Unlike gross and operating margins, a restaurant’s profit margin considers every cost that affects the organization’s bottom line, including line items — like tax, depreciation, and debt payments — that aren’t directly related to operations.
A company with a lower profit margin compared to its peers may be unable to absorb unexpected macroeconomic shocks and negative surprises. Keeping SG&A costs low and maintaining streamlined operations are key to high net profit performance.
Substantial SG&A Expenses Can Push Companies into the Red
All the companies in the bottom quartile of this rank have negative profit margins, which means they spent more than they earned, losing at least $0.03 on every dollar generated in revenue.
Suffering from the poorest profit margins in the industry, Empire Resorts is losing $0.70 on each dollar of revenue due to substantial increases in SG&A expenses. In 2017, these payments increased by approximately 56% compared to the prior year, in large part for legal, accounting, and consulting fees related to the company’s efforts to finance casinos and other development projects. Empire Resorts’ marketing and advertising expenses also rose, and the new executive chairman position contributed heavily to the increase in the costs of payroll and benefits.
Simplified Menus Are the Secret Sauce for Extraordinary Profit Margins
Just as it did in gross and operating margins, Dunkin’ Brands leads the pack in net profit, pocketing $0.41 on each dollar of revenue. Coming second, Wingstop’s net profit margin is 25.9% thanks to its simple yet efficient operating model.
Wingstop earns over 90% of its revenue on chicken wings, French fries, and other sides. Fewer menu items translates into fewer ingredients, which also makes prep smoother. Streamlining the operational process has helped both Wingstop and Dunkin’ cut labor costs while still achieving high same-store sales growth.
Higher Food, Labor, and Debt Expenses Hurt Upscale Restaurant’s Bottom Line
Public restaurant companies in the upscale segment have a median net profit margin of -3.2%, implying a net loss of $0.03 on each dollar of revenue. This comes from higher food, labor, and debt expenses than other segments.
Upscale restaurants have higher food costs not only because they offer premium ingredients but also because their smaller footprints limit access to supplier rebates. Further, they often experience higher food waste since orders are regularly customized and require more fresh ingredients.
These operations also allocate a significant portion of their budget to payroll and training to ensure their employees have the skills to offer guests the fine dining experience they expect.
That said, the higher COGS at upscale restaurants are covered by charging premium prices: compare McDonald’s $1-$2-$3 menu to the $15 cheeseburger and fries on Del Frisco’s bar menu.
Upscale concepts require a large capital commitment to build out, remodel, and maintain their locations, which is often funded through debt, resulting in high interest payments which negatively impact the companies’ bottom lines.
On the other end of the spectrum, quick-service restaurants achieve a median of 10.6% net profit margin, three times the industry median. Many of these companies, such as McDonald’s, Yum! Brands, and Wendy’s, are heavily franchised, which provides steady and stable income and positively impacts earnings.
These companies can also take advantage of their noteworthy real estate portfolio to collect rent and royalty income. Finally, the franchise model protects against variability in food and labor costs.
For non-franchised companies, the secret to keeping profit margins high seems to be developing a focused menu that is easy for employees to consistently produce while working to keep SG&A expenses and debt payments as low as possible.
ABOUT AARON ALLEN & ASSOCIATES
Aaron Allen & Associates is a leading global restaurant industry consultancy specializing in growth strategy, marketing, branding, and commercial due diligence for emerging restaurant chains and prestigious private equity firms. We work alongside senior executives of some of the world’s most successful foodservice and hospitality companies to visualize, plan and implement innovative ideas for leapfrogging the competition. Collectively, our clients post more than $100 billion in sales, span all six inhabited continents and 100+ countries, with locations totaling tens of thousands.