Looking to start a restaurant business in 2024? Let’s get you up to speed with the latest restaurant industry trends and learn what are the most profitable types of restaurants and what makes them stand out from the rest.
After reading this article, you’re going to:
- Understand what it means for a restaurant to be profitable
- Learn about the six most profitable types of restaurants and what makes them so beneficial
- Discover how to make your restaurant business as profitable as possible
What does it mean for a restaurant to be profitable?
Before we discuss examples of the most profitable restaurants and their types, it’s key to understand what it means for a restaurant to be profitable in the first place.
In a nutshell, for a restaurant to be considered profitable, it must generate more revenue than the expenses incurred in its operation. Profitability is a crucial measure of success and sustainability in the restaurant industry, reflecting the business’s ability to not only cover costs but also to yield financial returns.
Revenue generation: The primary source of revenue for a restaurant comes from the sale of food and beverages. Effective menu pricing, appealing food offerings, and quality service contribute to higher customer turnover and larger average bills, thus increasing total revenue.
Cost management: Keeping costs under control is essential for profitability. This includes the cost of goods sold (COGS), which is the price of ingredients, and operational costs such as labor, rent, utilities, and marketing. Successful restaurants manage these costs without compromising the quality of food or service.
Efficient operations: Streamlined operations enhance profitability by reducing waste, improving employee productivity, and enhancing customer satisfaction. This includes everything from inventory management to using the right food ordering system and the speed and quality of service.
Marketing and customer retention: Effective marketing strategies that attract and retain customers can significantly boost profitability. Customer loyalty leads to repeat business, which is more cost-effective than acquiring new customers.
To provide a clearer understanding of how a restaurant becomes profitable, let’s include some basic calculations related to revenue, costs, and profit margins.
Revenue calculation
This calculation shows the total income generated from selling food and beverages to customers in a given period (daily, in this case). It helps the owner understand the gross inflow of cash from operations before any expenses are deducted. High revenue is a positive sign, indicating good customer traffic and effective sales tactics.
Here’s a daily revenue breakdown assuming that a restaurant serves 100 customers a day and the average cost of a meal per customer is $20:
Daily Revenue = 100 customers × $20 = $2,000
Cost Calculation
Breaking down costs into categories like ingredients, labor, rent, utilities, and marketing provides a detailed view of where the money is going. This insight is crucial for identifying potential areas where spending can be reduced without compromising the quality of food or service. For example, if ingredient costs are too high, the owner might consider negotiating with suppliers or altering the menu to include more cost-effective ingredients.
Costs include ingredients, labor, rent, utilities, and marketing. For simplicity, assume total costs are $1,500 per day, broken down as follows:
- Ingredients (COGS): $600
- Labor: $500
- Rent and utilities: $300
- Marketing: $100
Profit Calculation
The profit calculation shows the restaurant’s actual earnings after all expenses have been paid. This is the net amount that the restaurant makes and can use for various purposes such as reinvestment, debt payment, savings, or owner’s earnings. It is a direct indicator of the financial health and operational success of the restaurant.
The profit for a day is calculated by subtracting the total costs from the revenue:
Profit = Revenue − Total Costs = $2,000 − $1,500 = $500
Profit Margin
The profit margin percentage is an essential metric because it provides a relative measure of profitability independent of scale. It helps the owner understand how much profit is made for every dollar of revenue. A higher profit margin indicates a more efficiently run business with better control over costs relative to revenue. This metric is particularly useful for comparing performance over time or against other restaurants in the industry to gauge competitive standing.
The profit margin is a percentage that shows how much of each dollar of sales a company actually keeps in earnings.
Profit Margin = (Profit/Revenue) × 100 = ($500/$2,000) × 100 = 25%
The above calculations are probably the simplest way of understanding what makes a given type of restaurant more profitable than others. It’s a toolkit all restaurant owners need to have.
Once you understand how profit works, you can calculate and discover which type of restaurant business will bring you the most profit in your area. Some more things to consider would be:
- Local trends: You can never be sure that the world’s most popular type of restaurant will do well in your area. Understanding local trends might be as important as following data.
- Operating costs: Perhaps rent is extremely pricey in your area, and you would benefit from either starting a food truck business or buying a couple of ice cream stands instead of investing in a brick-and-mortar type of business.
- Passion: This might be cliche, but if you’ve always dreamt about owning a fine-dining restaurant, you might find yourself not do so well in fast-food restaurants, food trucks, or fast casual restaurants.
Profit per Location vs. Overall Profit
When trying to figure out profitability trends, it’s also important to look at profitability per location rather than the worldwide profit of a given restaurant. For example, if you were to look for the most profitable restaurant in America, you would be met with names like McDonald’s ($48.7B U.S. systemwide sales) and Starbucks ($27B).
