Menu Engineering Analysis? What is that you ask?
With the small profit margins that restaurants operate on, not managing menu item performance among hundreds could spell disaster.
Ever wondered how restaurants kept track of those hundreds of menu items in terms of their revenue and profit performance?
What about weeding out the menu items that were not performing well and dragging down overall profitability?
A daunting challenge indeed!
I will show you in this blog post a proven method to identify best sellers from laggards and ways to maximize your restaurant profitability consistently.
Sound good?
Let’s get to it.
This Blog Post will cover:
Menu Engineering Analysis Magic
Consider this scenario in your restaurant.
You restaurant serves more than 100 menu items at a cursory count.
How on earth will you keep track of all those menu items?
Specifically, how do you know which menu items sell well?
And more importantly, which menu items are just not selling at all?
Those menu items are dragging your restaurant profit down!
Restaurants, with their high costs operate with small margins.
You have to keep all your menu items performing well, consistently.
A tall order indeed!
How are you going to achieve that?
Not to worry.
Menu Engineering Analysis to the rescue!
What is Menu Engineering Analysis?
Let us go back to what we talked about in the earlier section.
Two ideas jumped out:
- Best Sellers - menu items that sold well
- Laggards - menu items that did not sell
If you want to learn in depth about the concept of best sellers in hotel revenue, read this blog post I have written.
Why is it important to know about Best Sellers?
Well, it is all about keeping only menu items your customers are asking for.
If your menu items were all (or most) that were in demand, your sales volume would go up taking your revenue up too.
You would want that right?
Revenue is the life blood of restaurant business.
It is what keeps your business sustainable.
So, knowing your Best Sellers is critical.
However, the benefits do not end here.
It is also important to determine which of those menu items are also profitable.
We will define profitability later in the post.
For the moment let us conclude that keeping menu items selling is central.
So, how do you find out which menu items are your Best Sellers?
Great question.
Before I respond, let me ask you a question here.
Have you heard of the 80:20 Rule?
What?
Why have I changed the topic?
Let me clarify.
I have not changed the topic.
In fact, I will be letting you into a secret that many managers and even entrepreneurs do not know about.
It is a secret that will help you figure out which menu items are your Best Sellers!
And more.
Read on for the scoop on this.
Menu Engineering Analysis Concepts You Should Know
To begin with, we need to get some basic concepts clear.
Even before we talk about Best Sellers.
For example, what are the contributors to revenue?
Two ingredients contribute to restaurant revenue:
- Food and Beverage Covers
- Food and Beverage Average Check
Food and Beverage Cover is one of the two basic ingredients of revenues.
The Food and Beverage Cover can also be called the quantity element of revenue.
Food and Beverage Cover calculation is closely linked to guest patronage, number of guests consuming meal, number of meals being consumed and so forth.
In simple terms, it normally represents number of guests who have had a meal during a meal period.
So, you could say that number of guests is equal to number of covers.
There are some exceptions and some situations to be considered in the calculation.
Normally, it is the practice of every hotel or hotel group/chain to have their own definition of a Food and Beverage Cover.
Despite this, all of them follow the above principle in some way or other with some variation.
Food and Beverage Cover can also be considered Quantity Sold.
Food and Beverage Average Check is the other basic ingredient contributing to restaurant revenue.
The Average Check (or Food and Beverage Average Check) is called the price element of revenue.
Individual Menu Item prices are different from Food and Beverage Average Check.
The Food and Beverage Average Check is the average of all the menu item prices that were sold during a period.
Just remember the following formula:
RESTAURANT REVENUE CALCULATION
Restaurant Revenue = Food & Beverage Covers X Food & Beverage Average Check
Food and Beverage Average Check Behavior
There are some important behaviors of the Food and Beverage Average Check we must note and use in our pricing strategies.
- The Average Check is an average of all the individual menu item prices. See point 2 and 3 below.
- Some of the Menu item Prices are BELOW the average and some are ABOVE the average.
Download the Excel Worksheet later in this blog post to find out for yourself.
Menu Item prices which are below the average, tend to pull the overall average down.
Similarly, menu item prices which are above the average tend to pull the overall average up.
This allows you to focus your strategy based on this behavior.
Now that you know what contributes to restaurant revenue, it is time to go back to the Best Sellers we talked about in the beginning of this post.
Best Sellers in Menu Engineering Analysis
In the book publishing industry, there is a powerful business concept related to revenue generation.
This concept has percolated to all other industries.
That is the concept of Best Sellers.
What are Best Sellers?
Best Sellers are in a manner of speaking a business' bread and butter.
The Highest Revenue producing sources.
In the restaurant business, it is the menu items which are raking in the highest revenue from all sources.
You may be wondering why it is such a big deal to know your highest revenue contributors?
What does that achieve?
Well, it achieves a lot.
To begin with, you know that those menu items are favored by your customers.
That is important for you right?
Once you know which are your customer favorites, you can sell more of those menu items.
And even experiment with menu items similar to those.
All for the purpose of keeping your revenue growing.
Now you must definitely be curious as to how we will identify those best sellers.
Indeed.
I am headed straight there.
But before that, let me introduce you to something powerful.
Enough said, let us get to it.
Menu Engineering Analysis and The 80:20 Rule
Best Sellers in Menu Engineering Analysis advance the 80:Rule philosophy.
