Is Your Menu Working For You or Against You?

By John Nessel
Restaurant Resource Group

As a restaurant operator you already know the importance of keeping your food costs in line. Pretty obvious stuff huh? That’s because combined with your wages and other payroll expenses, food and beverage costs account for anywhere from 60-70+ percent of your total revenue. Moreover, your food and labor are relatively controllable costs compared to rent, utilities, insurance and most of the remaining expenses that make up your monthly payables list.

Menu Engineering

We’re going to save the labor conversation for another day. Today we’ll take a unique look at controlling your food costs. More specifically I’m going to introduce to you a powerful tool to help you achieve this. This tool, along with techniques for utilizing it, has been called menu engineering. In simpler terms I would describe the process as the methodical selecting, costing, pricing and evaluating of your menu items.  

Menu engineering provides the manager with information about a menu item’s profitability, as well as popularity, so that proactive planning, recipe design and customer pricing decisions can be made. Menu engineering is not a substitute for proper purchasing, food rotation, standard recipes or any of the other basic kitchen controls that can negatively impact your costs. Rather it is a method of evaluating every item on your menu relative to its present contribution to bottom line dollars, thereby allowing managers to recognize the items they want to sell! 

Contribution Margins 

While the concept of food cost percentage (an item’s ingredient cost divided by it’s menu price) is the most commonly used criteria for assessing effective cost controls, the concept of contribution margin (an item’s menu price less it’s food cost) is the basis of menu engineering. A simple question should make the distinction clear. If you could sell one more item before your restaurant closed today, would it be a sirloin steak for $20 that costs you $8 or a plate of pasta primavera for $10 that costs you $2. While the food cost percentage of the pasta is 20% versus 40% for the steak, the steak will contribute $12 to gross revenue as opposed to $8 for the pasta. I’ll take the $12… thank you very much. Contribution margin then is based on the dollars you take to the bank.

Accounting for the Popularity of Menu Items 

While a menu item's contribution margin tells us how many dollars each individual sale of the item contributes to the cash register, you need to know how popular the item is to determine the total dollars it contributes to the restaurant’s revenue. A popular item with a high contribution margin is a “star” while an unpopular item with a low contribution margin would fairly be called a “dog”. Menu engineering therefore takes each menu items contribution margin and its popularity into account to determine into which of four categories it falls: star, workhorse, challenge or dog. We’ll get back to these categories shortly.  

The Evaluation 

I have included a completed Menu Engineering spreadsheet to demonstrate how the process is performed based on the required information listed below (click on the image to enlarge it). This fully automated spreadsheet is available for sale along with other useful restaurant operations spreadsheets at www.rrgconsulting.com/spreadsheets.htm

click on the above image to enlarge...

The information that you need to perform a menu engineering exercise is as follows: 

  1. Column A. A list of your competing menu items (a separate evaluation should be performed for each menu category e.g. appetizers, entrees, and desserts)
  1. Column B. A periodic (weekly or monthly) total of the number of each item sold (use your POS report)
  1. Column D. The ingredient cost of each menu item (not just the “center of the plate” cost but the entire cost of the item)
  1. Column E. A list of the menu selling price for each item being evaluated

You can perform the evaluation yourself by manually calculating the numbers in the following: Columns C, F, G, H, L, N, I, J, M, K, O, and Q. (Note that the spreadsheet above automatically calculates these numbers)

The inputs in Columns P, R and S are calculated as follows: 

Column P: Profit Category is LOW if the menu item profit is less than the menu’s Average item profit ($4.16 in this example). Conversely, enter HIGH in the cell if the menu items profit is greater than average for the menu. 

Column R: Popularity Category is LOW if the menu item's menu-mix percentage (e.g. the total number of the item sold divided by the total number of items) is less than 80% of the average. Conversely this means that we are considering an item to be popular, and placing the word HIGH in the column, if it sells at least 80% of an average item’s popularity. In the example below, the average menu popularity equals 8.3% (100% divided by 12 items = 8.3%). Therefore we consider an item popular (HIGH) if it sells 80% of 8.3% or 6.7%.

Column S: The Menu Item Class is determined by the results of Columns P and R. If an item is both profitable and popular then it’s a STAR. It it’s profitable but relatively unpopular then enter the word CHALLENGE. If the item is relatively unprofitable but popular then enter the word WORKHORSE. Finally, a DOG is an unprofitable and unpopular menu item.  

How to Take Action Based on the Results 

Let’s start with the obvious. Keep the STARS and dump the DOGS.  

Your creativity is now required dealing effectively with your CHALLENGES and WORKHORSES. Lets start with the CHALLENGES. These items are profitable but relatively unpopular. Your “challenge” is to make them more popular. There are many ways to accomplish this including changing the preparation (Veal Marsala may be more popular than Veal Putanesca, but still just as profitable). Re-naming or re-plating the item to make it sound and/or appear more appealing is another alternative. Alternatively you might want to create a whole new menu item using the same “center of the plate” ingredient, but doing it in a way that will be more appealing to your customers.  

As for the WORKHORSES, they are popular items with less than ideal profit margins. Here is where your best opportunities lie. Your job is to re-engineer the menu item to reduce its cost while not sacrificing what makes it popular. This can involve substituting a single relatively expensive ingredient for a one that is less costly (e.g Assiago cheese in a Caesar salad for Reggiano Parmesan). It may involve substituting one cut of meat for a less expensive one knowing that the preparation is what makes the item popular. It might be as simple as using a less expensive garnish. How about increasing the items selling price? Your chef’s imagination and talent takes over here. If I knew how to perform this magic I would be wearing an apron and a tocque instead of sitting in this chair banging on my keyboard! 

Hopefully it is now easy to see how this information allows you to proactively manage your menu. From collaborations with your chef to tinkering with your prices you can use menu engineering to effectively manage a key aspect of your food costs! 
 

John Nessel is the President of Restaurant Resource Group a Boston based consulting firm that provides simple yet powerful financial tools and support services to restaurant owners and managers. He is also the author of The Restaurant Operators Complete Guide to QuickBooks. John can be contacted at john@rrgconsulting.com

 

 

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