I think the average margin might be misleading. After all, most restaurants fail pretty quickly. That number could be skewed by the unsuccessful businesses.
But I think it’s an interesting point. Why fight all day long for a 5% margin when you could put your money in index funds?
>Why fight all day long for a 5% margin when you could put your money in index funds?
Are you serious? You're making such a critical mistake. The business owner isn't paying for the products. The customers are. Every time a customer spends $100 you get $5 in pure profit after paying all the salaries (including your own) and all other costs. The 5% margin is applied on the money your customer is spending, not your own money. If you have $100 and get a 10% ROI then you would have to wait a year to get $10. If you have 10 customers each paying $20 for the all you can eat buffet then you have $200 * 5% = $10 profit.
Let's assume you spent half a million on your fancy restaurant. How long does it take to pay that back? You don't pay it back from the profit. The cost has already been taken into account and therefore lowered the margin which means the margin clearly doesn't influence the ROI. The final profit is $1 per customer with 300 customers per day which translates to $75k of pure profit per year or a ROI of 15% in the first year. The real numbers probably look completely different. 300 customers is probably a below average day. The restaurant may be more expensive or cheaper to set up (especially if they are renting instead of owning).
This is something that often seems lost in this discussion.
The profit margin is usually after the owners themselves have taken a salary. If they are paying for themselves appropriately, and the margin is 0%, this is often described as "making no money".
What's making no money here is the business as an entity, not the owner, despite the frequent rhetorical conflation of the two.
Payout of positive margins, if they exist, are often classified as "profit sharing" in the simplest of businesses, like sole proprietorships. In more complex large businesses, they become dividends or employee bonuses.
Most people can't afford to pay themselves nothing while running a business.
They might also be optimizing for taxes by heavily re-investing, charging personal stuff on the expense account (like car/gas/travel)... That makes it look like they are doing badly while they are doing okay.
It's a 5% margin on the sales, not on the capital.
The least you can expect is that a business sale is much larger than the capital stopped at it. Otherwise it is in great trouble, even on high margin markets.
They're making that 5% margin on multiple seatings per day, rather than once per year.
It doesn't really make sense to compare things this way, they're so different. Better to do an income flow analysis. For a given amount in invested capital, how much profit will a profitable restaurant generate in a year vs the stock market. The restaurant is gonna come in way ahead, though of course it's a very active investment (a full time job plus some) vs the passive index fund investment.
The two are orthogonal. The 5% here is on revenue. This would be like your salary. You can of course invest your savings in an index fund but you still want a salary to get more money into your investments.
But I think it’s an interesting point. Why fight all day long for a 5% margin when you could put your money in index funds?