By Jeff Dover and Andrew Waddington
If you could increase your restaurant’s operating margins by up to 20 per cent without significantly raising prices (and maybe even lowering prices for some items), would you? Most operators would answer with a resounding “yes.” You and your culinary team spend a great deal of time and effort developing menus, so why not maximize your return for those efforts?
Menu engineering is a menu optimization tool that classifies and defines strategies for menu items based on popularity and profitability. While most restaurant operators and chefs are aware of how to engineer and optimize a menu, surprisingly few actually put the concept into practice.
Menus may be defined in two general ways. First, they are a collection of items available for sale (the “offering”) and secondly they are the means of marketing the offering (such as a physical menu or menu board). Menu engineering relates to menu development in terms of both these perspectives.
The offering not only defines a foodservice concept, but controls many of the factors that drive profitability. Offering unpopular or unprofitable items has implications. For example, every sale of an unprofitable menu item represents a missed opportunity to sell a more profitable item. The complexity of a menu (i.e., the number of ingredients, difficulty to prepare, number of items, etc.) potentially affects capacity (the number of guests that may be served in a given period), inventory related costs and labour (the amount of time required to prepare and serve menu items). Unpopular items, therefore, may hurt a restaurant’s cost structure even if these menu items are profitable on a margin-per-portion basis.
Profitability + popularity = success
The two main reasons that menus include unprofitable or unpopular items are lack of awareness (the operator never analyzed menu sales or doesn’t regularly update recipe costs) and emotional attachment (i.e., the menu item is a favourite of the owner or chef). Menu engineering removes emotion from the equation and uses the profitability and popularity of menu items to identify which items should be removed, updated or preserved in their current form. This streamlines and focuses the offering.
The design of the physical menu is also critical. Menus should promote the items that you want to sell. Menu engineering analysis identifies those items quantitatively: Items that generate the greatest amount of margin (profitability) and customer satisfaction (popularity, a factor of long term profitability). This seemingly obvious notion is often overlooked. Many menus are designed solely for aesthetic value. An attractive menu design that aligns with the brand image of your operation is important, but it must be driven by an informed sales strategy. In fact, the menu or menu board is the most important real estate in your food and beverage operations with respect to maximizing margin generation.
How should you define profitability? Restaurant managers are often taught to target and achieve a food cost percentage (the total cost of a menu item including all accompaniments and, if applicable, packaging divided by the selling price). This unfortunately may lead to managers focusing on percentages and not dollars. George Tidball, founder of the Keg Restaurants, drove this point home for us. He said: “Why would I prefer to sell a $10 chicken breast with a 30-per-cent food cost and make a margin of $7 when I can sell a $20 steak at a 50-per-cent food cost and make $10?” The moral of the story is you take dollars to the bank, not percentages.
If you are focusing on the wrong objectives (i.e., form over function, margin ratios over margin dollars), or do not have sales objectives at all while developing your menus, you are, pardon the pun, leaving money on the table.
One of the great features of menu engineering is the relative simplicity of the initial analysis. A basic analysis only requires three types of information: itemized sales volume (the number of units sold for a given period taken from your point of sales system), the menu price and item cost per unit. The difference between menu price and item cost is the “margin” (menu engineering’s measure of profitability).
With this information, you can compare each menu item based on relative popularity (how well does a given item sell compared to other similar menu items) and relative profitability (how much margin does a given item generate each time it is sold). From there, the general strategies are also relatively simple: Make profitable items more popular, make popular items more profitable and get rid of the items that are neither popular nor profitable.
Of course, the outcomes of this process are only as reliable as the information used in the analysis. An accurate menu cost is critical. Many of the chefs we work with have a sound knowledge of the cost of the protein in the menu item. However, an astonishing number do not accurately cost out all recipe ingredients. Many operators forget to include “remainder of meal” costs such as bread, condiments and packaging. Others fail to update the recipe costs based on current ingredient costs. For this reason, fsSTRATEGY always recommends that clients create and maintain an accurate menu explosion model (a collection of detailed standard recipe costs) that is efficient to update as ingredient prices change.
Keys to setting prices
Once the item cost is determined, initial prices may be set for new menu items. Price should be considered carefully as it will have an influence on both an item’s popularity and profitability. A simple approach for setting initial prices is to divide the menu item cost by the desired food cost ratio, then testing that price against the prices of key competitors and adjusting accordingly. Unfortunately, this approach misses opportunities based on customer preference and perceived value. Once you have some sales data, however, use of menu analysis tools like menu engineering or cost margin analysis can be used to understand customers’ price-sensitivity and identify opportunities to increase or lower prices to maximize total margin.
