How Profitable is a Fast Food? Profits & Breakeven Analysis
If you are preparing a business plan for a fast food restaurant, you may want to know how much profits you can make with this business. In other words, you must know how much revenue you must generate to reach break-even and make profits.
With a market size of about $297 billion and over 197,650 fast food joints in the US, the average fast food has an annual turnover of $1,500,000..!
What does this mean for your fast food joint? How much revenues can you expect to generate? More importantly: how much profits can you realistically make with a fast food?
In this article we’ll look into the average revenues and profit margins of a fast food in the US. We’ll also look into how you can accurately forecast your fast food’s turnover and break-even point. Let’s dive in!
What is the average turnover for a fast food joint?
As per the data provided by Zippia, the annual turnover for a fast food restaurant is around $1,500,000. However, remember that this is only an average value, and turnover vary greatly based on the size of your fast food, its brand, location, etc.
By the same logic, franchises typically have higher sales vs. independent fast food restaurants. A few examples are: MacDonald’s ($2.94 million), Five Guys ($2.58 million), Chipotle ($2.2 million), etc.
What is the average profit margin for a fast food joint?
According to LightSpeed HQ, the average profit margin for quick service restaurants or fast food restaurants is between 6% and 9%. That’s pretty much in line with our profit analysis below (5-10%).
How much does it cost to run a fast food?
Operating a fast food restaurant attracts some recurring costs that include:
- Raw materials: You need to spend money on acquiring the raw materials required for running your fast food business
- Salary: You need to pay salaries to your staff members every month
- Rent & bills: Unless you own the commercial property, you must pay rent. Even if you own the property, you may have to pay mortgage installments. Plus, there will be utility bills that you must keep paying
- Marketing: You must spend on marketing your bakery to bring in new customers
- Insurance: Since the bakery is a business, you will need a business insurance plan and other relevant insurance plans such as a workers’ compensation plan
- Software: You need to spend money on software such as accounting software, POS software, etc. These are mostly monthly expenses
- Miscellaneous: There will be various miscellaneous expenses such as janitorial services for which you must keep paying every week or month depending on your arrangement and contractual obligations
In general, it costs between $33,000 and $41,000 per month to run a small fast food that makes $35,000 – $45,000 in sales per month. For more information on how much it costs to run a fast food, read our article here.
For clarity, we have included below the turnover to net profit waterfall for an illustrative fast food in the US operating both takeaway and a sit-in restaurant ($1,200,000 revenue per year and ~4% net profit margin). By far the largest expenses are salaries (~50% total revenues).
How to forecast profits for a fast food?
In order to calculate profits for a fast food, you must first forecast revenues and expenses.
Profits = Revenue – Expenses
Forecasting revenue for a fast food
Revenue can easily be obtained by multiplying the number of orders by the average order value:
Revenue = Orders x Average order value
For example, if you have 100 orders in a day with an average order value of $20, monthly revenue is about $50,000 (assuming 6 days a week).
Forecasting expenses for a fast food
There are 2 types of expenses for a fast food:
- Variable expenses: these are the COGS as explained earlier. They grow in line with your revenue: if your turnover increases by 10%, variable expenses grow by 10% as well
- Fixed expenses: salaries, rent, debt interest (or leasing) costs to acquire the equipment, marketing and all the other operating costs listed above
Calculating profits for a fast food
When we refer to profits, we usually refer to EBITDA (Earnings before interests, taxes, depreciation and amortization) as it represents the core profitability of the business, excluding things such as debt interests, non cash expenses and other non-core expenses.
In order to get to EBITDA, we use the following formula:
EBITDA = Revenue – COGS – Operating Expenses
We’ve included below the illustrative profit-and-loss of a fast food (from our financial model template for fast food restaurants).
Whilst gross margin stands at about ~75%, EBITDA margin can go up to 15-20% depending on the business and net profit margin up to 5-10% for the most profitable fast foods (in line with the industry averages discussed above).
How to calculate break-even for a fast food?
Break-even is the point at which total costs and total revenue are equal. In other words, the breakeven point is the amount of revenue you must generate to turn a profit.
Because you must at least cover all fixed costs (that aren’t a function of revenue) to turn a profit, the break-even point is at least superior to the sum of your fixed costs.
Yet, you also need to spend a certain amount for every $1 of sales to pay for the variable costs.
As we just saw, fast foods typically have a 75% gross margin (after raw materials and payment fees). Indeed, most expenses actually are fixed costs (salaries, rent, marketing, etc.).
The break-even point can easily be obtained by using the following formula:
Break-even point = Fixed costs / Gross margin
Using the same example earlier, let’s assume your fast food joint generates $50,000 in sales per month and has the following cost structure:
|Operating cost||Fixed vs. variable||Amount|
|Staff costs||Fixed cost||$25,000|
|Rent, bills||Fixed cost||$5,000|
The break-even point would then be:
Break-even point = Fixed costs / Gross margin %
= $38,000 / 75% = ~$50,000
In other words, you need to make at least $50,000 in sales per month to turn a profit.
Assuming the average order value is $20, your break-even is 2,500 orders per month. In other words, you make profits once you have at least 100 orders a day (assuming you’re open 6 days a week).
How to increase profits for a fast food?
There are various strategies to increase the profits of a fast food business such as:
- Value menus: Because of the global economic downturn, value menus with fewer entrees, tweaked food items from the main menu, one or two beverages, and at least one low-cost dessert. Adding value menu ensures business continuity and even improve profits by attracting a new segment of consumers
- Refine menu: Remove slow-moving and low-profit items. They usually lead to wastage and reduce profits. A refined menu can help you to maximize profits.
- Advertising tie-ins: Consider advertising tie-ins with national, regional, and local events (such as sports) to place your brand in front of people
- Provide discounts during lulls: All restaurants face a slow time during specific hours of the day (such as between lunch and dinner). Provide discounts for those hours to attract new or existing customers
- Loyalty program: Loyalty programs not only help to increase customer loyalty but also helps to increase the customer lifetime value, which eventually increases the profits
- Move online: Have an online presence allows online ordering. You may need to partner with third-party delivery services that will charge commissions. However, you can partner with SpotOn (an online ordering platform) that allows commission-free orders for pickups through your own website. For delivery they have partnership with DoorDash that replaces commissions with a flat rate per order
- Upsell: One of the most evergreen strategies is to upsell costlier items to maximize revenue & profit
- Create combos: Another age-old tactic is to introduce combo meals by mixing and matching slow- and fast-moving items. McDonalds is a great example of combo meals