Average fast food profit margin in the American market

When it comes to the fast food industry, it’s easy to imagine stacks of cash and quick sales. After all, fast food is a staple in America.

But, despite all that cash flow, the actual profit margin in fast food may not be as big as you might think. Fast food restaurants face high operating costs (think staffing, rent, and ever-rising food prices) which can eat away at those seemingly endless sales.

While revenue is important, your profit margin is the real indicator of your fast food business's financial health and long-term success. Tracking your profit margins can give you a clearer picture of how well your restaurant is doing and help you make more informed financial decisions.

In this guide, we’ll break down the average profit margins in the American fast food market and show you how to measure and improve your own profitability.

Elements taken into account in fast food profit margins

When talking about profit margins, there are multiple factors at play that can make or break your bottom line. Let’s look at the key elements you need to consider:

Average revenue in fast food sales

Let’s start with the top line: revenue. The American fast food market has been growing steadily over the past five years, with total industry revenue increasing at a CAGR of 2.5%, reaching $366.9 billion in 2023.

But don’t be fooled by these big numbers. A single fast food location typically brings in $66,000 to $2.5 million annually, depending on factors like brand recognition, location, and menu offerings. Top-tier franchises like Chick-fil-A often surpass this, making around $8 million or more per year at a single location. However, revenue is just part of the equation. To get a true sense of profitability, we need to look at costs.

The common expenses in a fast food restaurant

Fast food may have a reputation for low prices, but running a fast food restaurant isn’t cheap. Let’s break down the biggest expenses:

• Food costs: This includes all the ingredients needed to make your menu items, plus packaging. On average, food costs account for 28-35% of total sales. Prices for staples like meat, dairy, and produce can fluctuate, especially when supply chain disruptions hit (like ingredient shortages or increased transport fees).
• Labor costs: Paying employees is one of the highest expenses in fast food. Due to the industry’s high turnover rates, you’ll also need to budget for training new hires regularly. Labor costs typically eat up 25-35% of your revenue, and this can go even higher in states with rising minimum wage laws.
• Rent and utilities: Your location can make or break your business, but it comes at a price. Prime spots in busy areas tend to have high rent costs. Add in utilities like electricity (for fryers, grills, and lights), water, and waste services, and you’re looking at a higher percentage.
• Marketing and advertising: Getting customers through the door of fast food restaurants requires some marketing spend, whether it’s local promotions or national ad campaigns.
• Equipment and maintenance: Fast food kitchens are packed with specialized gear — fryers, grills, ice cream machines (and yes, they do break down sometimes). You’ll need to set aside a budget for regular maintenance and the occasional replacement.
• Miscellaneous costs: And then there’s the other stuff, things like insurance, licenses, credit card processing fees, and those surprise repairs that seem to pop up at the worst times. These extras can sneak up on you if you’re not prepared.

What is the average profit margin in the fast food industry?

The average profit margin for a fast food business usually falls between 6-9%, according to DoorDash. That might sound modest, but it’s actually pretty solid in the restaurant industry, where slim margins are the norm.

However, there’s a difference when you look at fast casual or quick-service restaurants (QSRs). These spots generally have higher profit margins, averaging about 17%. That's because fast casual places often have more flexibility in pricing, simpler (yet pricier) menus, and need fewer employees to operate. A great example is Shake Shack, which reported a 20% profit margin in May 2023 and expects it to go even higher by the end of the year.

Difference between gross margin and net profit margin 

When it comes to understanding your fast food profit margin, it's important to know the difference between gross margin and net profit margin. 

Gross margin measures how much revenue is left after you’ve covered food costs like raw materials (think the cost of your burgers, fries, chicken nuggets, pizzas, and milkshakes). It’s a good indicator of how efficiently your fast food restaurant is converting ingredients into fast food sales.

On the flip side, net profit margin looks at the bigger picture, taking into account all expenses beyond just food costs. This includes labor, rent, utilities, marketing strategies, and other variable costs that chip away at your total revenue. Your net margin shows the actual profit you’re taking home after paying for everything.

Keep a close eye on both metrics and use them in your business plan and SWOT analysis to ensure your fast food restaurant profit margin stays in the sweet spot.

