Why Are Restaurants’ Profit Margins So Low?

Why Are Restaurants’ Profit Margins So Low?


The restaurant industry in the U.S. is vast
and is a part of daily life in America —with 57 percent of us eating at a restaurant at
least once a week. In fact, for the first time in recorded history,
U.S. consumers are spending more money at restaurants than at grocery stores. With the restaurant industry growing and becoming
more prevalent every year, here are 5 things you need to know about the restaurant industry:
Number one: In 2016 there were more than 1 million restaurant locations in the U.S. and
they generate annual sales of $780 billion. Number two: According to the U.S. Bureau of
Labor Statistics, in 2017 the restaurant industry employed 12 million people—enough to fill
Chicago’s Soldier Field almost two hundred times over. Number three: 425,000 of the 1 million restaurants
located in the U.S. are either independently owned or ran by a franchisee—which means
many of these establishments are considered small businesses. You see, while franchised restaurants are
associated with a larger corporate body, the franchisee who owns and operates the establishment is not much different than the mom-and-pop diner down the street. Number four: The average profit margin for
U.S. restaurants usually hovers between 4 and 6 percent—meaning for every dollar in
sales, the business owner only collects 4 to 6 cents. However, profit margins have historically
been known to drop to as low as 1.4 percent. Number five: 33 percent of restaurant revenue
goes towards paying wages, which means that government mandated increases in the entry-level
wage can be really hurt an independent restaurant owner or franchisee. A business owner can only raise prices so
much before customers start going away. The restaurant industry plays a vital role
in both the lives of ordinary Americans and the U.S. economy.

100 Replies to “Why Are Restaurants’ Profit Margins So Low?

  1. So, what you're saying is that I should open my own Sports Bar & Grill. Got it. BRB going to get a $100,000 bank loan.

  2. Let me fill in the blanks for those who can’t think critically: The wages are around 33%, the building expenses are around 30-33% and the cost of your meal is around 30-33%. Hence the small profit margin.

  3. Year 1. Hire a worker at $5 an hour and tell them the pay will increase with experience.
    Year 2. Explain it's been a rough year but things are getting better.
    Year 3. Employee leaves, hire another at $5. Rinse and repeat.

  4. Fast food can make your fat, and fat means medical bills. So how much time are you saving if you have to struggle with time and money to get in shape? People love junk food, and you will get caught in that trap. I can make the food MY way, and often that is cheaper.

  5. McDonalds in Australia pays 20$ an hour.. Yet they haven't closed their doors.. This video is garbage. Some rich guy that buys his way into a franchise is not a "mom and pop". Nearly everybody in that statistic is a franchisee. That's why they didn't separate the stats. What's the franchise fee??? That doesn't matter lol. Corporate profit never got mentioned in this video…….

  6. Automation incoming in 5, 4, 3…
    But seriously, I doubt the corporate chains will be able to automate, as McDonald's decided to try and serve, everything in existence. The bigger the menu, the harder it will be to integrate.

  7. 1-Restaurant owners are slaves to the franchise that owns the land and dictates the rules. 2- Because the franchise sets a fixed pay rate for employees this makes them slaves for what little money they get. 3- some restaurants set up their operations a certain way that generally places the cook on the rock bottom of the pay scale. CRAZY, that the cook makes the product and is considered the lowest paid, terrible treated employee. ..

  8. Only one of these points say 'why' the profit margin is so low (in a round about way) because roughly a third goes to employees?! So if you could just pay these people less you could have more profit? Couldn't employers just pay employees nothing at all and take their tips too? Thats not just profit but additional income! So its nothing to do with competition? A street consisting almost entirely of a single franchise isn't a bad thing? Nothing to do with market saturation and the basic economics of supply vs demand? How about the other 66% of the costs etc? I bet the franchise is actually making a fantastic profit for doing nothing! You might go as far to say the honest 'small business' and all its employees are basically slaves to the corporation? Argh, too commie. Yay profits! Murica!!!!

