Boosting Restaurant Revenue: Part 4 of 10 – Menu Engineering

At the core of a restaurant is its menu. Everything from the kitchen design to marketing to hiring to location strategy – it’s all rooted in the menu. How many items should there be? Where do we buy our ingredients? How do we price our menu? Is there a gap between our theoretical and actual food cost and if so how did it happen? What should we discontinue and what should we expand on or enhance? Should we do a separate lunch and dinner menu or one all day menu? How can we increase our margins without just a blanket price increase that may scare off our customers or reduce their visit frequency? The answers to all of these questions are pursued in the process of menu engineering and analysis.

Boosting Restaurant Revenue: Part 4 of 10 – Menu Engineering

Think of menu engineering as the CSI (you know – that Crime Scene Investigators series on TV…many of my readers are outside the U.S. – 123 countries last month – not sure if CSI is in all of them) of restaurant menu strategy. At any rate, what I’m trying to get at is that menu engineering is the “science” part of the culinary arts. It’s about exhaustive analysis of menu sales and profitability where all the myriad of data points are tabulated and cross-tabulated and studied; all toward the intent of yielding actionable insights on how to make a restaurant menu more profitable to the restaurant and relevant to the consumer.

The process of restaurant menu engineering reveals significant trends, insights, “profit siphons”, and opportunities for item line-extensions and new item introductions. There are several components to menu engineering including:

a. Menu Profitability Analysis

Menu profitability analysis delves into the cracks and corners of menu sales performance to uncover hidden gems of untapped or under-leveraged profit potential. Remember that scene from “A Beautiful Mind” where Russell Crowe’s character sees volumes and reams of numbers fall away and numerical patterns, mathematical theories, and an exciting new, game-changing hypothesis emerge from the chaos? That’s what can happen with menu profitability analysis. Okay, I romanticized it a bit – and at times the process of menu profitability analysis can make one feel as nutty as Crowe’s character was in that movie – but I can say honestly that at times you do have these eureka moments where numbers crumble and behind them you see patterns that would otherwise not have revealed themselves. You don’t have to be an accountant or math-wiz to come to enjoy menu profitability analysis. If you like a Sherlock Holmes film or crossword puzzles or snorting around in the backyard with a metal detector, you may like doing menu profitability analysis. Whether you like it or not though, if you want to increase sales and profits for your restaurant organization, you or someone who works for you needs to go on the needles-in-a-haystack-hunt that is menu profitability analysis.

How do you do it? Good question. I’ll stop with making the homework sound like a fun game and try to succinctly describe how you do it and what mantras to say out-loud as you’re doing it.

The idea is that “you deposit dollars, not percentages”. The standard “target” food cost is roughly 30% (lower for QSR’s and higher for, say, a casual dining steakhouse). Some items on your menu will yield a lower food cost and therefore a higher percentage profitability. But, which “renter” (my “renter” analogy closes this article, but go with me for now) do you give the prime space to – the one who pays you a bigger percentage of their paycheck or the one who pays you a big rent regardless of how much or little of their paycheck it was?

A profitability analysis of your menu will show you which items are (enter any variety of catch-phrase ways various consultants have come up with to call the four quadrants in a standard economic two-by-two diagram, here): #1) high in sales quantity and unit profitability, #2) high in sales quantity but not unit profitability, #3) high in unit profitability but not sales quantity, #4) low in unit sales and unit profitability. Essentially, what all of this tells you is – on a category by category basis – #1) which items to make more prominent on the menu and/or find “line extensions” and new variations of to promote in the future as LTO’s and future permanent add-ons, #2) which items to “re-engineer” so that they become more profitable (like adding bacon to the standard cheeseburger as an option whereby both the price and gross margin are increased), #3) which items to consider giving a “promotion” on the menu in to better real estate so they can shine (and a number of other techniques to take high margin items that are low in sales quantity and increasing the quantity – or just realizing they are too unique to go mainstream and doing something else with them), #4) which menu items aren’t paying their fair share and are deadbeats that should be evicted.

Whew! That was a lot to sum up (and to absorb) in a single paragraph. While I realize some of my readers are rolling their eyes and thinking “child’s play”, please keep in mind our clients have ranged in sales volume from $250,000 to $12,000,000,000 (yes, 12-Billion) and we try to offer content relevant to all ends of the spectrum. Plus, even at the high end of the spectrum, you will concede sometimes this stuff is easier to just discuss and comprehend on an intellectual level than it is to actually produce. Let’s just say it like this – menu profitability analysis is commensurately difficult to the complexity of your restaurant organization but it is commensurately beneficial to endeavor to perform the analysis, make sense of the results, and effectuate the proper changes inside of your organization.

Whether you love or hate menu profitability analysis; whether you do it yourself or delegate it to someone else; whether this analysis is done on a single unit or a multi-national chain; the importance and necessity is equal.

