Restaurant Actual Net Margin

[houman1979]

Hi,

I am thinking about establishing a restaurant from scratch. It would be a fish and chips in a high street. However, when I read on the net it seems a very gloomy business area. I've read that the net margin of the restaurants would be from 5-15%. It is too low and it does not make sense to take such a big risk to achieve a very low profit. It means if you sell £1m (which is too high), your profit would be around £50-60K?

Honestly, in that case, your staff will make more (given their risk taking and hours of work) or you can be a uber driver and earn easier.

I was thinking these margins could be underestimation due to the tax purposes or due to the owner large salaries?

Any ideas?

 

[The Byre]

Work in the sector first, before making any decisions or committing yourself to anything (expensive!)

 

[houman1979]

Thank you for your advice. But my question was something else and if the margins are too low I may choose to not waste my money and time. So, any idea on the margins?

 

[Scalloway]

As the Byre says the only way to get a true feel for the business is to have worked in it.

Your gross profit margin will depend on such things as wastage and cost of raw materials. Using good quality material will reduce wastage but increase cost. You need a feel to find the sweet spot that meets your requirements.

The next biggest cost will be staff. You can improve margins by paying minimum wage, keeping staffing levels down and using lots of part timers to keep Employers NI down. Again you have to consider the trade offs.

 

[houman1979]

As the Byre says the only way to get a true feel for the business is to have worked in it.

Your gross profit margin will depend on such things as wastage and cost of raw materials. Using good quality material will reduce wastage but increase cost. You need a feel to find the sweet spot that meets your requirements.

The next biggest cost will be staff. You can improve margins by paying minimum wage, keeping staffing levels down and using lots of part timers to keep Employers NI down. Again you have to consider the trade offs.

Thanks but it still does not help.

Business developers do not need to work actually in a field and I need a rough estimation to see if it is even worth it? I have a partner who worked in the field for many years but I need an independent review. Also, I am not asking about gross profit (which is very misleading and in my view useless). I am concerned about the net profit as it is the actual money you make.

Based on my research the net margins are too low that it seems the staff in the same restaurant are making more and so I wonder why there are many restaurants out there. I need a rough estimation of actual net profit range.

 

[Mr D]

Hi,

I am thinking about establishing a restaurant from scratch. It would be a fish and chips in a high street. However, when I read on the net it seems a very gloomy business area. I've read that the net margin of the restaurants would be from 5-15%. It is too low and it does not make sense to take such a big risk to achieve a very low profit. It means if you sell £1m (which is too high), your profit would be around £50-60K?

Honestly, in that case, your staff will make more (given their risk taking and hours of work) or you can be a uber driver and earn easier.

I was thinking these margins could be underestimation due to the tax purposes or due to the owner large salaries?

Any ideas?

Staff making more than you between them? I should think so.
You'll find that in a number of restaurants. Chef plus a couple of wait staff will use up £50k between them without too much trouble. For a restaurant with a million pounds turnover you'd need to spend plenty on staff.

As for figures, what relevance could they be to you? If I give you the net profit of an established fish and chip restaurant in a seaside town how is that relevant to your set up from scratch fish & chip restaurant in a completely different area with different clientele?
Oh and the figure for the restaurant 2016 would be a little over £30k. Just cannot see how that figure for something you are not doing is in any way relevant.

Do the people in the area you want to set up have access to a chippie?

 

[Mitch3473]

There is money in everything if you do it right. I've never met a poor chippie owner. I've never met a poor farmer either but they're always pleading poverty.............................

 

[Mr D]

There is money in everything if you do it right. I've never met a poor chippie owner. I've never met a poor farmer either but they're always pleading poverty.............................

I've never met a poor chippie owner either.
Met one who drove off most of his customers by using cheap ingredients, he kept going for a year or so on just passing trade who hadn't used him recently or desperate kids who didn't want to walk to next chippie.

However I have met people who have set up restaurants from scratch who closed doors within months.

