It’s no secret that rising food costs and difficult economic times for consumers are making it tough to run a profitable restaurant business. While it’s true that margins vary widely depending on the type of restaurant, it’s worth taking a look at industry benchmarks to get a sense of how you compare. One such set of metrics are those provided by the Australian Tax Office (ATO).
Looking at these benchmarks you can learn, for example, relative to other businesses of your same size, what the typical margins are and if yours are any different. In the ATO benchmarks these costs are expressed as a percentage of “turnover” or annual revenue. This table shows metrics for restaurants in the range of $500K-$2M of turnover:
|Benchmark||% of Turnover|
|Cost of Sales (raw materials less labour)||33 – 38|
|Average Cost of Sales||35|
|Total Expense||86 – 93|
|Average Total Expense||89|
|Non-Capital Purchases||50 – 61|
|Labour||22 – 29|
|Rent||9 – 14|
For every restaurateur, the challenge is to maintain the quality of their food and service while keeping a watchful eye on expenses. This helps them to preserve (or improve) the margins that allow them to stay in business. Some expenses (maybe most?) are locked-in for significant periods of time. The rent that you pay is likely tied to a long-term lease arrangement. Your labour costs are not likely to vary significantly as your staffing requirements are set (unless you’re in high-growth mode) and, in Australia, the rates you pay are largely dictated by legislated awards.
So where do you turn to find ways to improve your margins? One opportunity to explore is how to get a better return on your marketing and advertising expenditures. In theory, marketing is the demand-generation engine for the business and most would agree that getting more people in the door is one key aspect of improving the financial health of the business.
So how do you compare in terms of what you spend on marketing? What would you say a typical restaurant spends on sales and marketing? That’s an interesting question and we’ll need to look elsewhere for an answer. One study (not specifically related to restaurants) indicated that the vast majority of businesses (75%) spend between zero and 6% of turnover on marketing.
So let’s run the numbers: if your turnover is around $500K that means that you (and restaurants like yours) are spending somewhere between zero and $2,500 per month on marketing and advertising. Maybe it’s difficult for you to think in terms of reducing this amount. Maybe it’s time to start thinking about how to get more for your money. In other words, if my marketing was more effective and I could reapportion those funds and use them more effectively then maybe I could push my revenues over that $500K mark without having to increase my marketing and advertising budget.
As you think about your restaurant marketing plan for the balance of the year, what are the areas where you might want to rethink how the money is being spent? Are you spending that money the same as you always have – without knowing if it’s really working? What evidence do you have that justifies continued spending in those areas?
What are your thoughts? How do you compare to the benchmarks? What do you see as the best opportunities to improve the financial health of your restaurant business?
Companies like Sonic Response can help with your restaurant marketing efforts and get the most of your money so that you can get the best return on investment without the need to increase your marketing and advertising budget.