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Menu profitability analysis delves into the cracks and corners of menu sales performance to uncover hidden gems of untapped or under-leveraged profit potential. Read on to learn how to do it successfully.
Restaurant Menu Profitability Analysis
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 perform a 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.
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Boosting Restaurant Revenue – PART FOUR: Restaurant Menu Engineering