  9. The minimum wage was historically higher but was not pegged to inflation. It is therefore a blatant lie to suggest small businesses will suffer greatly if it were restored. This video is simply propaganda, from the click bait tittle to the dishonest content.

  10. High mimimum wages or the insane expected tip level in the US: Tomato Tomato! High wages also leads to technical innovations to reduce Labour cost which in turn creates High paying jobs instead of low paying jobs that can't create proper demand to make the economy prosper and provide financial security.

  11. Why are we talking about low profit and wages when thereis enough money in the world for everybody to be a millionaire? There's enough food to feed the world, yet people are starving. Watch NETFLIX movie "The founder". It's about the man whole stole McDonalds from the brothers who started "fast food".

  12. The only reason I got out of this is "lower wages". The facts stated can easily be found anywhere.

  13. PragerU was founded in 2011 by radio talk show host Dennis Prager and radio producer and screenwriter Allen Estrinand is not an academic institution and does not offer certifications or diplomas.

    Prager created Prager University with Estrin as his business partner[1] in order to present his conservative views and to offset what he regards as the undermining of college education by the left.[

  14. Someone needs to teach Prager about accounting and how companies fiddle with the books to keep the declared profits as low and untaxed as possible.

    And while they are at it they should also teach Prager about the difference between top bracket tax rate and effective tax rate. I find it weird that fiscal conservatives never talk about effective tax rates.

  15. Restaurants get away with paying workers as little as $2.13 an hour. And not as a starting wage. Most employees who work in the dining room will never see a cost of living adjustment or pay increase due to company loyalty. Our real wages are almost exclusively tips and it isn't uncommon for us to be expected to work completely off the clock, forfeiting what little our bosses pay us to begin with. Restaurant food in America is kept artificially cheap because in many cases, hosts, bartenders, and servers aren't paid by their employers at all. It is possible to make a living off of tips. We chose this industry. But lax laws regarding how restaurant employees are paid make us incredibly vulnerable financially. We consistently provide a service, but our payment isn't mandatory since most of it is tips. That means that whenever anything shakes the local economy, our income is in question. Each month, the amount we will make is in flux. Making it incredibly difficult for many foodservice workers to plan for their economic future. The American restaurant business model isn't one that recognizes the dignity of its employees. It provides cheap food by underpaying workers. Americans need to realize that labor costs money. And not everyone can afford to eat out. Prices should be higher and businesses that need to exploit workers in order to remain profitable should fail.

  16. I talk to restaurant owners all day everyday through my inspections and I hear this all the time. Owning and operating a restaurant isn’t what it’s all cracked up to be. Barely keeping the doors open or on the verge of closing.

  17. What a load of crap. We know about the trillion dollar off shore, untaxed accounts. You do not differentiate between independent and monopolies? Sneaky, but not that smart. The goal: demonize paying extremely valuable labor a living wage.

  18. SPECIES BEING? HELLO? PSEUDO INTELLECTUALS, I WILL TAKE A LABORER OVER A PHILOSOPHER KING EVERY DAY, EVERY NIGHT! YOU ARE USELESS TO SOCIETY. GET A JOB AND THEN SPEAK.

  19. Your video never satisfactorily answered the question. All this video was a thinly veiled attack of workers wages. Wages are only one reason why profits are so small. I hope the "U' in your name doesn't stand for university, cause "u" failed big time.

  20. I guess when you run out of topics this is what you produce. No restaurants I know is surviving on a 4% margin. If you're a running a franchise and and your take home is only 4%, then it's obvious the franchise owner is making the bulk of the profit. If this is such a terrible industry why is everyone rushing to get in? Most costs go into rent, ask any restaurant owner who runs a one in a mall, the mall owners take rent and a percentage of the sales.

  21. Many people work at restaurants as second jobs for supplemental income. Hell, I'm about to do the same thing in a week or two. People have to be able to make a living.

    For the record, I am not a fan of mandatory minimum wage increases.

