Restaurant table turnover rate is a magical tool!

What am I talking about?

It is one of the most powerful analysis tools to boost revenue in a restaurant.

And restaurant profit margin too.

How is that you ask?

Recipe 1 of Financial Literacy for Beginners - Ultimate Cookbook is on restaurant table turnover rate.

And how managing that boosts restaurant revenue.

Click to know more about Financial Literacy for Beginners - Ultimate Cookbook.

This recipe will show in a simple way why restaurant table turnover rate is so powerful.

Still not convinced.

Let’s dive in right away.

Watch Video

Begin by Watching this 2 minute slideshow video

This Recipe will cover:

Restaurant Table Turnover Rate & Seats Available

Let’s begin with Taste Buds Restaurant.

A 40 seat restaurant serving burgers, soup and salads.

Seats Available in a restaurant is the asset that works with Restaurant Table Turnover Rate.

Restaurants may have different meal periods.

However, the seats available remain the same.

Seats Available is also known restaurant seat capacity.

We will look at three scenarios of use of the seats available.

Restaurant Table Turnover Rate and Covers Served

Covers Served are the business volume a restaurant generates.

Restaurant Table Turnover Rate is closely linked to covers served.

Covers are one of the two major contributors to restaurant revenue (the other is check).

You could call covers served as the utilization of the asset (seats available) in a restaurant.

See below:

Relationship between Seats Available and Covers Served

Restaurant Table Turnover Rate is related to:

• seats available and
• covers served.

Higher the covers served versus seats available, higher the table turnover rate.

And when the table turnover is higher, we will see the magic happen!

What magic is that, you ask?

That magic results in higher restaurant revenue.

How to Calculate Restaurant Table Turnover Rate

So, how is Restaurant Table Turnover Rate calculated?

See the slide below on the calculation.

How to Increase Restaurant Revenue

How do we use table turnover rate to increase restaurant revenue?

This is through a process of targeting more covers to serve every day than the seats available.

Of course, this targeting has to be followed up with action.

Action begins with setting up a daily covers to be served target.

See Chef’s Take below on some specific strategies to achieve an increase in restaurant revenue.

Chef’s Take - Strategies to Boost Restaurant Revenue

You need to understand two key concepts before laying out strategies:

• types of restaurants and 
• meal periods

Let's see how that works.

Types of Restaurants and Meal Periods

Different restaurant types have different table turnover rates.

For example:

An All Day Dining restaurant tends to have higher table turnover rate than a fine dining restaurant.

Why is this?

Because fine dining meals are longer in duration as they are accompanied by wine or other spirits.

At the same time, table turnover rate is also different for different meal periods.

Breakfast tends to to have the highest table turnover rate.

This is often because a breakfast buffet is laid out.

Meal period duration for a buffet breakfast is shorter than that of an a la carte one.

Dinner meal period table turnover rate tends to be the lowest.

This is because the meal is often accompanied by wine or other spirits.

Of course a dinner buffet might make the table turnaround relatively faster.

How to Increase Restaurant Table Turnover Rate

Here are some strategies to adopt.

Carefully analyze the customers that come to your restaurant.

Are they in groups of 1-2, 3-5 or higher numbers?

Tabulate how many covers were served for these groups.

Are your table sizes in sync with the group sizes that come to your restaurant?

For example:

Say, more of your restaurant covers were achieved with bigger groups.

If you have more tables of 1-2, then that is a mismatch.

You are clearly leaving money on the table (pun intended!).

Arrange table sizes and take bookings keeping in view a higher table turnover rate.

Bookings are another avenue.

If the restaurant is popular and regularly busy, try and book bigger table sizes.

You can even offer a bigger discount for groups of 5 or more.

Traps to Avoid

Increasing Restaurant Table Turnover Rate is closely linked to customer patronage.

Merely filling up the restaurant seats is not enough.

Unfortunately, many restaurants fall into this trap.

And then they have difficulty maintaining growth in restaurant revenue.

To sustain higher revenue, you have to bump up covers served

This can be achieved through bigger group sizes.

In a way, you are increasing number of customers per table.

This is one way of increasing restaurant table turnover rates.

