by Stephen Davis, VP, Integrated Insight
The restaurant industry should be bracing for significant economic challenges in the next twelve months. During the last recession in 2009, it took more than three years for sales at restaurants to return to pre-recession levels. The dramatic drop in sales at restaurants over the last two months is now roughly ten times the total decline seen during the Great Recession.
In order to survive the upcoming economic challenges, restaurants need to implement smart pricing strategies. One of the most powerful pricing tools restaurants can implement right now is menu engineering.
For many restaurant operators, menu engineering is a familiar concept but often disregarded in practice. The concept is simple: the restaurant menu should feature the most profitable and popular items to sell more plates that earn high contribution margins.
How Restaurants Can Engineer Menus to Optimize Profit:
Let’s take a deeper look at how to implement menu engineering strategies.
1. Examine costs and popularity for each menu item.
How to Determine Costs
In order to understand the most profitable dishes on the menu, restaurant operators need to start with understanding their costs. Taking the time to examine the cost of each menu item can be tedious, but it will produce significant payoff in the months to come.
Item profitability can be looked at on a food cost basis to keep it simple. The total food cost is found by adding up the individual costs of each ingredient on a per-item basis.
Gross profit is then calculated by taking the food cost per serving and subtracting from the sales price.
Sales Price - Menu Item Food Cost = Item Gross Profit
Taking item gross profit divided by the base of sales price provides a contribution margin for each item that does not include labor and other overhead.
How to Determine Popularity
Determining the popularity of menu items may be simple for a food operator managing the business day to day. However, to identify a more reliable answer, operators can simply pull the frequency of purchases for each food item from their POS system.
To determine each menu item’s popularity, compare the sales of each menu item on a base of daily number of customers for several months to estimate the item capture. Comparing item captures across the menu gives a measure of popularity for each item.
2. Optimize the Menu
Once contribution margin and popularity have been determined for each menu item, you can categorize them based on the matrix below.
When designing the menu, feature items with higher contribution margins such as stars and puzzles, and eliminate unprofitable ones.
Dogs: Items with low profitability and low volume. Remove them from menus.
Puzzles: Items with high profitability and low volume. Feature them more prominently on the menu and encourage wait staff to push them at table service locations.
Stars: Popular items with high profit margins. Look for opportunities to take marginal price increases on most popular items.
Work Horses: Items that are popular but not particularly profitable. Move work horse items to areas of the menu that are less prominent and don’t encourage wait staff to sell them at table service locations.
By categorizing each menu item, restaurant operators can see which items are best suited for price increases, cut from the menu, or get more prominent placement. Profitable items should be featured more clearly in the menu, and unprofitable ones should be removed. Let's look at a simple example of menu engineering with a short case study.
Dan's Diner Case Study
Dan’s Diner is just scraping by after re-opening with reduced dine-in capacity and curbside takeout. Dan is looking to optimize his menu in order to increase profitability. For each entrée, he identifies the profit margin and the number of dishes sold per customer.
Here is an example of four dishes Dan categorizes using the matrix to understand where he needs to make changes. Let’s look at an entrée from each quadrant.
The Dog: Country Fried Steak
The Country Fried Steak is the least profitable entrée and hardly anyone buys it. In order to reduce food costs and leaking profitability, Dan removes this item from the menu. Assuming that Dan’s Diner brings in $45,000 in revenue each month, a 1% decrease in food costs by cutting this menu item is worth $450 per month. These cost savings can pay an employee’s week of labor at roughly $10/hr or go towards advertising to increase demand.
When menu engineering during the current coronavirus crisis, it may be necessary to remove all "Dogs" from the menu without replacement temporarily to save costs.
The Puzzle: Dan's Gyro
The Gyro has a very high contribution margin but does not sell well. In order to encourage customers to purchase the profitable entrée, a Gyro combo special is added to the menu with a savings message and featured during happy hour.
"Puzzle" items are good candidates for discounts and deals. Their low volume means purchases are more likely to be incremental and the higher margin covers some of the discount without hurting the bottom line.
The Star: Baked Chicken
The baked chicken has the highest popularity and profitability. Dan’s baked chicken is known all over town. Customers love it for the price and quality. Dan loves it for the great margin. Dan takes a $0.20 price increase on the Baked Chicken Plate, which falls straight to the bottom line.
If Dan can identify a few star items to take minimal pricing on, the value falls straight to profit.
The Work Horse: Cheeseburger
Guests love Dan’s cheeseburger and waiters often push it as their personal favorite. The problem is that the profit margins are slim. Dan tells wait staff to stop promoting the item and instead push the Baked Chicken when asked for recommendations. Beyond steering the focus to "Stars," price increases can be leveraged to turn highly popular "Work Horses" into "Stars."
Each of these menu engineering strategies improves the bottom line by eliminating costly products and increasing the sales of profitable ones. The goal is to drive higher revenue, but more importantly, higher profits.
For more information on pricing strategy and how we partner with brands across the globe, please contact us at email@example.com
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