With rising costs and increasing competition, it’s becoming more necessary to be on top of your restaurant’s numbers.
As a good restaurant owner or manager, you know that getting the most value out of every dollar you invest in your business is the only way to thrive. While this endeavor requires creativity and skill, a better measure of your success can be found in complex numbers – specifically, in your restaurant’s return on investment or ROI.
From launching your restaurant to starting various campaigns, ROI is one of the most fundamental metrics you need to measure.
But what exactly is this metric, and how will it help you improve your business? Most importantly, how do you calculate it in your restaurant? In this article, we’ll discuss everything you need to know about your restaurant’s return on investment metric.
Understanding ROI for Restaurants
Return on investment (ROI) is a primary metric that businesses use to measure how much value they’re getting on their investment money. ROI answers the question, “How much money is your initial investment making?”
It’s a fundamental metric because it measures marketing performance, primarily related to the costs of launching that business activity.
Thus, having a high ROI is great for your business. If an activity in your restaurant has a high ROI, you should probably maintain that project. On the other hand, projects with low ROI are a drain on time and resources. If the value it returns isn’t worth it, you should stop doing it.
For instance, let’s assume that the initial investment in launching a new menu item is $1,000. This includes developing the recipe, training your chefs to make it, promoting it, and then selling it.
If the item is well-received by your customers and you earn $1,000 on the first month of launching it, that means its ROI is 100%, which is a fantastic number.
However, if it’s been a few months and you still haven’t made $100 on the new item, then you might want to reconsider its spot on your menu.
As you can see, at its core, the ROI calculator is rather simple:
(Amount returned / amount invested) x 100 = ROI
We’ll discuss how this formula works in detail in the following sections.
What is a Good ROI for Restaurants?
The average ROI of the entire restaurant in the US in the first quarter of 2022 falls at around 10.73%, according to CSI Market. MacroTrends also reports an average ROI for quick-service restaurants, or QSR, of about 5% for the 2022 period.
A general goal for any FSR or QSR would be to achieve about 10% of ROI every quarter consistently. As long as you stay within that ROI percentage, your finances should be pretty safe.
If you want to maintain not just the “average” number but a “good” restaurant ROI number, then aiming for anything higher than 10% should be safe.
Keep in mind that although knowing the average ROI can be helpful, outliers on either side of the graph can easily skew this data. This is why you should take these numbers with a grain of salt.
Instead, the best way to determine the best ROI for your restaurant is to consult with your marketing partner or a consultant. Thorough market research of your restaurant’s niche is still the best way to determine the ROI that you should be striking for every quarter.
How to Calculate ROI for Restaurants
Now that you understand ROI and how it affects your restaurant, you’ll need to know how to calculate it. Determining this metric is pretty straightforward – all you have to do is tally all your profits and expenses within a certain period.
This section will talk about calculating your restaurant’s ROI from the ground up.
Tally Your Startup Costs
Startup costs are the expenses necessary for you to launch your restaurant. Startup costs are important to keep in mind because most restaurants run on capital acquired from debt, and this is likely where the biggest chunk of your revenue will go in the next few years.
Startup costs include the following things.
- Leasing or buying commercial restaurant space
- Renovation of your restaurant establishment
- Kitchen equipment and all dining supplies
- Critical restaurant systems (such as POS, inventory, etc.)
- Licenses and permits for your business
- Marketing campaigns to promote your new restaurant
- Hidden, miscellaneous costs
All of these expenses are necessary before you can even begin to launch your restaurant, so you will have to factor this into your ROI calculation.
Compute Your Operational Costs
In contrast to startup costs, operational costs are expenses that you have to pay to keep your restaurant running every day. While startup costs tend to be significant amounts of money up-front, operational costs tend to be smaller but add up over time.
The following are examples of operational costs that you need to include in your tally.
- Labor
- Food costs
- Utilities (rent, water, electricity, etc.)
- Software subscriptions
- Maintenance
- Campaigns, promotions, and advertisements
- Taxes and compliance
Determining Total Sales
Your gross profit is simply the number of sales you have made ever since your startup date. You should be able to get this number through your POS system reports quickly.
Formula for ROI Calculation
As mentioned before, the formula for ROI calculation is as follows:
(Amount returned / amount invested) x 100 = ROI
In the restaurant industry, this translates to:
(Net Profit / (Startup Costs + Operational Costs)) x 100 = ROI
As a basic example, let’s say that you have the following values for a small food stand:
- Total Sales = $10,000
- Startup Costs = $5,000
- Operational Costs = $3,500
The first thing you have to do is to get your Net Profit. In this case, since the Total Sales is $10,000 and the Total Costs are equal to $8,500, the Net Profit would be $1,500.
Using these values, the formula will now be:
(1,500 / (5,000 + 3,500)) x 100 = 17.6% ROI
5 Tips to Increase Your Restaurant ROI
With a good understanding of what ROI is and how you can determine it for your restaurant, the next step is to attempt to increase it.
Increasing return on investment for your establishment is closely related to improving your profits, which you can do by either increasing sales or decreasing costs. Here are a few tips to help you with that.
