Few types of businesses capture the imagination like restaurants. Iconic movie scenes are staged in diners. Elegant restaurants form a glamorous backdrop for marriage proposals. We associate restaurants with date nights, quiet cups of coffee, happy hours, and socializing.
But entrepreneurs who intend to open an eatery need a strong business plan. For all their popularity, restaurants have razor-thin profit margins. Some types of restaurants are far more profitable than others. Read on to learn more about the six most profitable types of restaurants in 2021.
What Makes a Successful Restaurant?
Industry consultants explain that running a restaurant as a profitable business is similar to other industries. Minimize the cost of goods sold, set prices high enough to cover overhead, and find a popular location to generate foot traffic.
It is hard to pinpoint the average revenue for a restaurant because the service models vary so greatly. The business model for a quick-service restaurant is so different from a fine dining establishment that it is difficult to make a valid comparison. Nonetheless, the average income of restaurants less than a year old is $112,000 a month.
When you subtract overhead expenses, the average profit margin for a restaurant is 2% to 6%. That narrow margin doesn't leave much room for error. But it could explain the failure rate of 60% for new restaurants within the first year.
As for restaurant owners, their earnings span a broad range, between $30,000 and $155,000 a year.
A Look at the Top Restaurants in 2020
Most of the top-grossing independent restaurants are in tourist-friendly cities. Thirty-four of the top 50 restaurants for 2020 are in Chicago, Las Vegas, New York, or Washington, D.C. The average check for these high gross profit eateries ranged from $19 to $194. Steakhouses are well-represented, comprising 23 of the top 50. Their customers paid a premium for the chance to enjoy a tender filet mignon. The average check of $100 for this group places these steakhouses in the fine dining category.
What Are the Most Profitable Restaurant Types?
If you're an entrepreneur reviewing the top restaurant list, you might think you should invest in a steakhouse in a busy city. Not necessarily. The restaurant industry includes other types of restaurants with lower investment costs and a respectable average profit margin. Following are the six most profitable restaurant types.
In the restaurant business, bars have the highest profit margins. The markup on alcoholic beverages is much higher than for food. The startup cost for a bar averages between $125,000 and $850,000. Bars generate a healthy bottom line, with average annual earnings estimated at $300,000.
The low cost of breakfast food ingredients increases the profit margin for diners. Breakfast dishes are easy to prepare and do not require a chef. The most profitable diners are open beyond breakfast hours. When that happens, customers appreciate it. A National Restaurant Association survey showed that 55% of consumers would order breakfast items more often if restaurants offered them all day.
3. Food Truck
It may surprise you to see that food trucks are on this list. They are profitable due to low overhead. Food trucks have minimal labor costs, limited menus, and no rent. In a recent survey of food truck vendors, 64% earned more than $100,000 per year. Of the top earners, 16% made over $200,000 per year.
Ghost kitchens, or delivery-only restaurants, thrived during the pandemic when brick-and-mortar restaurants were closed. In large cities with expensive real estate, more restaurants are taking this approach. Overhead is very low in this type of business because there is no restaurant to rent or servers to pay. With this business model, the restaurant offers limited menus, such as wings, pizza, or sandwiches. Delivery-only restaurants often partner with companies like DoorDash and Uber Eats for online orders and delivery.
Consumers love pizza because it is reasonably priced and children enjoy it. A pizzeria is a good choice for a restaurateur because ingredient costs are low. Pizzerias often have fewer menu items, which also keeps overhead costs down. Using mobile-friendly ordering increases order frequency and average check size.
6. Pasta Restaurant
Inexpensive ingredients make pasta restaurants profitable: The pasta itself is inexpensive and restaurants can charge as much as $30 for a specialty pasta dish. Pasta restaurants span a range of foodservice models, from fast-casual restaurants to full-service Italian restaurants.
How Do You Improve Restaurant Profit Margins?
With its slim profit margins, the restaurant business leaves little room for mistakes. Following are ways to make a restaurant more profitable.
Have a Well-Organized Accounting System
Without an organized accounting system, a restaurant manager cannot maintain accurate financial operating data. Tracking weekly operating data allows you to monitor income and expenses and identify problems early. Accounting software from Skynova lets you track expenses and sales tax, run reports, and more. Even if you work with an accountant or financial consultant, you need systems to provide them with accurate and current data.
Cut Food Costs
Unlike fixed costs like rent, you can reduce the cost of ingredients if your food costs are too high. Evaluate your recipes to see if less-expensive ingredients will be just as delicious.
Work with your food suppliers to find cheaper alternatives. Engage your staff in the cost-saving, as well. If your customers don't finish certain entrees, have your chef reduce portion sizes.
Put the Menu on a Diet
Review your menu periodically and assess which items to keep and which to retire. This process is known as menu engineering. Evaluate each menu item based on popularity and profitability. Remove items that are both unpopular and unprofitable. However, if your customers love a dish that has expensive ingredients, consider altering the recipe or increasing the price.
Encourage Workers to Upsell
If you've ever ordered in a fast-food restaurant and had the cashier ask if you'd like a larger drink for a little more, you've experienced upselling. In a full-service restaurant, train your servers to offer customers appetizers, desserts, and top-shelf liquors.
Mind Your Marketing
Potential customers research restaurants on social media, so be sure you have a presence on Instagram or Facebook. Post images of your restaurant, outdoor dining space, and entrees. If you have happy hour specials, discounts, or events, publicize these on social media. Encourage satisfied customers to leave reviews.
Allow customers to order food or make reservations online. Partner with a company like DoorDash or OpenTable if you don't have the infrastructure to do this in-house.
Serve Up Specials
Promoting specials helps restaurants sell excess inventory, test new recipes, or increase profits. Because specials are by definition limited-time offers, they create a sense of urgency in customers.
Happy hours also fit into this category. They help restaurants attract customers in the slow period between lunch and dinner.
Reward Your Regulars
Show appreciation to your regular customers with a rewards program. This can take many forms but usually involves rewards or points for money spent in the restaurant. Points lead to free products or cash prizes. Rewards programs encourage your customers to come in more frequently.
Track Your Transactions With Skynova
The restaurant business can be complex but Skynova has all the tools a small business needs to run efficiently and professionally. Skynova accounting modules work seamlessly to track documents, run reports, and expedite billing. We also enjoy creating original articles on topics that interest our customers.
Notice to the Reader
The content within this article is meant to be used as general guidelines and may not apply to your specific situation. Always consult with a professional accountant to ensure that you're meeting accounting standards.