Catering Profit Margins: Why Meal Prep Beats Event Catering

I have a confession to make. I love to eat. A lot. I eat so much that I had to set up a whole company to cook for me, because my wife couldn’t manage to produce the amount I consume. My standard is 3,500-4,000 kcal a day and my favourite place to eat is a restaurant. My lover has even come up with a trick to motivate me to be active. For me, activity has to have a purpose, so I love jujitsu, the gym (to get stronger at jujitsu), running (so I don’t run out of breath at jujitsu) and swimming (because it’s my time together with my daughter). If you say to me, “Let’s go for a walk to a café for dessert!” – I’m first.

The other thing I’m obsessed with is when things just work. An example would be the techniques in Jiu-Jitsu, which I’ve been training for 23 years, improving all the time and still finding ways to improve the small components. I can’t stand doing things in a sub-optimal order, like wandering around a shop without a written shopping list. But what frustrates me most is when things don’t work in business. When things don’t work, we have a loss-making business, an unprofitable business with negative margins.

Having run two meal prep (prepaid meal-plan) brands, one of which reached $203,956 in turnover per month at its peak, I have learnt that there is not one, not two, but even three catering margins!

1. Gross Margin, also known as Level I Margin
2. Operating Margin, also known as Level II Margin
3. Net Margin, also known as Level III Margin

Before we get into what these margins are, let’s get back to the basic question for which you are probably reading this article: “How do you run a profitable foodservice business?

A profitable business is one that makes a profit. If a business is not profitable, the problem is 100% one of two things, or worse, both at the same time:

• The sales are too low.
• Costs are too high.

If you ask, “Which is more important – revenue or cost?”, I will answer: “Revenue, but at what cost? Costs can be generated by any of us. Revenue, i.e. sales, requires some effort. We have to find a need in a group of people and then convince them to pay us to satisfy it with our product or service. I deliberately wrote “at what cost” because if increasing revenue is going to be done in an unprofitable way, we don’t want to do it.

“Thanks, Sherlock, I thought we were trying to sell at a price below our costs.” – Although this sentence sounds absurd and you’re right to think I’m stating the obvious, it’s not.

In winner-take-all businesses, managers sometimes make the decision to maximise revenue growth at the expense of profitability. Look at a major online marketplace that holds more than 60% of its home e-commerce market (yes, 6 out of 10 products sold online there go through it). Its annual profit runs to around $150 million. Despite many attempts, neither Amazon, eBay, Temu nor AliExpress managed to unseat it locally. From this point of view, would you be willing to accept a loss of $15 million per year for 5 years in order to grow your business to the point where it will generate $150 million per year as a near monopoly?

In the foodservice market we can find a similar strategy in meal prep. There are several well-known brands that communicate aggressive price discounts and may sell products with zero or even negative margins, e.g. with the intention of becoming the leader and causing the competition to withdraw. This is a fine line, as selling below cost to push rivals out is restricted in many markets.

Although, as I said earlier, revenue is ultimately more important, a profitable business starts with costs. We usually spend money first (costs) to get customers, and only then do they pay us (revenues). This is the first way your business can be unprofitable.

Gross Margin – Level I Margin

Gross Margin is the difference between turnover and the cost of goods sold. It tells you how much you are actually earning from the sale of your products after deducting direct production costs.

If your gross margin is high, it means that your production is going well and that you are able to sell your products at much higher prices than the cost of production. A high gross margin is a sign that your business is running efficiently and effectively.

Operating Margin – Level II Margin

The operating margin shows how much you earn from your core business after all operating expenses, but before tax and finance costs.

A high operating margin shows that you are managing your business well and controlling the costs associated with day-to-day operations. It’s a key indicator of how effectively you’re managing your day-to-day costs.

Net Margin – Level III Margin

Net margin is a ratio that shows how much you earn after deducting all costs, including operating, financial and tax expenses.

A high net margin is proof that your business is financially sound and can make a profit after all costs are taken into account. It is the ultimate indicator of the financial health of your business.

The importance of different margin levels

Gross Margin:

A high gross margin is a sign that your production is efficient and you can sell products at prices well above the cost of production.

Negative gross margin – “The cost of producing a good or service exceeds the amount you receive from sales”. How can this situation occur?

1. You sell a prepaid meal plan for days ahead at today’s prices. In the meantime, the cost of an employee, raw materials and transport increases. In a few dozen days, you realise that the amount of money you received from the customer at the beginning does not cover the cost of production.
2. You organise an event. It turns out that your equipment breaks down and your people get sick. You don’t have a choice because you’re bound by contract and you don’t want to lose face, so you hire equipment from a rental company and find people on the spot. Rental equipment is very expensive, and so are employees for the time being.