 

[Mark T Jones]

To me, the fact that you are fixating on net margins would indicate that you aren’t yet ready for business

Why?

1. Because without other metrics is is meaningless. If you turn over ?1 million, then 15% s prety good. Also, is the owners salary included in that net figure?

2. Averages rproduce nonsense results. ‘A man lying on the floor with his head in the freezer and his feet in the oven is, on average, comfortable’

So, if you want to excel n your restaurant, you want to eithe4 drive turnover mercilessly, or, better still, add value to elevate your margins above the norm

 

[houman1979]

Thanks for the replies. I am doing a market research and I know that it depends on the many factors but in market research you use data and rough estimation to plan for yourself. If I know that the net profit margin could not be over 10% so it is a rubbish industry as even if I sell £1m of fish and chips (which is too much!!!) I will end up with £100K and lot of stress. An uber driver may make £30K net but without stress and risk taking.

And as you said that you have never seen a poor chippie, I think the profit margins are not correct as it the industry was so book why I see newcomers every day? For example, retail clothing in high street is a dead industry and waste of money but it seems restaurants are making good money that is still worth trying hard and taking risks.

 

[houman1979]

To me, the fact that you are fixating on net margins would indicate that you aren’t yet ready for business

Why?

1. Because without other metrics is is meaningless. If you turn over ?1 million, then 15% s prety good. Also, is the owners salary included in that net figure?

2. Averages rproduce nonsense results. ‘A man lying on the floor with his head in the freezer and his feet in the oven is, on average, comfortable’

So, if you want to excel n your restaurant, you want to eithe4 drive turnover mercilessly, or, better still, add value to elevate your margins above the norm

Net margin is the only metric that show how much you will have in your pocket at the end of the day. Gross shows a very misleading figure as fixed costs could swallow a big chunk of it or make it even loss making.

I know that the owner salary could be included but we know that due to the tax matters owner salary is usually very low and they mostly pay themselves dividends which are not deductible.

Also, developing a restaurant to a point that sells £1m is a very big job.

Averages always could give you a clue which should be later adjusted to your specific case. but at least I know what would be my expectation. So, in your opinion, all market researches are valueless?

 

[Mr D]

Thanks for the replies. I am doing a market research and I know that it depends on the many factors but in market research you use data and rough estimation to plan for yourself. If I know that the net profit margin could not be over 10% so it is a rubbish industry as even if I sell £1m of fish and chips (which is too much!!!) I will end up with £100K and lot of stress. An uber driver may make £30K net but without stress and risk taking.

And as you said that you have never seen a poor chippie, I think the profit margins are not correct as it the industry was so book why I see newcomers every day? For example, retail clothing in high street is a dead industry and waste of money but it seems restaurants are making good money that is still worth trying hard and taking risks.

Yes restaurants can make good money. For every one you see lasting 5 plus years there will be a chunk who don't make their first year.
You've got the expertise - your business partner. Trust them or trust some random people on the internet.

So why are you wanting a fish & chip restaurant from scratch rather than a chippie already established?

 

[Mark T Jones]

Net margin is the only metric that show how much you will have in your pocket at the end of the day. Gross shows a very misleading figure as fixed costs could swallow a big chunk of it or make it even loss making.

I know that the owner salary could be included but we know that due to the tax matters owner salary is usually very low and they mostly pay themselves dividends which are not deductible.

Also, developing a restaurant to a point that sell £1m is a very big job.

Averages always could give you a clue which should be later adjusted to your specific case. but at least I know what would be my expectation. So, in your opinion, all market researches are valueless?

Context and understanding is everything

Well orchestrated personalised market research is invaluable. Random statistics are meaningless

Your net margin is critical. Other people’s is just a number unless you have full context

Here’s a little example. Som3 years ago, extensive research showed clearly that people who drink alcohol outlive tee-totallers by many years. Until someone pointed out that many tee- totallers are recovering alcoholics - which fundamentally changed the conclusions

Again, generic broad averages are meaningless to you

 

[Mr D]

Net margin is the only metric that show how much you will have in your pocket at the end of the day. Gross shows a very misleading figure as fixed costs could swallow a big chunk of it or make it even loss making.

