By Doug Radkey
Sales don’t pay your bills; profits do. In an industry that is obsessed with topline revenue and social media impressions, we often forget the number that really matters: your bottom-line profits. It’s easy to boast about a small independent restaurant generating $1.5M in revenue, for example, especially when average guest spend is at an all-time high. But if you’re walking away with just four to six per cent net profit (or worse) and losing money month over month, then are you really operating a successful restaurant? As we move into a new era of operations, it is imperative that we look to change the conversation around what it really means to be successful and the mindset required to make that happen.
Let’s talk about profitability in real terms, and how you can take your restaurant from being just average to being an industry leader by understanding where your money is going, what your numbers are actually saying, and how to make the strategic shifts that lead to scalable success.
Where are we now? (And where should we be?)
According to recent data from Restaurants Canada, the average restaurant profit margin in Canada lies between just four and six per cent, with many sitting closer to their break-even point or even worse, they’re losing money.
But where should your restaurant be? For a healthy, sustainable business, your restaurant should be producing a net profit margin of 15-20 per cent (or more). Using that $1.5M restaurant as the sample, that would be $225K to $300K in profit versus the average of $60K to $90K (or less).
Is this an easy feat? Definitely not. But is it possible to reach? Absolutely.
To reach this benchmark requires strategic clarity, high levels of discipline, and a complete mindset shift. It means no longer chasing vanity metrics. It means understanding that every dollar spent or every dollar earned must have a purpose.
Let’s explore the real drivers of profit and the strategies to optimize them.
Food costs: beyond percentages to contribution margins
Most operators think about food costs as a percentage, shooting for what’s been the industry standard of 28 to 32 per cent (depending on their concept). And while that’s a good foundational start, it’s certainly not the full picture.
There’s theoretical food cost, which is what it should cost to produce a dish, and actual food cost, which is what it ends up costing you after you factor in waste, theft, spoilage, and portioning issues. If you’re not constantly comparing theoretical vs. actual, you’re bleeding money without even knowing it.
But let’s go a step deeper and look at contribution margin. A dish with a 35 per cent food cost but a $12 contribution margin may be more valuable than a 25 per cent dish with only $4 in profit within your sales mix. Again, percentages don’t tell the whole story.
How can you use contribution margins to your benefit? You can engineer your menu around high-profit drivers and feature high-margin items in your marketing and staff training program while removing or repricing your low-margin underperformers.
Remember: profit isn’t about selling more. It’s about selling smarter. Even a smaller, smarter menu beats a bloated one every single time.
The mindset shift: simplify to amplify.
Labour: the true cost of a paycheck
The second biggest expense in any restaurant? You guessed it, it is your labour costs. But again, the percentages you are likely accustomed to are just part of the equation.
Yes, labour cost should typically fall between 25 and 30 per cent of revenue before benefits and taxes for a healthy overall profit margin. But that alone doesn’t tell you whether your team is truly contributing to the bottom line.
Let’s look at the dollar contribution per labour hour. In other words, ask yourself how much revenue each labour hour is generating. Tracking this helps you align scheduling with revenue patterns while reducing unnecessary overtime by spotting inefficiencies and then identifying team members who are high performers.
This isn’t about cutting shifts; it’s about aligning labour with demand throughout the day.
The mindset shift: ensuring your payroll is a performance investment.
Rent control: negotiate hard to maximize your margins
Yes, your real estate is fixed, but the impact it has on profitability can be a game-changer.
As a rule of thumb, rent should not exceed six to 10 per cent of gross revenue. Any higher, and you’re going to be squeezing profit from every other area just to survive.
If you’re already locked into a lease, look at how you can maximize foot traffic and sales per square foot. What is your marketing strategy? Can you expand into other revenue streams, such as delivery or catering? Can you rent out your space for events or collaborations? Can you curate unique guest experiences to turn slow periods into profitable dayparts?
And if you’re in negotiations for a new space, don’t be afraid to push hard. Use your feasibility study and other data as leverage. Present your case and look to build a long-term partnership with your landlord.
The mindset shift: Rent isn’t just a line item; it’s a long-term commitment that defines your margins. Set it up strategically or be stuck paying for it both financially and mentally for years to come.
Technology and automation: work smarter
Profitability isn’t just about cutting costs. It’s about controlling costs while selling the right items at the right price, at the right time. We now live and operate in a time where there is no excuse for not knowing your numbers to make data-informed decisions.
Your tech stack is not just for novelty; it must be part of your profit strategy. With the right technology for your concept, you can schedule based on demand using AI tools, optimize inventory management to reduce waste, automate your ordering process, and use guest data to personalize your marketing.
The mindset shift: Technology isn’t here to replace the human touch; it’s here to streamline everything behind it so you can focus on what actually moves the needle towards higher profits.
The profit mindset: leading with discipline
As you review your P&L or develop your next forecast, ensure to work toward these benchmarks:
F&B: 28 per cent
Labour: 28 per cent
Rent: 6 per cent
Tech: 1.5 per cent
Marketing: 5 per cent
Other: 8.5 per cent
These numbers total 77 per cent (23 per cent Earnings Before Interest, Taxes, Depreciation, and Amortization) minus eight per cent average depreciation and other = 15 per cent net profit.
While that may be the ideal equation, at the end of the day, profitability isn’t just about math; it’s about leadership.
It’s about making tough calls on pricing, saying no to low-performing items and inflated menus, training your team to think like owners, and setting a standard for both excellence and accountability. If you don’t lead with profit in mind, your team won’t either.
Because here’s the truth: Profit is what gives your business life. It allows your business to serve your community. It strengthens the entire ecosystem. Profit is what allows you to reinvest, grow, and build something that lasts while living the lifestyle you want and deserve.
Your profit is your story
Sales are a vanity metric. Your profit tells you whether your systems work. Whether your pricing strategy is sound. Whether your team is aligned. Whether your leadership is effective.
So, let’s stop chasing volume for the sake of ego. Let’s start designing hospitality businesses that are lean and intentional while driving profits of at least 15 per cent.
When you get it right and when every dollar is tracked, every decision is strategic, and every part of your operation is aligned – that’s when the magic in this industry happens.
That’s when your restaurant becomes a legacy brand.
Doug Radkey is the president of KRG Hospitality Inc. plus a 2x author, and a keynote speaker on all things bars, restaurants, and boutique hotels. He is on a mission to revolutionize the way hospitality businesses start, stabilize, and scale all over the world by aligning strategy, programming, and coaching to deliver what’s needed most – strategic clarity. For more information, visit krghospitality.com
