Sageworks study that shows the average industry profit margin growing from a mere 0.4% in 2008 to 5.1% in 2013. Sageworks now estimates that the net profit margin for the past 12 months tops off at 6.2%. But as food and gas prices continue to increase, as well as the ongoing minimum wage battle, the necessity for restaurants to spend more money is constantly escalating. The pressure to increase the prices of menu items makes it difficult for a restaurant to thrive in an ever-changing economy.

Keeping Customers With Rising Food and Labor Costs

Sageworks analyst Kevin Abbas noted in 2013, “The trend line for restaurant net profit margins is very clearly positive and growing over the last three or four years following the recession, but as we continue into 2014, the challenges of rising food costs, increased labor costs, and economic uncertainty all could cause that trend to either flatten or potentially reverse, depending on how successful restaurant managers are at dealing with those challenges.”

How can you combat rising food prices without losing your customer base? Bloomberg Businessweek noted some solutions on how to cope with rising food and labor costs:

  • Introduce entry prices. Increasing the prices of items on your menu could be unavoidable, but in order to keep your customers loyal and happy, consider introducing newer menu items with lower price points to combat the price increase of your regular menu items.
  • If the production location of your inventory is located far away from your restaurant’s location, consider switching suppliers to reduce transportation costs.
  • Introducing seasonal menu items not only decreases the amount of money that you spend on food that is out of season, but also keeps customers coming back to try the new meals you have on your menu.
  • Be creative with your menu. Have menu items that stand out from your competition.

Other great ideas on preserving margins from here

The Nation’s Restaurant News reported that customers are frequenting fast food and casual dining establishments less often, with fast food showing a 0.7% decrease in customer traffic and casual dining falling 2.7% in April of 2014. The same report states that even with this decrease in customer traffic, customers appear to be spending more. The increase in spend makes sense when looking at a 1.3% increase in customer traffic in fine dining establishments and same-store sales spiking 7.7%. Since customers are eating out less, they may want to get higher quality out of what they are spending. The majority of high-end restaurants tend to have a constantly changing menu to keep up with the seasons and what customers want at that time, and it is evidently working for them. Follow this trend to take your restaurant to the next level in order to keep customers coming back.

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