Every year in America, about 4,000 new restaurants open their doors. Bright-eyed entrepreneurs have dreams of creating the next BIG thing in their town. The one that all the food critics rave about. The one that is packed every Friday and Saturday night. The one that will make them a millionaire! And for good reason…
Annual sales in the restaurant industry are $799 billion dollars. With a “B”. With more than 1 million restaurants nationwide, food is BIG BUSINESS. Most of the restaurants now operating are single-unit or independently owned with average sales of $874,000 for full-service restaurants and $777,000 at quick-service restaurants (QSR). With an average of a 14% profit margin for the industry, the restaurateur would earn an annual income of $122,360 for a full-service restaurant…in addition to the owner’s salary.
However, the dark side of the industry is that about 17% of restaurants will be forced to close their doors annually within their first year of business. (source) A different study by The Restaurant Brokers group indicates that up to 90% of independent establishments close during the first year, with a 70% closure rate within 3-5 years for the group that makes it past the first year.
So why is it that these establishments don’t make it very long? Simple, they run out of capital and don’t have a reliable way to bring in more money.
So, what are the best ways to make money in the restaurant industry?
There are four principal areas in which your restaurant can generate money.
1. Food sales
Food sales are the very core of what makes the restaurant industry so popular. Duh. Perfect for working families who don’t want to cook, that amazing and well-earned date night, or an excellent place to do business.
Food however, is a variable cost. Average food costs should be between 28-35% of all revenue generated from the restaurant. This leaves the average profit margin after expenses to be in the range of 3-10%.
Now, there are definitely some ways in which you can increase your profit margin in the food side of things. It all starts on knowing your numbers and which items are most profitable.
2. Beverage sales
Alcoholic beverages provide the largest area for profit potential. Depending on the type of alcohol, profit margins range up to 500%. According to a Bloomberg business study, a typical restaurant tries to make alcohol account 30% of top-line revenue. Some restaurants, such as Chicago’s Bin 36, do 50% of its sales in alcoholic beverages…three-quarters of which come from wine by the glass.
It is important to keep in mind that there are restrictions when selling alcohol that varies by state and by county. As an example, in Alabama, taxes on wine are $1.70 per gallon. This must be worked in to the overall profitability forecast with careful consideration.
3. Catering sales
Catering is a great additional stream in which you can add revenue to your restaurant. Catering provides a more fixed cost as compared to a traditional brick-and-mortar restaurant. Due to the planned and fixed labor costs, catering delivers margins on average of 10-15% higher than the traditional setting, sometimes reaching to almost 40-55%.
Here’s an additional aspect to keep in mind if you go this route. If you also own a license from the Alcohol Beverage Control or Commission in your area, you can use this to serve alcohol at private events, increasing your overall revenue of these events significantly. Most food trucks don’t have a liquor license, so this can give your company a very unique selling proposition to win the job.
Places where this type of business perform well are at weddings, birthdays, and so on because they must sign only one contract rather than one with a food provider and another with an alcohol provider – or even worse – do it themselves!
4. Packaged Sell-ables.
The last way is by doing packaged sell-ables. This includes different types of swag, such as t-shirts, or by selling a part of your product. An example of this would be bottling and selling your BBQ sauce if you’re a bar-be-que restaurant. This can lead to substantially higher profit margins while building your brand.
There are ways to wor:k on the profitability of the four areas previously discussed. Of course, it will depend on your location, concept, licenses, and what the market is receptive of.
The best part is that when done correctly, you can use your marketing to drive sales and produce additional revenue. As an example, use your social media to drive happy hour business during slower times during the week. Or use direct mail to drive interest in your highest profit food items.
Are you interested in driving additional revenue for your business? Do you have an excellent product, but not enough people know about it? Are you unsure if your marketing plan is working?
Don’t worry, there’s an easier way!
We are here to help. We can help you figure out your most profitable items and help you develop the marketing strategy that’s sure to turn you from wanna-be restauranteur to restaurant-mogul. You don’t have to be just another statistic.
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