Editor's Note: This article is part of Inc.'s weekly report on business niches in partnership with financial information company Sageworks

Net profit margins for the restaurant industry continue to improve following the recession, according to data from financial information company Sageworks.

Beginning in 2009, net profit margins have steadily increased each year, topping off at 5.1 percent in 2013, while sales growth slipped only marginally. Food and labor costs are the largest expenses for operating a restaurant, explains Sageworks analyst Kevin Abbas.

“As we continue into 2014, restaurants may continue to face rising food costs, increased labor costs and economic uncertainty," Abbas says. "The challenge to privately held restaurants will be whether or not to pass on those expenses to the consumer in menu prices or absorb some of those costs to maintain a loyal, local customer base.”

Abbas notes that some of the currently positive trends within the industry may reflect advantages gained from the use of technology, which have allowed some managers to better track sales and expenses in order to optimize their business models.

“One broad theory is that restaurant owners were able to better manage their restaurants in 2013, as reflected in increasing net profit margins,” he says. “This year, owners are likely to be keeping an eye on the current minimum wage debate, as increases in labor costs would impact efforts to maintain and grow the bottom line.”

According to Pew Research Center, nearly 44 percent of minimum-wage workers are in food-preparation and serving-related occupations.

Compared to other industries, restaurants fared relatively well during the recession. While most saw a dramatic decrease in sales during 2009, restaurants were still able to generate growth, albeit at a rate below the historical average for the industry. Following 2009, sales growth has remained healthy at around 5 percent each year.

There are two main drivers of sales growth for a restaurant: more visits or increased spending per visit. Based on a recent survey of research focused on restaurant traffic, it seems likely a large part of growth for restaurants is driven by growth in average spending per visit, as research has indicated restaurant traffic has remained flat.

When analyzing sales growth by region, restaurants in the northeast saw a dramatic slowdown in 2013 compared to the other regions. Looking at net profit margins by region, restaurants located in the south saw much higher margins compared to restaurants located in other regions in 2013 (6.7 percent versus approximately 4.0 percent, respectively).

 

 inline image