  22. Part of why UBI > Min Wage. There are <needed> means of wealth redistribution that tread more lightly on small business and the organic market forces in general.

  23. 5-7% is the average, but it doesn't take into account all the tax credits, incentives, and tax deductions. This ups your bottom line greatly!

  24. now I know why my manager doesn't let us servers get OT .. we only make 2.67$ per hour which would be roughly 4$ OT but with just a 4-6% profit margin they really don't have room for that . all of our paychecks r void every week .

  25. Profit margin is low for several reasons. 1. Too much competition 2. Table turn around time – how much time it takes to clear a table so the next party can be seated before prime time is over. 3. Government mandated minimum wage – let the staff share tips as part of their daily pay. 4. Quality and Quantity balance. 5. People want something new and different to enjoy – think outside the box and then charge accordingly for it. Combine food & drink with entertainment. With that said try this to help – Offer add on items and if needed train staff to push add on items. 7. Talk up the product and make customers feel special. 8. Advertise as much as possible.

  26. 4%-6% seems pretty good to me. It's a bit lower than average of stock market but then against stock market is more complex and volatile and risky.

  27. To those that believe in free market they should be low because if it were so profitable everyone would be joining the industry.
    And if you believe in free market a low profit margin just means that some people will leave the industry to do more profitable things reducing supply and increasing profit margins.

  28. Democrats love to shout about $15 minimum wage. Unfortunately, they don't realize how much they hurt small businesses when wages are set arbirarily.

    Democrats think they're sticking it to corporations. But it's actually the little business that gets hit the hardest. Many can't compete, and end up going out of business. When that happens, the Walmarts of the world take over. As we know, most Walmart merchandise are manufactured overseas. That means that Walmart creates fewer jobs in America than small businesses do.

    The bottom line is that democrats often end up hurting the little guy with their socialist policies.

  29. PU – any comment on this story out of Phily? http://www.philly.com/philly/news/crime/council-bill-removal-safety-glass-windows-beer-delis-meeting-20171208.html

  30. Also, when a restraunt first opens, realistically they won't start to see profit for about two years. So for the restraunt to succeed, they have to have enough money in their reserves to cover all the operating costs for that length of time until they can reach that 4-6% profit margin.

  31. It is OK to pay more for Tomatoes? But the employee should work for free.. I would rather pay more at a good restaurant knowing the employees are taken care of. I realize most of these jobs are entry level but unfortunately many people need it to pay there rent and buy food.

  32. [Why Are Restaurants' Profit Margins So Low?]
    1 Competition drives rates down
    2 This field is easy to enter. You dont need a specialized degree or very high IQ or much work experience
    (Let us assume Khan from B'desh starts a highly successful and profitable Balti joint in Houston. Within a month 2 more Khans will be running their Balti restaurants nearby)
    3 As stated somewhere in the video, the customer can always walk away to the restaurant 3 blocks down if he perceives the rates are too high

  33. The problem with restaurants is quite complex and multifaceted, but I'll try to summarize it for you in a couple of sentences. The main problems with restaurants about Hollywood (the left) trying to control your mind, the arabs and anyone that doesn't support a jewish state, the left and their refusal to support tax brakes to the rich (opps, better make that the middle classes, that sounds better) and of course fascists (that are actually more like The Democrats / Lefties) and alt right…. (that we only have a problem with because they don't like the Israel and jews).

  34. Minimum wage laws do more harm than good, as this video explains. Namely for the restaurant business, they result in one of two things (or both): higher consumer prices and/or fewer employees. Fewer employees almost always mean slower service. If consumers face higher prices AND slower service, do you think they're more likely to come back soon?