I know that the owner salary could be included but we know that due to the tax matters owner salary is usually very low and they mostly pay themselves dividends which are not deductible.

Also, developing a restaurant to a point that sell £1m is a very big job.

Averages always could give you a clue which should be later adjusted to your specific case. but at least I know what would be my expectation. So, in your opinion, all market researches are valueless?

I'm guessing you haven't purchased a business before. And haven't tried to sell one.

Averages tell you nothing about what you can do. The average on high street in Llandudno and the average on sea front in Blackpool and average on a high street in London will give you 3 very different average figures skewed in 2 instances by the local season length (which is short).

 

[houman1979]

Yes restaurants can make good money. For every one you see lasting 5 plus years there will be a chunk who don't make their first year.
You've got the expertise - your business partner. Trust them or trust some random people on the internet.

So why are you wanting a fish & chip restaurant from scratch rather than a chippie already established?

Because nothing is available for sale (actually nothing available at all)!!!

 

[houman1979]

I'm guessing you haven't purchased a business before. And haven't tried to sell one.

Averages tell you nothing about what you can do. The average on high street in Llandudno and the average on sea front in Blackpool and average on a high street in London will give you 3 very different average figures skewed in 2 instances by the local season length (which is short).

Not in the restaurant industry and actually I was looking for a range as I read in other website that the profit margin of a franchise fastfood could be around 5-7% depends on the area which in that case I am not going to waste my time or money. But if someone says to me that a chippie could have net margin of 10-35% based on this, this and that, I can see that proper planning could pay you back.

Maybe I did not explain my question correctly.

 

[Mark T Jones]

Oh well, Good luck.

 

[Chawton]

What's the fixation with the Uber driver comparison? Yes they can make 30k for relatively low stress, but what can they exit with if they make a success of their driving? A car with 500k miles on the clock?

Point being one is a scenario where you can create a business that becomes a saleable asset in it's own right. Or alternatively a passive income if you decide to step aside and get it managed. The other isn't.

So of course the chippy scenario involves more potential stress. Rightly so.

 

[Mr D]

What's the fixation with the Uber driver comparison? Yes they can make 30k for relatively low stress, but what can they exit with if they make a success of their driving? A car with 500k miles on the clock?

Point being one is a scenario where you can create a business that becomes a saleable asset in it's own right. Or alternatively a passive income if you decide to step aside and get it managed. The other isn't.

So of course the chippy scenario involves more potential stress. Rightly so.

Indeed - the income is a small part of having a business. The ability to pass it on / sell it later is also worth looking at.

Closest comparison I have seen is buying a house to rent out. Say £500 a month rent and net profit £1000 a year. Peanuts, you couldn't live on that.
Yet 25 years later the property is worth £200k and the landlord has paid little of their own money out on the asset.
£200k isn't a bad pension pot / asset to leave family / basis for then taking on another investment.

 

[Mr D]

Because nothing is available for sale (actually nothing available at all)!!!

No businesses suitable in the area? Try a different area or try a different business.
Setting up from scratch is not easy, trying to do it with a restaurant - I'm sure you've worked out the risks and dealt with them.

 

[ecommerce84]

I know you say there aren’t any fish and chip shops for sale locally but are there any others in the town?

Decent chippys are surprisingly hard to find and those that are good, make plenty of money.

Don’t be so dismissive of GP - it can tell you a lot about businesses, especially in food service.

Have you sat down and made any profit/loss forecasts for your business with different turnover levels to determine what you need to achieve to make it worthwhile?

Do you have experience with staff rota’s? You can save a lot of money if you know how to effectively manage staffing levels.

I do wish you luck - it’s a tough sector to be in, but there is money to be made - if there wasn’t then there wouldn’t be as many chip shops and restaurants as there are.