BETA
This is a BETA experience. You may opt-out by clicking here

More From Forbes

Edit Story

Restaurants' Margins Are Fatter, But Competition Is Fierce

This article is more than 6 years old.

Profitability has improved at restaurants offering table service, even though operators are coming off a slightly slower year of sales growth than in recent periods, according to preliminary industry data from Sageworks, a financial information company.

“Full-service” restaurants (NAICS 722511), on average, increased sales by 1.8 percent, according to Sageworks’ financial statement analysis of privately held firms for the 12 months ended Jan. 9. That compares with 5.3 percent average annual sales growth in the previous 12-month period and 8.4 percent for the period ended Jan. 9, 2016.

However, net profit margin for full-service restaurants increased on average to 6.1 percent, based on statements filed for the most recent 12 months, following several comparable periods in the range of 2.3 percent to 2.8 percent.

“Even though sales growth slowed for full-service restaurants, the trend has been improved sales for several years now,” said Sageworks analyst Libby Bierman. “The gains in profitability have also been encouraging. If restaurant owners can maintain or improve margins on top of another year of sales increases, 2018 could be a good year.”

Indeed, the National Restaurant Association expects 2018 will be the ninth consecutive year of sales growth in the industry, which the association says comprises roughly 4 percent of U.S. GDP and employs 15 million people. The group’s own data puts restaurant industry sales at $799 billion in 2017.

“Looking at 2018, sales for the overall industry will continue to be in the moderate growth range,” said Hudson Riehle, association senior vice president of research and knowledge.

Restaurant industry data

Sageworks

It’s the number of new restaurants that is driving industry sales growth, with about 60,000 new places opening each year and 50,000 closing for a net gain of 10,000 additional points of access annually, according to Riehle. This expansion keeps operators focused on remaining competitive – not just with other restaurants but also with other consumer spending categories, such as transportation and housing.

Operators have consistently proven to be innovative, flexible and able to adjust quickly to rapidly evolving needs, he said.

“The restaurant industry has always been and will always be a very consumer-driven market,” he said. In fact, 90 percent of Americans enjoy going to restaurants, Riehle said, adding, “And you can’t get 90 percent of Americans to agree on anything.”

Restaurant industry data

Sageworks

Owners of full-service restaurants, in particular, have to reinvent themselves constantly in order to flourish, according to Tina Lombardi, partner at Teal, Becker & Chiaramonte CPAs in Albany, N.Y. (Teal, Becker & Chiaramonte are clients of Sageworks.)

Lombardi provides management advisory services for the restaurant industry and has a personal connection as well: Her brother runs a full-service Italian restaurant in nearby Wynantskill, N.Y., and she does his accounting. Whether it’s opening a patio one year for outside dining in nicer weather or offering take-out service with family-sized meal portions, full-service restaurants like her brother’s must innovate and look for new ways to drive customer traffic, Lombardi said.

At the same time, restaurant margins are heavily influenced by input costs, especially food, so owners must watch those carefully, she said. “My brother buys paper goods on a monthly basis, but on a weekly basis, he lists all of his other vendors on a spreadsheet and he has all of his items listed so he can compare the prices among vendors, because the vendors have the same product and the prices fluctuate a lot,” Lombardi said. This kind of attention to detail, she said, “really drives his profitability.”

Labor costs for restaurants have been pretty stable, although Lombardi noted that some states like New York have recently increased the minimum wage. If labor expenses increase, restaurant owners might have to raise prices or keep an even tighter rein on schedules to leverage staffing throughout peak mealtimes and lulls, she said.

Sageworks’ restaurant industry data show that sales growth for full-service restaurants in the past year has been slightly lower than growth for all restaurants – a category that includes quick-service restaurants and snack/non-alcoholic beverage bars. Privately held firms across the entire restaurant industry (NAICS 7225), on average, posted 3.5 percent sales growth, compared with the 1.8 percent growth in full-service sales. Profitability has been about the same, however: an average 6.5 percent net profit margin for all types of restaurants in the most recent 12 months, compared with the 6.1 percent margin for full-service restaurants. Bierman said it’s unclear from Sageworks’ data exactly why industrywide sales grew more quickly.

Lombardi said one advantage quick-service or limited-service restaurants increasingly have that may be a boost to sales is their use of adjustable menu and pricing boards or screens, which allow quicker menu-price adjustments if costs escalate. Most full-service restaurants still rely on printed menus that aren’t as easily or as quickly adjusted on the fly.

Riehle said that wholesale food pricing inflation ran about 1.7 percent in 2017, but it is edging up again, and that can put additional pressure on margins without offsets from revenue management – whether that includes menu pricing or new products and services.

Looking ahead, Lombardi said restaurant owners are hoping that the tax cuts included in the law enacted late last year will put more money in customers’ wallets. “I think sales are going to stay healthy,” she said.

Through its cooperative data model, Sageworks collects and aggregates financial statements for private companies from accounting firms, banks and credit unions. Net profit margin has been adjusted to exclude taxes and include owner compensation in excess of their market-rate salaries. These adjustments are commonly made to private company financials in order to provide a more accurate picture of the companies’ operational performance.

 

Follow me on TwitterCheck out my website