  35. Anyone from chicago? I was a formal owner of ‘Thalia Spice’ and can definitely confirm this margin. For my business I needed to generate $1400 a day to break even but was barely hitting $1000 and was eating me alive. Eventually had to pass it over to more experienced business owner but restaurant business is tough. I was 26 at the time

  36. Profit margins of 1-4% are pretty standard across several industries, not just restaurants. What I would like to know is – is that 1-4% before or after the owner's salary is paid out? I'd be willing to bet that it varies quite a bit by restaurant. And I notice that you didn't mention that in quite a few states, the servers are paid $2.12 per hour. Yes they get tips, but often it won't make up for the low wages, especially in lower-price restaurants like diners.

    As a comparison, I live in Canada. Servers here get about $10 an hour, which is a bit lower than minimum wage. Our restaurant prices are about the same as American restaurant prices. Keep in mind the volume that restaurants do – most places I've worked, the average server brings in about $1000 in revenue per 6 hour shift. Pay that server $2.12 an hour, and that's $12.72 out of the owner's pocket for that 6 hour shift, leaving them with $987.28. Give that server a raise to $10 an hour, that brings you up to $60 for the server – much better for them, leaving the owner with $940 – not that much worse.

  37. I work on airplane engines, a friend from high school works at the local Dunkin Donuts, he only makes about $3 an hour less than me…

  38. 2 things come to mind. With it costing a minimum of 100k to start and spider indexes vastly out gaining the investment, it must be passion and gravitas that makes someone want to want to open a restaurant cause it ain’t for the money or the desire to pay a divorce attorney. Secondly how much higher should convenience fees of going to a restaurant be for us to return to eating out only occasionally versus more than weekly and with that how much better will the food be when demand plummets and the local guy driven by passion rather than corporate dollars runs the show.

  39. Most Profit is Theft. …. because …..
    A human as an EMPLOYEE who makes a product is paid less than what the same human as CONSUMER must pay for the same product to use it. The difference includes all expenses and a concept called PROFIT which is not given to the same human who makes and buys the same product.

  40. I've made a career in the restaurant industry as a server and bartender at a franchise. I've worked for my company for six years and have never received a raise. My employer pays me 2.13 an hour. In order to make ends meet, I need to work between fifty five and sixty hours a week. Im 'lucky' that my boss lets me work those hours, but instead of paying me overtime, im required to break the law and work off the clock for fifteen to twenty hours every week. The money I make in tips lets me scrape by while my employer gets hours of free labor. I enjoy my job and take pride in my work. But it isn't right to expect me to work for free. Despite the fact that I work more than full time, my livelihood depends on the generosity of others. Most restaurant workers are essentially employed beggars. No other industry gets an almost free workforce and no other industry is allowed to rely on their customers to subsidize their labor costs. If the only way restaurants can eke out a profit is by breaking labor laws and making people work for free, there is something wrong. I don't know what the solution is, but it isn't exploiting workers. I don't know where the thirty three percent figure came from, but that isn't what I have seen in my experience in the industry.

  41. Surly as long as all restaurants are subject to the same rules the market place is fair and the most efficient and or best will survive and grow replacing the least efficient that don't. The alternative is continue to allow businesses to pay wages that cannot support their employees and their family's lowering expendable incomes to the point where fewer people can afford to eat in restaurants then what happens to the industry?

  42. Bit of B.S. here. The labor cost is offset by the current Tip wage structure. Most restaurants pay servers 1/3 of minimum wage..

    What makes margins so low is food costs, high requirements to prepare food, shelf life of product, building overhead, and advertising.

    Its NOT paying servers more.

  43. Some numbers dont add up: if you have 780 billions on annual sales and 1 million restaurants, you have an average of 780.000 on sales, and with 4% margin you are sayng that an average restaurant owner makes 31 thousand dolars annually????????????

  44. And some idiots want 15/hr 🤦🏻‍♂️ dude go increase your skill level, learn something that’s in demand and you will be paid what you are worth to the market.

  45. too much distracting animations. at the end of this video I still had to ask:
    "Why Are Restaurants' Profit Margins So Low?"

  46. Nice use of animations, but total fail on explaining any of the factors creating the profit margins in the industry. Not to mention that most small business owners are paying themselves a salary, and US Tax code, makes it far more profitable to run a low or almost zero profit, even a loss some years for tax advantages.