Operating margin

A high operating margin indicates that you are managing your day-to-day operating costs well, which is key to a healthy business.

Net Margin

A high net margin is an indication of the overall financial health of your business, showing that you are able to make a profit after all costs are taken into account.

This margin structure helps to understand and control the company’s finances, which is crucial for long-term success.

Based on my experience, I have identified 4 key elements that affect gross (stage I) margin in the foodservice industry.

Food cost – the cost of purchasing raw materials for production.

Labour – the time spent by employees cooking, packing and possibly delivering food to the table or home.

Logistics – in the case of home delivered food, this is the cost of an external or internal courier and their means of transport and associated costs.

Customer acquisition costs – marketplace commissions such as Uber Eats, DoorDash or Deliveroo, Facebook ad budget, ad agency fees, social media, photo production costs, graphics. All costs incurred to get the customer to buy from you.

Why gross margin matters?

The company that can spend the most on customer acquisition will always win. The company that can spend the most on customer acquisition is the one whose product prices are the highest, whose margins are the highest, and whose customers return most often and stay the longest. To put it in human terms, the ideal scenario is that you sell expensive products or services to customers, it costs you little to produce them compared to the amount you receive, and customers return to you regularly and for years.

Let’s suppose we have two restaurants, Green Pepper and Pink Orange:

Green Pepper attracts customers with discounts and attractive prices. Its owners rely on word of mouth and don’t have much money to spend on advertising, as they sell food with a minimal mark-up.

• Cost of acquiring a customer – $8 – very low, as it’s mostly word of mouth.
• Average bill – $25
• Average cost – $20
• Profit per customer visit – $5
• Average number of visits per customer – 1.5 – the restaurant doesn’t even have a social media presence. Although the food is decent, customers just forget about it.
• Total customer value – 1.5 * $5 = $7.50 – the amount Green Pepper can spend to acquire a customer and still end up with zero.

Pink Orange creates an exclusive brand where the cheapest water sells for $6, but the owners invest heavily in advertising and customers like the place and come back often.

• Customer acquisition costs of $75 – they invest heavily in all possible customer acquisition channels.
• Average bill – $125
• Average cost – $20 – thanks to their size they can optimise costs and it is similar to Green Peppers.
• Revenue per customer visit – $105
• Average number of visits per customer – 5 – it is a trendy place, food is decent, customers are eager to return
• Total value of the customer – 5 * $105 = $525 – the amount that Pink Orange can spend on acquiring a customer in order to come out at zero.

In this example, Pink Orange’s business is much more secure because of the margin it generates throughout the customer lifecycle.

How do you implement revenue counting, gross margin, operating margin and net margin?

The absolute most important thing, and the first thing you should do at this point, is to keep these numbers in front of you and your management at all times. You can’t control what you can’t see. It is not something you should “look at”. Your control cockpit should have 4 indicators that you control all the time. Monthly is the absolute minimum:

• Revenue
• Gross margin, also known as Level I margin
• Operating margin, also known as Level II margin
• Net margin, also known as Level III margin

If at this stage you are still thinking: “At my level, I don’t need to check it that way”, ask yourself whether you run a business or have an expensive hobby. If it’s the latter, you really don’t need to. I also refer you to 23 Biggest Myths About Catering Management.

The easiest way is to ask your accountant to give you a breakdown. Armed with this knowledge, you will be able to explain how she should qualify the costs. It’s not a perfect solution, as you’ll see the data with a delay of a month or more, but it’s better than not seeing the data at all.

The second method is to use a system that scans your invoices and helps you control your workflow, such as Cheff.it for restaurants or Flambia System for meal prep, diet catering, event catering, pre-school catering, hospital catering. Then you can react in real time.

Data is nothing without action. At my own brands we have a monthly meeting where we discuss important issues for the business, look at what has changed, why there have been increases and what has caused decreases. We come out of the meetings with a to-do list for which individual managers take responsibility. For example, I am responsible for customer acquisition costs, while my operations director is responsible for food costs and employee costs per package.

Just as data alone won’t make a difference, reading alone won’t make a difference. Take action now and increase your chances of making your foodservice operation profitable.

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Where to go next

This is one piece of a bigger move: adding a prepaid meal-plan line to the kitchen you already run, and run the meal-prep profit numbers. When you are ready to land your first paying subscribers, The Second Service is the step-by-step playbook.