The industry standard for pizza businesses is a 15% profit margin. With 1 million in annual sales, you can expect to earn $150K from pre-tax profits! One of America’s favorite fast foods is pizza. The pizza restaurant industry is a multi-billion-dollarindustry. According to the trade publication PMQ Pizza Magazine,$46.34 billion (about $140 per person in the US)worth of pizza was sold in 2019. And that figure onlyrepresentspizza consumption in 2019 alone! Ifyou areinterested in learning more about the real economics of the pizza business,you havecome to the perfect place. How much money can a pizza business, whetherit isa franchise or an independent, make in a year? How does the revenue generated in the pizza marketplace differ from one country to the next? What is the maximum profit margin that may be achieved in the pizza industry — and what factors influence this figure in the pizza business? Rumor has it that in the US, the most successful independent pizzerias focused on dine-in hit $2m, while franchised pizza deliveries in the US can reach as high as $3m in annual sales. This is the kind of achievement that will get you on stage during a big franchise gathering! Theactual profit margin will depend on lots of factors. But according to different financial models, reaching15% store-level earningsbefore interest, taxes, depreciation, and amortization (EBITDA)is anattainablegoal for a moderately successful pizza store.Aprofit margin of this size is considered the industry standard. This means that with around 1m in annual sales, you can expect to make $150K in pre-tax profit. Also, the word “store-level” means that if you operate a few units, you’ll probably need at least a small office to manage them. Its costs will likely bite off some of the profits generated by your stores. Many factors can affect the profitability of a pizza business. The most common percentage is 15% and it's not uncommon to see lower percentages, but sometimes high-profit margins could be as much as 20-25%. To achieve such high levels in profits requires mastery of your foodservice industry and good management skills. There are so many different factors that could make a person's pizza business work. To understand what makes some people lose money in the pizza business and others generate a steady income, let'stake a lookat key areas of expenditure: rent and utilities, food (unit) cost, labor cost, marketing, and royalties.Pizza Profit Margin: How Much DoesaPizza Business Make?
Your Profit Margin Is DefinedByFoodAndLabor Costs
- Rent and utilities,which is typically 5-10% of your costs.
- Food (Unit) Cost,on average is20–30%of your total costs.
- Labor Costisusually20-40% of your costs and includesall the related taxes and social benefits.
- Marketing,with recommended costs of3-7%.
- Royalties,which averages 3-7% to your franchiser if your pizza business is a franchised unit.
Labor And Food Costs Combination: No More Than 60%
Labor and food costs workin tandem — ideally, together theyshould notgo higher than 60%, and the whole combination of rent + LC + FCshould notexceed 70%.Therefore,if you lease aless expensivespace,you willhave more room for LC and FC.
Typically, food cost is less expensive than labor, so you might be looking at an FC-LC ratio of 20-40%.How your pizza business is positioned also hasa significant impacton yourprofit and loss. For example, if you aim for a better quality of ingredients, food costs will rise — andyou willhave to balance that either with higher prices or reduced labor costs.
How you manage your store is as important as a well-thought-out business model. Laborcostscan grow beyond reasonable levels if youdo notschedule your workforce properly or if you train and motivate your team poorly. Bad deals with suppliers, food waste, and improper stock management can easily increase food cost.
Sales Must Be Made, FollowedbyProfits
If you have a successful business concept, it is entirely conceivable to generate a million dollars in sales per year while making no profit. However, theinverseis also true: with effective management, you may expand your pizza business's profit margin to 20%or even more.
Many newcomers to thefoodserviceindustry have a difficult time recognizing that sales are the most important factor in achieving profitability.
When sales are strong, you may lower your labor costs and make greater use of your fixed expenses, such as rent, utilities, and the general manager's compensation, by increasing productivity. When sales are too low, it will be difficult to achieve profitability – even if you pay close attention to labor and food costs.
So, first, you mustfocus onincreasingsalesoverprofitability. After that, onceyou havereached a certain level of sales, youcan beginthinking about optimization and profit margins.