Competitive Menu Analysis

Menu pricing strategy doesn’t happen in a vacuum. Naturally it is important to study your own theoretical food costs and profitability targets, but this analysis must often be weighed in the context of the competitive landscape. A competitive menu analysis is a study of price, portion, preparation, and presentation of comparable menu items for the competition as well as an overall general segment benchmark of how you stack up against others in your industry category and segment. This is done by conducting a “by-category” and itemized comparison of the competitive set and non-competitive benchmarks. For example, you would take your appetizer category and list all items to see your highest priced, lowest priced and total quantity of items in that category. Then you stack the same information for the competitors and benchmarks. This helps you see how you compare in terms of actual pricing, “perceived pricing”, variety (too many items and you may be carrying bloated inventory or make it confusing to customers to sort through, but too few items and it may have an impact on dining frequency due to limited choice). Some parts of this type of analysis are very much scientific and some are more an art form to compare. In general, my feeling on competitive analysis is that the goal should be a menu (and brand overall) that isn’t easily comparable. When it is, often the two compete on price rather than value.

c. Inventory Issues

Inventory issues play in to an overall menu engineering program and consideration for menu evolution. This would include considerations such as make/buy analysis, inventory turns and par levels, utilization reports (how many SKU’s in your inventory, spread against how many vendors, etc) to determine if cost savings may be found with changes to the menu in terms of size, quantity, yield, and general procurement strategy.

d. Restaurant Industry Trends and Menu Trends

This is one of the areas that we see the big chains get off track more so than the independents or regional chains. With all of their armies of analysts, marketers, researchers and seemingly endless budgets; big chains are by nature slower moving and less inclined to want to see seismic industry or consumer dining behavior change happen. Why? Well, imagine you have 35,000 restaurants and you have to turn all of them on a dime – for a franchise company that’s like getting 35,000 kindergarteners with tempers and lawyers to gleefully follow the teachers every direction when on a field trip (it can be done, but that is one heck of a teacher…uh, hem, miracle-worker of a restaurant CEO). The mega chains work on at least an 18 month planning schedule. Some fads (you should not chase “fads” but should prepare for “trends”) come and go in less time. That said, the greatest threat to the big guys and greatest opportunity for the mid-sized chains down through independents is to move faster to identify and respond to emerging restaurant trends that are sustainable. I have a blog post (or a couple) dedicated to this and the idea of “the origin of restaurant trends” that I encourage you to read. The point here though is that effective menu engineering must consider not just what can be “proven” in the here-and-now, but what assumptions there are for the future. All too many restaurant chains became casualties conducting their menu engineering analysis based on what was “true today” but ended up losing out because they didn’t see “what would be” and once that “came to be” it was too late because their ship was too big to change course as fast as was required to become relevant in time; especially since they were working on an 18-month calendar but were already 36-months behind the seismic shift.

Another way I like to say all of this is that “Starbucks would never have been born in a focus group.” We can all look at Starbucks today and applaud Shultz as a genius CEO; but if most of his same cheerleaders were asked in 1971 if what would come to be would have come to be, they would have asked for him to have a CAT scan. What Shultz did was part art and part science and part entrepreneurial bravery [see “courage”]. He didn’t point to what was to build his case; he built a story and vision of what could-be. The Starbucks menu has evolved, but even at the start it wasn’t about what was proven to be sell-able prior or even at the time – it was a bet on what could happen in the future with solid category leadership (also see: “Why McDonald’s Coffee will Never Taste As Good as Starbucks Coffee”). Likewise, as you consider your own menu strategy – which is at the core of your entire foodservice company strategy – think not just on what has worked up until now, but on what could be the future. Dream as bold as you like. Success favors the bold. You could be thinking of your neighborhood or your entire category of the industry. Or, maybe bolder still – creating an entirely new category (which is what the truly GREAT ones did – name one, that’s what they did).

e. Other Operational Issues

Naturally there are a wide range of other considerations that play in to fully “engineering” a new menu. There are plenty of other factors chains must consider such as seasonality and availability of ingredients, consistency of product across various markets where different suppliers/distributors may be needed, the considerations associated with having an established corporate commissary or centralized culinary operating model versus decentralized – there’s a lot to it. For purposes of this series, I am limiting the purview of menu engineering to a restricted scope which can be accomplished without a total overhaul of the restaurants purchasing, supply chain, kitchen layouts, etc.

Menu engineering can be (in a very simplified nature for chain executives reading this) conducted by a single person and still yield powerful insights that can influence the entire organization. My intent with this article is to suggest that no matter the size of the restaurant system, menu engineering is more than a back-of-house or “culinary department” effort; menu engineering is a critical aspect of the marketing department’s scope of work too. The menu being the core of the entire operation means that ALL levels of the organization can play a part in the overall menu “analysis”. For certain though – whether pursued by an inter-departmental team, or a single owner/operator, or mandated by a forward looking chain CEO – menu engineering is one of the surest ways to improve sales and profitability in the short and long-term. No proper discussion about over-arching programs to drive sales can be complete without also factoring in the overall menu strategy – and that starts with a fact-based and analytical approach to menu engineering.

An easier way to look at all of this is to think yourself as a landlord and every item on your menu a tenant. Like with all real estate, some locations are more valuable than others. In a three panel menu the center of the middle panel is your “Boardwalk” (or prime, most valuable space) and the right panel bottom is your “Baltic Avenue” (or “menu Ghetto”). The restaurant menu engineering process is an analysis to help you determine who is paying their fair share and who needs to pay more or be evicted.

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