1. Determine Your Target Market
Identifying your target market is one of the basics of marketing: to know what to sell, you first need to know who’s buying. Your primary target market is critical to understand because they will be your most significant source of revenue.
Determining your target market involves conducting in-depth market research about your customers, location, and marketing strategy.
There are three main categories that you need to analyze when determining your target market:
- Demographics. This factor denotes the shared socioeconomic characteristics of your customers, whether it’s sex, age, income, education level, location, and more.
- Psychographics. In contrast to demographics’ physical categorization, psychographics involves psychological groupings regarding attitudes, values, beliefs, etc.
- Behavior. This analysis factor looks at your customers based on how they interact with your business, their spending habits, digital behavior, hobbies, and buyer habits.
Your target market needs to be well-defined before you attempt to launch a marketing campaign to improve your ROI. Your marketing department or consultant usually conducts this type of research.
2. Launch Effective Marketing Campaigns
Marketing campaigns are designed to promote your business to your target demographics. Where the previous section answers the “who,” marketing campaigns answer the “how.”
Campaigns are conducted to reach your target demographics and convince them that your product is what they want. Operating a successful marketing campaign involves rigorous research about your target population’s identity, interests, and habits – then leveraging your creativeness to capture their attention.
Marketing campaigns are also handled by your marketing department or any marketing consultant, although it will involve more creative work compared to identifying demographics.
3. Identify Methods for Your Progress
You shouldn’t fully launch a marketing campaign without setting performance indicators first. Key Performance Indicators serve as your measuring stick that shows your progress towards your chosen goals.
Since your primary goal is to increase your ROI, your KPIs should reflect that, such as the following.
- Overhead margin
- Gross profit margin
- Net profit margin
- Historical sales
The KPIs you measure should be telling you whether you’re any closer to your goal of having a higher ROI.
In that respect, you can use these metrics to measure your initiatives. If your KPIs show positive results, continuing those campaigns or projects is most likely beneficial.
On the other hand, if KPIs indicate negative or less than stellar results, continuing those initiatives will likely drain your finances.
4. Don’t Neglect Your Website or Pages
We’re currently at an unprecedented age of information access, with the ability to see almost anything on the internet 24/7. This means that the internet is the new battlefield; the age of reputation and word-of-mouth shops have long since abdicated its reign.
In this kind of environment, it’s becoming increasingly critical to maintain an internet presence.
As a commercial establishment, your customers expect you to be available in as many channels as possible, or else they’re going to look for competitors who are. To illustrate, data from the National Restaurant Association shows that about 83% of US adults use mobile devices in search of restaurants and food places.
This means maintaining a whole battery of websites, social media pages, and messenger accounts to be as accessible to your customers.
Also, don’t neglect your presence on food delivery apps and services, as its use has seen a meteoric rise in recent years and is unlikely to go away.
5. Be Brave Enough to Innovate
Lastly, one of the best things that you can do to improve your ROI is to try something new.
Many restaurant owners make the mistake of thinking that innovation is resource-intensive. On the contrary, the best inventions are the simplest ones.
Innovation is the process of coming up with a better solution to an old problem. In your restaurant, innovation could be something as simple as changing your menu offerings best to reflect the eating habits of your primary customers.
It’s an elegant action, for sure – simple yet directly addresses an issue creating waste, such as extra food left behind on plates because of too big portions.
In this way, innovation is one of the best ways of increasing your ROI. A restaurant manager who can innovate will most likely succeed in the business. Here are a couple of areas that you might want to thoroughly evaluate in your restaurant business.
- Online ordering and delivery. Deloitte has recently released data showing that 40% of frequent restaurant-goers prefer to order online. Online orders are also likely to see a 26% increase in check size in QSRs and 13% in FSRs. Mobile food delivery is unlikely to go away, and you need to know how to play that game well.
- Establishment security. Dine and dashers, petty thievery, and employee theft are frequent concerns among restaurant establishments, often with significant consequences. Innovating in security implementation using surveillance systems and Glimpse software is an excellent way to address these issues.
- Innovative marketing. The internet is opening new avenues for marketing. You have a whole arsenal of new digital marketing weapons, such as social media presences, messenger promotions, email marketing, SEO, and more.
Understanding and Improving Your Restaurant’s ROI
Although the restaurant industry is becoming more challenged by the day, it remains a profitable and rewarding industry for those who know how to keep track of their numbers.
Your restaurant ROI is one of the most important metrics to be aware of.
Without understanding your returns, you also won’t have a deep understanding of your restaurant’s value. This article has discussed every aspect of ROI that you should know about and has given you some tips to improve your bottom line.
One of the best things to improve your ROI is to improve your restaurant security by using a platform like Glimpse.
Glimpse uses AI camera technology that automatically detects, catalogs and verifies all drinks served over the counter in a bar, or any food served out of the kitchen. Glimpse provides daily and weekly reports to owners and managers that immediately show the who, what, where and when of potential lost revenue – think of it as the smart eye in the sky. With Glimpse, you increase compliance rates and deter infractions in your establishment as they happen.
Sounds like a bar and restaurant automation tool that you’d want to have? Schedule a demo now!
Glimpse
+1 (786) 292-2373
insights@glimpsecorp.com