    They also completely ignore that the vast majority of restaurants go out of business in less than 2 years, as many who open them do not know how to manage one. So easy barriers to entry, high turnover of failures, and the pressures brought on by constant inflation, coupled with mass migration, which means more people, yet less of them able to afford eating out, so pressures from increasing costs, and decreasing population with disposable income for a luxury good.

  47. The video didnt explain why the profit margins were so small, it just stated that profit margins were low.

  48. If the rising price cause customers leave, that is not bad at all, that is how productivity increased, and how society involved

  49. Sorry but actually people get paid less than minimum wages who work in restaurants. Most people get over minimum wage because of tips. Now I know profit margins are small BUT why is it our responsibility to provide money for the people working there? Isn’t that what our meals are for? This comment is about how the tip system should be abolished and we should just raise the cost of meals instead to because yes tips increase profit margins but make no sense. It’s not an incentive either, a study has shown that service does not matter in terms of tips.

  50. Soo…if we raise minimum wage, restaurants would have to charge us more for food, and push some of us back to…oh God no…shopping at grocery stores and cooking our own meals?!?! Isn't people cooking at home one of the 4 signs of the apocalypse?

  51. It is obvious that if all restaurants have minimum wage, coustimers will pay equily higher. Real goal is to have balance between minimum pay and enough demand… It's a pitty that PragerU is sometimes onesided. If few people because of the minimum wage would work in restaurants, they would do sth. more inovative, creative and prosperous for themself and community.

  52. It is WILDLY unwise to eat food prepared by anyone except yourself and/or people that you PERSONALLY trust. Eating out is generally a foolish thing to do, for a wide variety of reasons.

  53. I was sadly one of those 12 million people employed by food industry last year but thankfully I got a good job this year I will never work in the food industry again it sucks 😂😂😂😂 how ever I have to say some people love it so if you love it do your thing man it just wasn't for me

  54. The people who said that the video doesnt explain why profit margins are low probally rolled 1's on there intelligence stats for real life d&d.
    To put it simpily, a profit margin of 5% or lower is not enough to compensate for minimum wage increases, resulting in fewer, more overworked staff. More unemployment and lower profit margins due to a forced decrease in quality of the chain. If food comes out slower and rushed, what do you think people will do? Stay and eat there?!

    Oh and a £0 minimum wage wont force people to work for free, the employer and the employee have to settle on a wage before hiring.

  55. Lutherangrants; com helped me financially .With a single application for grant with them i received $30,000 for my business funding.

  56. Around where I live it seems like restaurants only last a few years than go bankrupt. New ones keep popping up… but very few are around for longer than that.

  57. If you increase the minimum wage, all your competitors will get hit by it too. Relatively to them, you aren't losing much.

  58. I think it's because I don't have the palate to tell the difference between a $5 stater brothers steak with $1 in broccoli and $1 in mashed potatoes with most restaurants I go to.

    I'm a decent bbq guy, and find it more relaxing to fire up my own than to have other people wait on me. It seems to me the only reason I would eat at a restaurant would be to impress a woman.

  59. 6 months into my first restaurant. This is tough work. Only employee is myself and my dad. Not enough consistent business to hire more help.

  60. No doubt. However most of the restaurants lack systems to make them profitable but the food is great. On the other hand, the corporate restaurants have all the systems and the food is horrible microwave garbage.

  61. When I opened my 1st restaurant (fine dining) in 1989, there were maybe 3 other fine dining places in my town of 180,000. We now have about 200,000 people but probably 30 fine dining restaurants. At same time, government regulations grew exponentially making profits even less. I got out in 2008 and do consulting. Never been happier although my job is vastly more difficult helping independents show a profit. As an added detriment, the labor market today is VERY challenging. As a pastry Chef friend once said to me, “Everyone wants a job but no one wants to work”. Spot on.

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