Maintaining an accurate standard recipe cost model provides an additional cost control benefit: The ability to calculate theoretical food cost. Theoretical food cost (calculated by multiplying the number of units sold by the standard recipe cost) represents what the food cost for a given period should be if everything went as planned. This theoretical food cost should then be compared to the actual food cost. The actual food cost should be one per cent to 1.5 per cent greater than the theoretical food cost, which allows for waste, spoilage, shrinkage, etc. If the difference between theoretical food cost and actual food cost is greater or less than 1% to 1.5% of food sales, restaurant management will know that food cost control needs to be evaluated. Reviewing menu item costs each period will also enable management to react when menu ingredient costs change (as we all know happens) and adjust the pricing or other aspects of the menu accordingly.
Keeping it simple
Only once you know which items you wish to promote should the physical menu and menu boards be designed. Essentially, you want to ensure the items you want to sell (i.e., the items with the greatest margin) are the most visible to customers. One study found customers read menus for only 109 seconds on average, so you have less than two minutes of attention from your customers. In a quick counter operation where customers order from a menu board at the point of sale, the time it takes for a customer to read and select a menu item is doubly important. Therefore, it is imperative that the design of the menu and or menu boards be carefully considered.
First, regardless of the type or style of menu being designed, it should be uncluttered, easy to read and as concise as possible. This will reduce the time required to scan each item on the menu and increase the likelihood that customers see every item.
Second, you will need to help the customer find the items you want to sell (profitable) and that you think they want to buy (popular). Never assume the customer will find these on their own. The following tactics can increase item visibility:
Item order. Studies have shown that items at the top and bottom of lists with six or more items will typically outsell items “buried” in the middle of the list.
Position. For decades, menu designers have included relative positioning of menu items in a suite of tactics to increase menu performance. The theory is based on gaze-motion studies that predict the path customers’ eyes follow on a menu and identify “sweet spots” where items are more prominent. Recent studies have tested the eye movement theories and their effect on sales with varying results. Nevertheless, industry convention suggests that there is truth to the theory, even if results vary due to the other factors identified in this article.
Pictures. Pictures can effectively increase menu item sales because they draw attention to an item and help customers envision what they are ordering – lowering the purchase risk. Before using pictures on your menu, consider the following:
- Accuracy. Like descriptive text, pictures must accurately represent the components, garnish and presentation of the dish or customers’ expectations will not be met.
- Brand positioning. Pictures can reduce perceived brand positioning, which can limit the menu’s ability to demand premium prices.
Formatting. Formatting such as font type, size, style and color, placing a box around select items, and background colour can draw attention to menu items you want to sell.
Descriptive text. Studies have shown that descriptive text increases menu sales significantly. In a 2001 experiment at the University of Illinois, descriptive text increased unit sales by 27 per cent compared to items not using descriptors. The study also experienced significant increases in customers’ perceptions of menu item quality and value, establishment quality and trendiness, and intent to repurchase.
Science meets art
Menu design is both a science and an art. Menu designers should apply scientific methods to maximize a menu’s performance, but recognize that every operation is different. Some tactics and approaches may have significant impact on one menu but less for another. For this reason, menu design should be considered an ongoing exercise of monitoring, analyzing and adjusting to find what works best for the operation.
You can optimize your menu yourself, or hire a consultant for an objective perspective. Consultants may include additional revenue management services to develop long-term sales strategies. For example, in addition to basic menu engineering theory, fsSTRATEGY’s CRAVETM methodology for menu optimization explores five core factors that drive successful menus (Capacity, Relevance, Accuracy, Visibility and Economics) and has yielded significant results. In fsSTRATEGY’s experience, a restaurant’s margins increase three to 20 per cent when a menu is optimized for the first time and continued optimization offers additional benefits.
Menu optimization works and we hope that we have illustrated that with minimal efforts you can maximize the return on new and evolving menus. If you have not optimized all menus in your restaurant, you should do so immediately. Not doing so is essentially the same as leaving money on the table.
About the authors:
Jeff Dover and Andrew Waddington are with fsSTRATEGY Inc., business strategy consultants to the foodservice industry. Visit us at www.fsstrategy.com.