Other ways are to:

• encourage customers to return
• Provide loyalty discounts
• Create a loyalty card with benefits
• have regular promotional offers

A higher table turnover rate can make up for even a lower price in contribution to restaurant revenue.

What is the Magic of Restaurant Table Turnover Rate?

1.  Serving more covers than the seating capacity
2. Turning over tables more than once of each seat available
3. Using same asset (seats available) multiple times in a meal period

Download PDF of this Recipe for Easy Reference

Recipe 2 Coming Up...

Managing Inventories for a Better Bottom Line

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Restaurant Buffet Profitability is critical for a restaurant business.

Do you offer a buffet breakfast, lunch or dinner at any of your restaurants?

Have you ever wondered whether your buffet meals are profitable?

Even if you did not offer them, are buffets worthwhile?

How would you know?

In this article, I will lay out a case for buffet offerings vs the traditional a la carte menus.

Let’s jump right in.

This Blog Post will cover:

Traditional Restaurant Offerings

The most common offering of restaurants is the menu based one.

What is known in the industry as a la carte menu items.

These are individual menu items listed with a price for each.

Menu items could be food or beverage types.

Or a combination thereof.

More granularly, they could be based on meal periods.

What are meal periods?

Commonly they are:

• Breakfast
• Lunch
• Dinner

Lunch and Dinner might further have multiple courses (with menu items) like:

• Salad
• Soup
• Entree (Main Course) and
• Dessert

A customer can order any single or combination of menu items in any meal period.

So, what then is a buffet all about?

Let me introduce you to an example of the concept you may be more familiar with.

The Combo Meal

Ever been to a McDonald’s or Burger King?

If you have, you know if you order Chicken Nuggets, you will be asked if you want the Nugget Combo.

What is this Combo?

Well, it is more than one menu item bundled together.

For example:

• Chicken Nuggets
• French Fries and
• Soft Drink

What’s the big deal with this bundling concept?

It is a big deal.

More importantly, the buffet is a restaurant’s version of the Combo meal example above.

Let me explain.

The Bundle Concept

A buffet spread is a bundle offering just like the Nugget Meal Combo.

It brings together the following generic menu items which are also available a la carte:

• salad
• soup
• entree
• dessert

The above is a generic buffet composition for lunch or dinner.

There can be more items added to the above depending upon what the selling strategy is.

But these can be considered basic.

We now come back to an earlier question.

What’s the big deal with a buffet?

Rationale for buffet

Why are buffet spreads offered?

There are many reasons.

Let’s take first the obvious ones:

• ease of access to the customer or guest
• quick turnaround,
• visual attraction,
• more choices,
• unlimited quantity,

These are reasons which are a huge win for the customer.

I will, through an example later, prove how that is so.

How about the restaurant?

Do they benefit from a buffet offering?

Or, does the buffet make money for them?

Yes, they do.

And indeed it does.

A powerful principle is at work relating to bundles.

The Buffet Revenue Bundle Concept

A buffet which is well conceived of and priced attractively is a major contributor of revenue.

How so?

Let me give you an example of what this means.

Illustration

Let us assume a Lunch Buffet in a 24 hour Dining Restaurant (Coffee Shop).

Items included are: salad, soup, entree, dessert, individual prices of a la carte items included in buffet:

• Salad $3.50
• Soup $4.50
• Entree $11.75
• Dessert $4.75
• Total of a la carte items (without taxes): $24.50

Now, assume that the buffet spread is priced at $20 (without taxes).

Advantages of the Bundle Strategy

Let us list the advantages of this strategy:

• Most critical one is for the guest:
  • saving of $4.50 with unlimited choice of menu items in buffet.
  • this amounts to 18% discount based on a la carte total.
• This is for the restaurant:
  • It need not sell salad, soup, entree, dessert individually;
  • in one shot, all items have been sold through a buffet offering.
  • This has powerful implications for revenue.
• Not all guests who choose buffet spreads consume every part of the meal.
  • Some may just have the entree and dessert or the soup, entree and dessert and
  • similar combinations which do not include all the items.
  • This has implications too.
• Revenue contribution is higher when a buffet is sold than when individual a la carte items are sold.
• Simply put, revenue is higher with buffets sold.
• This is because of the combination (bundle) of menu items sold at one time.
• Apart from this increased revenue, there is a strong impact on margins and profitability. [See section later on Buffet Profitability].
• With a buffet laid out, restaurant outlet operates with less service employees.
  • This reduces labor costs and
  • boosts restaurant profitability.
• With a buffet laid out, there is less movement in and out of the operating equipment.
• For example, plates, dishes, chinaware, glassware and so forth) between restaurant and the kitchen.
  • This brings down breakages thereby boosting profitability of the restaurant.