However, when you look at profit by location, McDonald’s makes a ‘mere’ $2.7 million, which doesn’t put it even in the top 10. Meanwhile, smaller players like The Cheesecake Factory ($12.6 million/location) and Ocean Prime ($12.1 million) make about four times that amount per location. As long as their expenses are not through the roof, they should be far more profitable than many of the most popular restaurants in the restaurant industry.
In essence, if you’re looking to open a profitable single-location restaurant, it might be unwise to compare yourself to giants like McDonald’s, Starbucks, or Wendy’s, who make most of their profit off of the sheer scale of their operations rather than exceptional per-location performance.
6 Most Profitable Types of Restaurants to Open in 2024
Now that we understand the basics of how a restaurant can become profitable, let’s take a look at some of the most profitable types of restaurants in 2024. I will discuss each type of restaurant with a different example of an actual restaurant to make things easier to digest.
1. Quick Service Restaurants (QSR)
McDonald’s epitomizes a quick service restaurant (QSR) by effectively managing food costs and operational efficiency. In the fast food sector, it minimizes expenses through bulk purchasing and optimized supply chains.
McDonald’s excels in rapid service, offering a streamlined menu that caters to a wide customer base seeking affordability and speed. This approach keeps it at the forefront of the fast food industry while maintaining global appeal through localized menu adaptations.
- Volume sales: McDonald’s leverages its global reach to serve millions, using high sales volumes to offset lower price points.
- Efficient systems: Streamlined operations and standardized processes ensure quick service and cost control.
- Economies of scale: Bulk purchasing and centralized supply chains reduce costs significantly.
- Franchise model: Most outlets are franchised, reducing corporate risk and capital expenditures while generating steady revenue through franchise fees and royalties.
- Brand power: Strong marketing and brand recognition attract a broad customer base, ensuring steady traffic and repeat business.
2. Fast Casual Restaurants
Fast casual restaurants are a popular dining choice for those who want good food quickly without the formality of traditional sit-down eateries. These establishments often feature menu items that are a step above fast food in quality but still affordable and served promptly. The business model of fast casual places focuses on efficiency and customer convenience, often allowing for customization of dishes.
- High-quality ingredients: Charging a premium for fresh, often locally sourced ingredients boosts revenue.
- Streamlined menu: A simple, customizable menu reduces kitchen complexity and waste, lowering costs.
- Efficient operations: An assembly line setup speeds up service and reduces labor costs.
- Brand loyalty: Commitment to quality and sustainability builds customer loyalty, encouraging repeat business.
Unlike many competitors, Chipotle does not offer breakfast dishes; instead, it concentrates on a streamlined menu of build-your-own burritos, bowls, and tacos. These menu options emphasize fresh ingredients and customizable meals, which appeal to health-conscious consumers looking for quick yet wholesome dining options. This strategy allows Chipotle to maintain a strong presence in the competitive fast casual market.
3. Fine Dining
Ruth’s Chris Steak House is a prime example of what fine dining restaurants offer. Known for its signature steaks and elegant atmosphere, it perfectly embodies the characteristics of fine dining establishments. Guests at Ruth’s Chris can always expect excellent customer service, with staff that are attentive and knowledgeable, enhancing the overall dining experience.
- Higher menu prices: Ruth’s Chris, like many fine dining establishments, sets higher prices for its dishes, reflecting the premium ingredients and sophisticated preparation methods used. This allows the restaurant to maintain a higher profit margin per dish compared to more casual dining options.
- Excellent customer service: Exceptional service is a hallmark of fine dining restaurants. At Ruth’s Chris, the emphasis on customer satisfaction helps in building a loyal customer base that values and is willing to pay for a superior dining experience. This loyalty translates to repeat visits and positive word-of-mouth, driving sustained revenue.
- Focus on quality: Fine dining establishments invest in top-quality ingredients and expert culinary staff to create memorable meals. This commitment to quality attracts patrons who seek out gourmet dining experiences, further supporting the restaurant’s ability to command higher prices.
Patrons can expect higher menu prices, which reflect the quality of the ingredients and the level of craftsmanship involved.
4. Casual Dining Restaurants
Olive Garden serves as a classic example of a traditional restaurant in the restaurant industry that caters to a more relaxed dining experience, unlike a fine dining establishment. Known for its family-friendly atmosphere and Italian-American cuisine, it offers a comfortable setting where guests can enjoy hearty, well-prepared meals without the formalities and higher costs associated with upscale restaurants.
- Family-friendly atmosphere: Casual dining places like Olive Garden attract families with a relaxed environment and kid-friendly menu options, encouraging repeat visits.