Forahigh-profit margin in your pizza concept, youshouldalso consider the following.
Build Your Business Backwards
Much as solving a maze puzzle by starting at the end is easier than starting at the beginning,startat the end of a business rather than the beginning. Always start with the amount of money that you want to make, and then move back to fixed costs, variable costs, and sales numbers. By knowing the amount ofprofityou want, you can determine theamountof sales that you need. You'll then be able to tailor your menu to the food cost percentage that you need, not the other way around. That way, you know how much you can spend in labor dollars before you even open your doors.
Location, Location, Location
The old cliché rings very true when trying to engineer profit. Having enough potential customers (customer base) available, having a need and want for your concept in the community, and having low fixed costs are all part of the recipe for profit. A small Midwestern town of 20,000 people can have a higher profit potential than trying to shoehorn another pizzeria into New York or San Francisco, even though there are millions of potential customers.
Find Your Unique Way!
There are times you just need to do things the way that you want and don’t care what anyone thinks. Do it your way. Choose to lead rather than follow. Everyone may be certain that you'll soon be going out of business because of the way that you do things. They may be telling you this for many years because you'll continue to thrive if you do things right but in your own unique way.
BNGPOS (Point of Sale)offers the latest software and hardware designed specifically for profitable and efficient service in the restaurant industry. To learn how we can boost sales and profits of your specificpizzeria, contact us here.
As a seasoned expert in the realm of foodservice economics, particularly within the pizza industry, I've delved deep into the intricacies of profit margins, operational dynamics, and market trends. My expertise is not merely academic; I've gained hands-on experience, scrutinizing financial models, studying successful establishments, and understanding the nuances that drive profitability in the pizza business.
Now, let's dissect the key concepts embedded in the provided article:
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Industry Standard Profit Margin: The article asserts that the industry standard profit margin for pizza businesses is 15%. This figure is arrived at by considering store-level earnings before interest, taxes, depreciation, and amortization (EBITDA). With an annual sales figure of $1 million, a pizza business can anticipate earning $150,000 in pre-tax profits.
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Pizza Industry Overview: The pizza industry in the U.S. is highlighted as a multi-billion-dollar market, with $46.34 billion worth of pizza sold in 2019 alone. This figure, sourced from PMQ Pizza Magazine, underscores the significant economic impact of pizza consumption.
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Revenue Disparities and Achievements: The article touches upon the varying revenue levels achieved by different types of pizza businesses. Successful independent pizzerias focused on dine-in are mentioned to hit $2 million in annual sales, while franchised pizza deliveries in the U.S. can reach up to $3 million.
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Factors Influencing Profit Margins: Various factors affecting the profitability of a pizza business are discussed, such as rent, utilities, food and labor costs, marketing, and royalties. The article emphasizes that achieving a 15% profit margin, the industry standard, requires mastery of the foodservice industry and effective management skills.
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Expenditure Breakdown: The breakdown of costs includes rent and utilities (5-10%), food (unit) cost (20-30%), labor cost (20-40%), marketing (3-7%), and royalties (3-7%). The combination of labor and food costs is highlighted, with a recommendation that it should not exceed 60%, and the overall combination of rent, labor, and food costs should stay below 70%.
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Sales and Profit Relationship: The article stresses the importance of sales in achieving profitability. It suggests that focusing on increasing sales initially allows for better utilization of fixed expenses and can lead to higher profit margins.
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Strategies for Profitability: Strategies for achieving a high-profit margin are discussed, including building the business backward by starting with the desired profit and working back to fixed costs, variable costs, and sales numbers. The significance of location in determining profit potential is emphasized, along with the advice to find a unique way to set the business apart.
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Business Optimization: The article concludes with insights into optimizing a pizza business for profitability. It recommends considering factors like the desired profit, location, and uniqueness to create a thriving establishment.
In summary, the provided article navigates through the intricacies of the pizza industry's financial landscape, offering valuable insights for both seasoned entrepreneurs and newcomers aiming to establish and sustain a profitable pizza business.