Revenue that consists only of individual a la carte items sold is less effective than a buffet sold.

As said before, the buffet is like a bundle.

The Buffet Revenue Contribution

The increased revenue contribution from:

• a buffet compared to individual a la carte items
• is clear from the above illustrations.

But that is not the only benefit.

There is a huge factor that boosts margins and profitability when a buffet is sold as a bundle:

• the additional variable costs for the revenue achieved are lower
• this increases profitability.

The Buffet Bundle Profitability

Finally, the most powerful implication of the buffet spread offering is this:

• more buffets sold in a particular meal period result in higher profitability,
• due to better contribution margins compared to individual a la carte items.

This article was first published by the author for www.4Hoteliers.com and is reproduced here with their permission.

Menu Engineering Analysis for Highest Restaurant Profitability

Want to Learn about restaurant profitability through menu engineering analysis?

WATCH below video (< 5 mins) of a flow chart based menu engineering analysis for highest restaurant profitability.

Related Posts You Should Read

Does Table Turnover feature at all in your priorities?

Are you regularly struggling to meet revenue targets in your restaurant?

Know what happens when you ignore the single most powerful revenue boosting phenomenon for a restaurant operation?

And consequently profitability as well.

So, what is that phenomenon, you ask?

Great Question!

I am glad you asked.

I will lay out a strategy that will swiftly galvanize your operation volume, revenue and profit all in a fell swoop.

And all in a minute!

What, you say with your mouth open in disbelief?

Yes, indeed.

Welcome to the 1 Minute Profit Recipes Series.

The series will focus on one key hotel or restaurant business or financial concept in each 1 minute blog post.

And you can absorb it visually too with a infographic that you can download and keep as reference or video you can watch.

Sounds a great proposition right?

And now let me introduce you to the magic phenomenon.

The phenomenon of The Restaurant Table Turnover!

This Blog Post will cover:

The 1 Minute Profit Recipe Philosophy

You are a busy professional.

You run a busy hotel and / or a restaurant operation.

You do not have time in your hectic schedule to learn from long winded online courses.

You barely get a break in your day.

How about a minute however?

Surely you can spare a minute!

That is all I ask.

Welcome to the 1 Minute Profit Recipes Series.

It is a series tailor made for busy professionals like you.

The series will focus on one key hotel or restaurant business or financial concept in each 1 minute blog post.

Or 1 Minute Profit recipe to be more precise!

.

1 Minute Profit Recipes - Recipe 1 - Table Turnover Infographic

Learning Visually

You know what they say: a picture is worth a 1,000 words!

A video is worth probably much more.

And the unique thing about the 1 Minute Profit Recipes is that it is totally visual.

The profit recipe is anchored by an infographic.

A visual way of understanding the concept in the recipe.

Not just understanding!

Each recipe has a dedicated section where you can take 3 steps right after reading it.

You could say: apply the learning.

That is true learning, is it not?

And now on to this recipe which is about The Restaurant Table Turnover.

Table Turnover: The Capacity, Revenue and Profit Connection

To boost your Table Turnover, you must understand and leverage connection between:

• capacity,
• revenue and
• profit

Capacity is the foundation for your restaurant profitability.

Ensure that you relate covers, revenue and profit to it.

You can influence revenue by looking at the capacity-covers gap.

This will boost revenue and ultimately profit

If you manage the Capacity and Revenue recipes, the higher Table Turnover should lead to higher profit.

Watch Video

3 Steps You can Take Right Now

The 1 Minute Profit Recipe is all about rapid action.

It is about applying what you learned to your restaurant operation.

Here are 3 Steps you can take right now:

1. Close the gap between seating capacity & covers served by increasing covers served, this will increase the table turnover.
2. Know the contribution from covers and average check, they impact revenue
3. