Imagine this scenario, you’ve been running a restaurant for six months and you’re wondering why the bottom-line isn’t that good. You’ve calculated all of your fixed & variable expenses and have noticed that your revenue should have been enough to earn a profit. It’s quite possible that the cost to make your food products are too high, your menu is too diverse, or the ingredients on a dish might be too much. To improve a restaurant’s profitability, one should look into the process called menu engineering.
Menu engineering is the overall study of your products’ profitability and popularity together with placing them strategically on your menu to motivate customers to buy. As we’ve said, the main goal of menu engineering is to increase profits. But how do we do that?
In every restaurant business, there will be products that will be of higher cost than the others. Operating with products with high costs only is a recipe for disaster. It is imperative that the restaurant operates with a balance of low and high cost margin products to achieve a healthy overall food cost percentage. Equipped with this data, a featured promotion calendar can then be created that can help boost the overall performance of a restaurant.
Back to Basics
To do menu engineering for your restaurant, you’ll have to be equipped with certain skills and knowledge in the industry. These are essential when you and your partners decide it’s time to start your menu engineering project.
1. Set Start and End Dates
Our primary goal in menu engineering is to be able to release a powerful menu wherein the products with high profit will be featured more often than not. With this in mind, you need to be equipped with data and a timetable is necessary to study the results.
There’s no exact science as to how often should you be doing menu engineering. Depending on the manpower and resources available, you can do menu engineering every month. You can set a timeline for every start of the month (August 1st) until end of the month (August 30th), then repeat monthly. If monthly will be too tedious for you, try doing it quarterly and it should work just fine. It’s better to be doing menu engineering than completely leaving it alone.
2. Costing Your Menu
Calculating the food cost for every menu item is a tedious task. However, completing this task will reap lots of rewards in the end as it will help you reduce your food wastes, set your selling price right and help prevent over-ordering.
Steps on How to Cost Your Menu
a. List all the ingredients involved in a specific product. Restaurants differ in nature but don’t forget to add items such as packaging if you’re a takeout restaurant; seasonings and garnishes if it’s a formal dining restaurant.
b. Calculate the cost for each ingredient in terms of yield/weight.
c. Add the cost of all the ingredients and that is your food cost for a specific menu item.
Attached is a food cost computation for an item called Signature Fruit Tea for a Specialty Beverage restaurant. The Price per cup can be derived from the Price per UOM multiplied by the Yield/Weight.
Some items are cooked in batches and that’s the purpose of the “Conversion” column – 1 batch of brewed mountain tea can yield 4L, the cost for 4 liters of Mountain Tea is 263.27, the price per UOM column will then convert to its price at 1L, 65.82. Multiply this amount by the yield per cup at 100 ml or .100 L, to get the Price per Cup at 6.58.
After costing your menu, you will be able to set a standard retail price for your products. With the SRP available, you can now measure two important metrics in the restaurant industry: Gross Profit Margin and Food Cost Percentage.
Gross Profit Margin is the difference between the SRP and Food Cost of a product in your menu. Using the example above, the corresponding SRP for a Medium Signature Fruit Tea is 120, while a Large Signature Fruit Tea is 140. Their food costs are 40.78 and 55.67, respectively. Subtract 40.78 to 120 and you’ll get 79.22 as the Gross Profit of a Medium Signature Fruit Tea. The Large Signature Fruit Tea will have a Gross Profit of 84.33 – subtracting 55.67 to 140.
Food Cost Percentage is the % you’ll get when you divide the Food Cost of a product to its SRP then multiplied by 100. As a general rule of thumb for food businesses, a food cost less than or equal to 40% is a healthy number. Using the examples above, Medium SFT’s Food Cost of 40.78 is to be divided by its SRP of 120, multiply the result by 100 and you’ll get 34% as Food Cost Percentage. The Large SFT’s Food Cost of 55.67 is to be divided by its SRP of 140, multiply the result by 100 and you’ll get 40% as Food Cost Percentage.
3. Knowing your Best Sellers
Once you have set the time period, it is time for you to know is the total number of items sold. The purpose for doing this is to know your top selling and grossing products. Knowing your best sellers will help you in creating the promotion calendar mentioned above.
Attached is a sample of a sales ranking report for one month. Here you can see the total number of items sold and the corresponding amount. To simply know which item is popular, use the “RANK” formula in Excel on the Total Item Sales column.
The Matrix
There is a way to put all of these things that you’ve learned altogether and it’s called the Menu Engineering Matrix. The matrix is a method of category management wherein all your products will go into one of these four groups: Stars, Puzzles, Horses, Dogs. The matrix is very easy to learn and will only depend on two factors, the product’s popularity and their profitability.
Stars are your best-performing group. All products in this category will are pointing upwards on both factors, popularity and profitability. Try your best and do not touch these items as a slight change in them might reduce their viability.
Puzzles are your confused group. The products in this category are low cost but difficult to sell. Some questions to ponder: Are the products in this group not marketed aggressively? Do they need an ingredient replacement? Can the customer see the item on the menu? Is it properly described? Use these questions as a guide and solve these puzzles to become Stars.
Horses are your luxurious group. Categorized under this group are products who have high cost but are very popular to your customers. There lies a huge opportunity for this group for success but there’s also inherent risk to it. An idea that comes to mind is to probably change some ingredients to lower the cost. But comes with that idea is the risk that your customers will notice the change and won’t be as popular once the recipe is changed. So make sure your R&D team goes through it thoroughly and turn the risk into success.
Dogs are your worst-performing group. Products under this category have high cost and hard to sell. These products usually don’t present much of an opportunity. Some options for these products are to completely redesign them or to remove them from the menu.
There is a way to quantify all of these categories. The data you’ll need is the total profit margin and the total items sold on the time period that you’ve chose.
To measure a product’s profitability, see if the total profit margin is higher or lower than the average profit margin for all items in a certain timeframe.
| Avg. Profit Margin | 500 | |
| Total Profit Margin | Profitability | |
| Product A | 750 | High |
| Product B | 300 | Low |
To measure a product’s item’s popularity, see if the total items sold is higher or lower than the average items sold for all items in a certain timeframe.
| Avg. # of Items Sold | 300 | |
| Number Sold | Popularity | |
| Product A | 500 | High |
| Product B | 150 | Low |
The Essentials
The importance of menu engineering cannot be stressed enough. The people you choose to do it for your restaurant will be an important decision for the owners. The person ultimately qualified to run the project is none other than the Chief Operating Officer of the restaurant. The COO is familiar with operations on both FOH and BOH and that knowledge alone makes him qualified to run the project. The COO will also be the one in charge of creating the team.
Conclusion
Menu engineering is a process that will help any restaurant in the world. It can be used by a large conglomerate or a small startup. The results you’ll get from the project will help you make decisions that should help the restaurant reach their ultimate goal of maximum profitability.
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EagleOwl goes deep into the inventory and operational efficiency of your business. The platform includes features such as supplier and purchase order management, recipe costing, menu engineering, SKU price fluctuation alerts, a collaboration tool to communicate within the platform, production costing, SKU level daily variance report, automated consumption reports, Opex and financial reports.