- Moderately priced menus: These restaurants appeal to a broad demographic by offering good quality meals at reasonable prices, which helps to increase customer frequency.
- Alcohol sales: Featuring a selection of alcoholic beverages boosts average bill sizes significantly, as beverages typically have higher profit margins.
- Versatile seating options: Efficient use of space with diverse seating arrangements accommodates different group sizes, optimizing space and increasing turnover.
Olive Garden’s strategic location in busy areas maximizes foot traffic, appealing to a broad audience looking for accessible, enjoyable dining. This approach helps maintain a steady flow of customers who seek quality food and a pleasant dining experience in a more casual setting. Olive Garden’s popularity underscores its successful adaptation to consumer preferences and its solid position within the casual dining segment.
5. Pizza Restaurants
Domino’s is a prime example of how pizza restaurants typically operate within the fast casual sector. Unlike traditional brick and mortar restaurants, Domino’s leverages a robust delivery and carry-out model that complements its physical locations. This approach allows them to serve food efficiently and cater to a wide customer base who seek convenience.
- Efficient operations: Domino’s uses technology-driven ordering systems and streamlined cooking processes, reducing labor costs and improving service speed.
- Volume sales: The widespread popularity of pizza ensures high volume sales, keeping revenue consistent.
- Cost-effective ingredients: Ingredients like dough, cheese, and tomato sauce are economical and bought in bulk, helping to keep production costs low.
- Menu diversification: Beyond pizzas, Domino’s offers items like wings and sandwiches, attracting a broader audience and increasing transaction sizes.
- Scalable business model: The franchise model allows for rapid expansion.
According to a National Restaurant Association survey, pizza chains like Domino’s are popular due to their ability to offer quick service and consistent product quality. Furthermore, pizza restaurants typically achieve high profit margins through cost-effective ingredient sourcing and the mass appeal of their menu items, which are designed to satisfy diverse tastes at an affordable price. This model has proven successful, making Domino’s a well-recognized name in the industry.
6. Delivery-Only Ghost Kitchens
Ghost kitchens like Kitchen United represent a profitable business model in the food industry, providing an easy way to start your own restaurant business with minimal overhead. They offer facilities for preparing a broad range of menu offerings, including dishes from various ethnic restaurants. This model allows operators to focus on producing higher quality food without the costs associated with traditional restaurant settings.
- Lower overhead costs: They save on expenses typical of traditional restaurants, like large dining areas and extensive staffing, improving profit margins.
- Diverse revenue streams: Operating multiple culinary brands under one roof allows for various income sources, stabilizing overall earnings.
- Efficiency in operations: Shared resources and centralized kitchens reduce costs and increase production efficiency.
- Increased delivery reach: Strategic locations optimize delivery, expanding customer bases more effectively than traditional setups.
Ghost kitchens often achieve some of the highest profit margins in the sector due to lower operating expenses such as rent and staffing. The average profit margin for ghost kitchens is typically higher, making them an efficient and financially attractive option for new and established chefs alike.
Key Takeaways
- Understanding profitability: A restaurant is considered profitable if it generates more revenue than expenses. Key components include effective menu pricing, cost control (ingredients, labor, rent), efficient operations, and strong marketing and customer retention strategies.
- Most Profitable Restaurant Types:
- Quick Service Restaurants (QSR): Such as McDonald’s, excel in volume sales, efficient systems, economies of scale, and a strong franchise model.
- Fast Casual Restaurants: Like Chipotle, are known for high-quality ingredients, streamlined menus, efficient operations, and strong brand loyalty.
- Fine Dining: Exemplified by Ruth’s Chris Steak House, where higher menu prices and exceptional service contribute to profitability.
- Casual Dining: Like Olive Garden, appeals to families with moderately priced menus and a comfortable atmosphere.
- Pizza Chains: Dominated by brands like Domino’s, which focus on volume sales, efficient operations, and cost-effective ingredients.
- Delivery-Only Ghost Kitchens: Such as Kitchen United, minimize overhead costs while maximizing efficiency in operations and diversifying restaurant revenue streams.
- Strategies for Profitability:
- Localize and Adapt: Tailor your restaurant type and strategy according to local preferences and trends.
- Manage Costs Wisely: Focus on controlling operating costs and optimizing resources without compromising quality or service.
- Leverage Technology: Utilize modern technologies for inventory management, customer service, food online ordering, and marketing to enhance efficiency and customer engagement.
- Cultivate Loyalty: Build a strong brand that encourages customer loyalty, which is more cost-effective than constantly acquiring new customers. Introduce a restaurant loyalty program to keep customers coming back.
