Every restaurateur understands the importance of keeping food costs in line. Food and labor are the controllable costs compared to rent, utilities, insurance and the other expenses associated with operating a restaurant. The reason it is critical to control food costs is because, when combined with payroll, these expenses account for 60 to 70 percent or more of total revenue.
Food cost percentage remains the most commonly used metric for assessing effective cost controls (and bonuses!), but it’s actually contribution margin which should serve as the driver for creating and designing a menu—contribution margin equals the dollars you put in the bank.
A simple question should make the distinction clear: Should a restaurant sell steak for $45 that costs you $18, or an entrée salad for $12 that costs you $2. While the food cost percentage of the salad is 17% compared to 40% for the steak, the steak will contribute $27 to gross revenue as opposed to $10 for the pasta. Contribution margin then is based on the dollars you take to the bank.
Designing a Menu
There is much more to creating a menu than most people realize. One of the greatest tools that is typically overlooked might mean the difference between a profitable restaurant and a liquidation sale. This tool, along with techniques for utilizing it, is known as menu engineering. Quite simply, it is the process of selecting, costing, pricing and evaluating every item on the menu.
Make no mistake, menu engineering is never a substitute for accurate purchasing, inventory management, vendor relations, standardized recipes or any of the other basic kitchen controls that can negatively impact your costs. It does, however, provide two key bits of information regarding a menu item: its profitability and its popularity.
Menu engineering is as simple as taking a proactive planning approach in recipe design, allowing for more accurate pricing decisions to be made. It is a method of evaluating every item on your menu relative to its present contribution to the bottom line and not necessarily food cost percentage.
Tracking the Popularity of Menu Items
While a menu item’s contribution margin tells us how many dollars each individual sale contributes to the cash register, you need to know how popular each item is to determine the total dollars it contributes to the restaurant’s revenue.
For example, a popular item with a high contribution margin is a “star” while an unpopular item with a low contribution margin is a “dog.” Menu engineering, therefore, takes each menu item’s contribution margin and its popularity into account to determine into which of four categories it falls: star, workhorse, cash cow or dog.
Take Action Based on the Results
Keep the stars and dump the dogs. That’s Restaurant Management 101.
Ingenuity is now required to deal effectively with cash cows and workhorses. Start with the cash cows. These items are higher in profitability but lower in popularity. The trick is to make them more popular. There are many ways to accomplish this including changing the preparation (e.g., beef tenderloin with blue cheese may be more popular than beef tenderloin with mushroom sauce, but still just as profitable), updating the menu name or description, or revamping the plate presentation to make the dish look and sound more appealing to the customer.
Workhorses are a menu’s popular items that have less-than-ideal profit margins. The best opportunities to increase menu profitability are found with these. The key with workhorses is to re-engineer the menu item to reduce its cost while at the same time not reducing its popularity. The simplest solution is to increase the price of the dish, but this is not always practical and may negatively impact its popularity.
An alternative might involve substituting a single, relatively expensive ingredient for a one that is less costly, such as using bacon instead of prosciutto. Or it might involve substituting one cut of meat for a less expensive one, knowing that the preparation is what makes the dish popular. It could be as simple as using a less expensive garnish, or none at all.
Controlling Costs is Key
Now it’s easy to see how this information allows for the proactive management of a menu. From collaborations with the kitchen to making small changes with prices, menu engineering can be utilized to effectively manage a key aspect of your food costs and put money in the bank!
Have questions? Want more info.? Give me a call. I’d be happy to discuss your restaurant’s needs and costs with you.
Andy Simmons, Restaurant Consultant