How to calculate the profit margin of your fast food restaurant 

Calculating your profit margin is easy once you know the basics:

1. Find your gross profit using the following formula: Gross Profit = Total Revenue – Food Costs
2. Then, work out your net profit with the formula: Net Profit = Gross Profit – Other Costs
3. Finally, calculate the profit margin: Profit Margin = ( Net Profit ÷ Total Revenue ) × 100

Risks and challenges impacting profitability in your business

Now, there are a bunch of risks and challenges that can hit your profit margins hard. Here’s what to watch out for:

The market’s competition effect on pricing 

Competition in the fast food industry is fierce. Profitable fast food chains like McDonald's, Chick-fil-A, and Taco Bell constantly adjust their menu items, which can put pressure on independent fast food restaurant menu prices. If you’re priced too high, you risk losing new customers, and if you price too low, you may not cover costs.

Economic factors raising overhead expenses

Economic changes can drive up your overhead expenses significantly. For example, the Raise the Wage Act of 2023 means the minimum wage is set to increase steadily in the next few years. Starting in 2024, it’ll be $9.50 per hour, climbing to $17.00 by 2029. This increase in labor costs can eat into your total revenue and net profit margin if you're not careful. In addition, costs for utilities, insurance, and rent are rising, putting more pressure on your bottom line.

Supply chain disruption affecting the cost of raw materials

We all know how crazy things got with the supply chain during the pandemic. When supply chain disruptions happen (due to weather, transportation issues, or global events), your food costs go up, forcing you to either increase menu prices or absorb the additional costs, both of which can effect your fast food profits.

Fast food trends shifting towards healthier options

More people are looking for healthier fast food options these days. In fact, 50% of Americans say they're actively trying to be more healthy with their diet. While this fast food trend is great for attracting a new customer segment, it can be a challenge to balance healthier menu items with keeping your costs low. 

Strategies to ensure your fast food sales profitability

If you want to maximize profits, here are some proven tips to keep your fast food business on track:

Figure out your bestsellers with efficient menu planning

To boost your fast food profit margin, it’s super important to know which menu items are your top sellers. A POS system (point of sale) is perfect for this. It keeps track of every sale, so you can see exactly what’s flying off the shelves and what’s not.

For example, if you see that sandwiches are selling better than chicken nuggets or soft drinks, you can make smart decisions about your menu. A POS terminal gives you real-time info about customer spending, which helps you figure out which items are bringing in the most cash.

It also helps cut down on waste. If something isn’t selling, you’ll know and can adjust the price or remove it from the menu. With a POS system, you can make sure you're offering the right items to bring in the most money, helping you raise your profit margin. Plus, if you run more than one fast food restaurant, a POS system will track sales across locations so you can make better decisions for all your shops.

Automate regular processes to increase staff efficiency

Automating means using technology to handle tasks that would normally require people to do them manually. In a fast food restaurant, this could be anything from taking orders to processing payments or fast food management and restaurant accounting. By doing this, you can save time, reduce mistakes, and make your staff more efficient.

For example, you can set up integrated payments at your registers so when a customer pays, the system automatically records the transaction, updates inventory, and adjusts the day’s totals.

You can also automate inventory tracking. Instead of manually counting ingredients, the software in your POS can automatically update stock levels as orders are placed, letting you know when it’s time to reorder. This helps you avoid running out of key items or overstocking, which cuts down on waste and keeps total costs low.

Encourage more sales by implementing customer rewards programs

People love getting rewarded, and a simple loyalty program can really pay off for your fast food business.

You can set up a program where customers earn points every time they make a purchase. For example, every dollar they spend could equal a point, and once they hit a certain amount, they can redeem those points for discounts or free items. It’s a great way to keep customers engaged and encourage them to spend more on their next visit.

Having loyalty programs tied to online ordering is also a huge plus. Customers who order online can still earn and redeem points, making it easy for them to stick with your brand no matter how they order.

Market your food items to the right audience

Understanding who your customers are and where they hang out can help you focus your efforts and drive more sales.

If you have a fast food stand, make sure you’re showing up where your audience is. For example, set up shop at local events like fairs, concerts, or community festivals. These events are full of hungry people looking for quick, tasty meals, and your stand could be the perfect solution. You’ll get your food in front of lots of potential customers while they’re in the mood to spend.

It’s also a good idea to tailor your promotions to specific customer segments. For example, if you’re near schools, you could offer discounts for students or family combos. Or, if you’re in a business district, focus on quick lunch options for office workers.

Liked this blog? Check out our other hospitality resources including our 'restaurant business models' guide and our 'food waste management' guide.