Dec. 21, 2005
If you think food cost is important, you're right. But experts say too many operators — particularly independents — believe it impacts profits more profoundly than it really does.
Gross margin, menu price and how well an item sells are equally influential parts of the overall profit picture, but operators don't always give them due credit. It wasn't until 1982, when two professors at Michigan State University's School of Hospitality Business discovered that blending all four of those cost-revenue factors yielded the clearest picture of what actually makes money for a restaurant. They called their discovery menu engineering.
In a nutshell, the pair used a computer program to calculate the real value of every item on a
restaurant menu in order to understand its actual contribution to the bottom line. They learned that:
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Many operators focus too closely on food cost, when other cost/sales components influence profits more substantially.
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Menu engineering is a tool that allows operators to maximize their menu's profitability.
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Many software options are available and cost between a few hundred and several hundred dollars. Some are designed to work with desktop computers while others are made to mesh with a POS system.
* While some items sell well, their high food cost or low menu price minimizes their gross margins.
* While some items have high gross margins because of menu price or low food cost, they still might not sell well.
* While some are good sellers, their margins are modest.
* But the real jewels are those that have high margins and acceptable food costs.
Helping restaurant operators figure out how to sell more of the latter was the professors' goal.
Nearly 25 years later, a multitude of high-functioning computer programs remove all the guesswork as to which items bring home the most profit. Some basic models require operators update data manually, while others automatically poll data from a point-of-sale system. In both cases, the operator gains a keen understanding of how every item on a menu either helps or hinders his operation.
Jim Laube, a former restaurant operator turned consultant, has worked with a lot of well-meaning operators who watch food cost like hawks, guys whose blood pressure soars with every 2 percent spike. His advice to them is simple: Dig deeper into the data, because what you find might actually please you.
"If their food cost is high, maybe their sales mix shows they sold greater numbers of a higher-cost item than usual," said Laube, president of RestaurantOwner.com. "What's important is those same items could have higher gross-profit margins, and that means greater profit despite the higher food cost. By looking just at food cost, an operator makes the mistake of focusing on one part of the overall picture."
Dave Ostrander, another operator turned consultant, said he also used to be a food cost fanatic. But when he learned about menu engineering, his P&L changed for good.
"I was one of those guys who always wanted to run a 33 percent, but just running a low food cost isn't the answer," Ostrander began. "What I didn't know was counterproductive to my profits. ... I needed to know about contribution margin -- exactly how much every item I sold brought to the bottom line. I learned that food cost does not pay the bills. My banker never once complimented me on my food cost, he only wanted to know what my profits were."
Ostrander's FoodCost Pro software (which will include a menu engineering upgrade early next year) evaluates every menu item thusly:
- Star: highly profitable and highly popular
- Workhorse: moderately profitable but highly popular
- Challenge: highly profitable but only moderately popular
- Dog: low profitability and unpopular
Barrington Software's Cooken product uses the same nouns except for calling a workhorse a "plowhorse." Company president
George Kotcher said Cooken is designed to mesh with the company's POS software to provide a microscopic analysis of a user's menu. But as easy as it is to run, interpreting that data wisely takes some thought.
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"Menu engineering requires somebody who has some vision of how they want to measure what's sold and make then decisions about it," said Kotcher, whose company is in Barrington, Ill. "It helps you see what you should sell at what profit margin," which could mean raising an item's price to increase profits or lower it to spur sales.
Having menu engineering software that works in concert with the POS system, he added, allows a look at long-term performance. An operator who sees sales of a particular pizza slide during winter might think twice about cutting it from the menu when history shows sales rise in spring and summer. On the other hand, knowing weather affects sales of certain items might lead the operator to consider changing menus quarterly to meet seasonal demands.
Laube advises operators use their menu engineering tools to review menu categories independently. Separating entrees from appetizers, soups from salads and pizzas from pastas allows the comparison of top performers to dogs within their own "breed." In other words, comparing sales and profits of cheese sticks to clam pizzas might not reveal a lot.
A hard-numbers comparison gets operators to move beyond their emotions and make cuts if necessary.
"Seeing it in black and white shows you it's got to go," said Ostrander. "It can also help you make the decision to rename it, reposition it or re-price it, and there's potential profit in that."
Make your customers 'see stars'
Ostrander said when he shows his clients his menu engineering software, "their reaction is shock and awe. Most independents never look at their menu that way." Chain operators, said Kotcher and Laube, know better. Those operators' knowledge of how to tweak the menu with slight price adjustments is where they leave most independent operators behind. They understand that pennies and nickels gained here and there add up to big dollars over time. The math is simple: If a pizza operation with $750,000 in annual sales gained 1 cent on every dollar sold over the course of a year, the boss gets an additional $7,500 year-end bonus. And such increases are exceptionally modest, said Ostrander — if an operator wisely adjusts prices to widen margins and increase sales. Laube agreed, even saying lowering prices on some items is smart if it boosts sales of good gross-margin offerings. The whole goal of menu engineering, he added, is to move more products that have higher margins, even if food cost increases some in the process.
In addition to price manipulation, operators must learn how to best position their most profitable items on their menus, menu boards and promotional materials. Even customers who appear to be slow at ordering actually spend just a few minutes reading their menus. The "sales pitch" from the paper has to grab their attention visually and keep it cognitively; interesting graphics must catch the eyes and descriptive language must stimulate the mind.
"I never sold cheese pizza, I sold pizzas with three blended cheeses," Ostrander said. "It's marketing. But do most pizzerias say that? No. They say 'pepperoni,' 'cheese' and 'sausage.' We sold our pepperoni as the best in North America, we told them our sauce was made with fresh, vine-ripened tomatoes. ... If you don't 'sell it,' your menu
is just a glorified price list."
Seeing it in black and white shows you it's got to go. It can also help you make the decision to rename it, reposition it or re-price it, and there's potential profit in that.
— Dave Ostrander,
Pizza Operations Consultant
Even the most basic menus can be improved graphically with well-placed boxes or starbursts around high-margin items. Bold or colored type works well, too. Laube said menu boards typically rely on high-quality photography to help customers decide what they want quickly, but he said some are overdone. "Too many pictures over-stimulate customers; they don't have the same impact as a few well-chosen photos."
There's no shortage of consultants available to help operators with menu design and layout, but Laube suggested a more economical option: Visit great chain restaurants and study their menus.
"Places like Chili's and Applebee's make a science out of it, and I know Red lobster hires outside menu consultants to do theirs," he said. "Go to those places and take notice of what they do to draw attention to those items they want to sell. And believe me, they know exactly what they want to sell."