menu engineering

How to Reverse Margin Erosion with Menu Engineering

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Margins are being compressed for restaurants and foodservice operators around the world. Nearly every geography, cuisine, and operating model is being hit with increased costs relative to rent, labor, commodities, demands of modernization, competitive pricing and promotional tactics designed to take share, and a more fickle and demanding consumer with rapidly evolving dining behaviors.

From Middle America to the Middle East and everywhere in-between, there is spotty revenue growth with unique brands and hybrid formats that is coming at the cost of lumbering incumbents torn between two competing notions: drive revenue or cut costs.

But the choice doesn’t have to be binary. Both can be done simultaneously while catching a wider net of performance improvements — banded together through a single improvement initiative —  that can also prove powerful as a catalyst for wider organizational and financial transformation.

As we’ve said before, the menu is the single most important piece of marketing collateral that a restaurant has, and every great restaurant turnaround worked its way from the inside out — originating from the heart of the house, expressed through brand purpose and positioning, and manifesting itself through the menu and other vital stakeholder touchpoints.

Whether you’ve embarked on a brand audit, a brand refresh, or a full-on turnaround, revitalizing a restaurant’s menu is one of the most complex — yet surest and fastest — ways to improve profitability. Here’s how the menu can help with (and a few common menu mistakes to avoid):

    1. Revenue Growth – A 2% increase in sales is equivalent to a 10% reduction in cost. A well-developed menu can drive check average, new trials, frequency, party size, and advocacy by identifying opportunities for upsells and add-ons, new profit centers, limited time offers (LTOs), bounce backs, and new products.
    1. Food and Beverage Costs – There are a number of questions to be asked when identifying ways to improve food costs. To be sure though, they can’t be improved sustainably by simply increasing prices across the board, reducing portion sizes, and swapping out ingredients for lower-priced (and lesser-quality) alternatives. Menus can and should function like a tour guide to help navigate guests to items that are not just more profitable, but also that are signature items (the Cayman Curse is our most straightforward and time-tested example) that can enhance brand positioning and perception while also supporting margin growth.
    1. Labor – With the menu making an impact across all functional areas of the business, it can influence make/buy decisions, inform discussions about insourcing or outsourcing a commissary kitchen, and – properly approached – a menu overhaul can certainly be an effective lever for wider labor optimization efforts. When you get into the nuts and bolts of margin improvement through the lens of a holistic menu strategy, you will undoubtedly find ways to optimize labor (best done by balancing the guest experience, operational process improvements, and utilization metrics).
    1. Marketing – When done well, menus help garner free publicity, gain priceless earned media, and give something to talk about internally and externally in such a way that can seriously drive revenues and advocacy. These kinds of initiatives give a good reason for external messaging, versus marketing simply for the sake of marketing. An understanding of behavioral economics and both pricing and menu psychology are becoming requisites of the modern foodservice marketer.
    1. Market Share – Think of any of the most successful restaurant turnarounds in recent history and you will find a commonality; those who have been gaining share at their competitors’ expense leveraged the menu as a central part of their strategy. Right? Can you think of any examples worth mentioning that this wasn’t the case? Market share gains are not just about effective marketing or a lucky card draw. The category leaders thrust themselves forward with a well-choreographed and charismatic campaign that was either centered on the menu or considered it central to their efforts. They weren’t handed gains, they won them with their menu strategy emblazoned on the shield and sword they fought with.
    1. Enterprise Value – Everyone wants to be associated with a winner, and meaningful menu improvements can help create the momentum to grow sales, margins, and win the hearts and minds of those who matter most (inside and outside the business). When you get the menu right, you will enjoy benefits not only to the P&L but also on the balance sheet. Transformations born out of the heart-of-the-house (brand positioning, product development, enrolling stakeholders, etc.) clearly equate to top-quartile performance with regard to other fundamentals of finance — like the balance sheet. Those getting it right with their menu strategy are also rewarded with growth of intangibles and intrinsic value of the enterprise they are entrusted with enhancing.

Because of the nature of the incrementalism and organizational inertia that can sometimes be hard to beat, menus are often developed based on the momentum of what was there before. Many organizations tout the virtues of innovation while also lacking the internal will or systems required to create and implement change on a holistic and seismic level. That also means, usually those who are responsible for the rollout of the menu are either trapped in a committee consensus environment, lack the organizational influence, or are wary of risking internal political capital to shake things up in a meaningful way.

Since nearly every functional area is touched by the menu (supply chain, marketing, operations, training, culinary and beverage development teams, finance) and will require buy-in and winning over critical stakeholders (support center team, field and unit-level operations, external supply and distribution partners, franchisees, financiers, crew-level teams, media, and most especially the guest), it serves as a central point of senior-level influence.

While many view the menu like maintenance — something that needs touchup paint and an oil change — influential category leaders have leveraged the menu as a means to stage a turnaround and reinvigorate a system.

The tools and techniques can be as black and white as the ebony and ivory of a piano but remain as elusive as the perfect symphony or composition when left to less-skilled hands. The music here requires both stylistic artistry and technical mastery. It’s deceptively simple; getting the right chords, rhythm, harmony, balance, and a beat that both soothes the soul and exudes the shared spirit and enthusiasm (a brand, company, product, community, shareholders, stakeholders, and the rest of it). When you get those things just right, though, you can not only improve sales and margins, you can bring something into the world that inspires others and stands the test of time.

About Aaron Allen & Associates

Aaron Allen & Associates works alongside senior executives of the world’s leading foodservice and hospitality companies to help identify, size, and seize opportunities to drive growth, optimize performance, and enhance enterprise value. Our clients span six continents and 100+ countries, collectively posting more than $200b in revenue. Across 2,000+ engagements, we’ve worked in nearly every geography, category, cuisine, segment, operating model, ownership type, and phase of the business lifecycle.

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