Have you heard of the 80:20 Rule?
Why have I suddenly digressed to something you may not have heard of?
What is the connection with menu items?
Let me explain.
The 80:20 Rule is one of the most universally applicable doctrines or principles or phenomenon (whichever way you want to call it).
The 80:20 Rule is all about:
- priorities,
- effort and
- results.
The 80:20 Rule says that other things being equal, 20% of your effort produces 80% of results.
This all boils down to one critical fact.
Among all the effort that you put into anything, there is 20% which is actually producing 80% of your results.
It also means that the other 80% of effort is ending up producing only 20% of your results.
Can you see where I am going with this?
It means, you must focus all your energies on the 20% that is raking in the 80% results.
And spend less time on the 80% which is only eking out 20% of results.
In all the menu items that contribute to the total food and beverage revenue, there are some which are producing a big chunk of your food and beverage revenue.
I am talking about identifying your top menu items.
Your Top 20 Menu Items
Let us say that you understand your Top 20 Menu Items (out of 100 plus) of Food and Beverage Revenue.
This allows you to use the 80:20 Rule to focus on those menu items that are bringing in the majority of your food and beverage revenue.
Taking this a notch deeper, you should spend more time each month reviewing the:
- business volume (food and beverage covers served) and
- price (food and beverage average check) of these Top 20 Menu Items
so that you can maximize your food and beverage revenue.
This also allows you not to spend wasteful time focusing on menu items which barely produce any food and beverage revenue.
Caution: this does not mean that those smaller menu items are to be ignored!
It only means that you devote more time to the ones that are really boosting your food and beverage revenue.
Best Sellers are the 80% results in the 80:20 Rule.
If you think about it, you will come to the conclusion that this Best Sellers concept allows your restaurant to utilize its scarce resources optimally.
Menu Engineering Analysis and Popularity
Did you notice that until now we have been talking about Best Sellers from a revenue perspective?
We found out that Best Sellers are indicators of customer preferences.
They are customer favorites.
In other words, they indicate popularity of menu items.
We are using revenue for determining popular menu items or best sellers.
Revenue Popularity thus has two ingredients to it (as we saw before):
- Quantity Sold and
- Unit Price
In other words, popularity can be the highest quantity of menu items sold or the highest price for menu items sold or both.
However, popularity is only part of the story.
There is one other powerful performance measure for menu items.
And that is Profitability.
How profitable are your individual menu items?
Are all best sellers or popular menu items also profitable?
Those are critical questions we have not answered yet.
And this is because we have not calculated profit yet.
We have only calculated food and beverage revenue.
Let us now bring in that remaining piece of the jigsaw puzzle.
Menu Engineering Analysis and Profitability
To calculate profitability we need to understand one more powerful concept.
And that is the concept of Gross Profit.
What is Gross Profit you ask puzzled?
I am getting to that.
Gross Profit is calculated as follows:
Gross Profit Calculation
Food and Beverage Revenue minus (-) Cost of Goods Sold = Gross Profit.
What is Cost of Goods Sold now you ask totally confused?
Well, the moment your customer orders a menu item and it is served, your restaurant has already incurred the cost of preparing that menu item.
In other words, the Food Cost of the Sold Menu Item.
This Food Cost is what is also called as Cost of Goods Sold.
This Cost of Goods Sold is a Variable Expense.
Variable as in, it will depend on the type of menu item, it’s price as well as the unit cost.
Gross Profit is what you earned as profit from selling that menu item.
Without deducting any other expense from the revenue.
So, now you are beginning to see that popularity is not all.
Profitability or Gross Profit is even more important.
Let us go back to that question we asked earlier.
Are all best sellers or popular menu items also profitable?
In Part 2 of this 2 Part blog post, you will get to answer that critical question.
However, there is one more thing to be determined.
You may be wondering about that too.
What happens after determining popularity?
Or, in other words, what will you do with that information?
Awesome question.
Let me give you a flow chart inspired answer.
Menu Engineering Analysis - a Flow Chart Approach
WATCH the video below to get your answer to that question and possibly some others too.
These are 3 powerful menu engineering analysis strategies that you can apply to keep your menu items selling fast and delivering the highest revenue and profit.
In Part 2 of this 2 Part blog post, you will get to utilize popularity and profitability to not only boost revenue but also maximize your restaurant’s profitability.
Want to experience for yourself how a Menu Engineering Analysis works for a restaurant?
DOWNLOAD the Microsoft Excel Worksheet with:
- Scenarios,
- Strategies and
- Tips
on how to conduct a powerful Menu Engineering Analysis.
With real menu items, prices, costs and profitability measurement.
Action Steps You Can Take Right Now
- DOWNLOAD above Excel Worksheet
- USE Excel Worksheet to input your restaurant menu item names
- INPUT Quantity Sold (or Targeted to be Sold), Unit Price and Unit Cost
- READ through instructions on how to organize the information for identifying Best Sellers
- TAKE decisions based on the organized information
Your Key Takeaways
- Know your restaurant menu items more closely in terms of their performance
- Use Menu Engineering Analysis to identify menu items by popularity and profitability
- Identify which are your Best Sellers and which Laggards
- Take decisions for individual menu items based on menu engineering analysis results
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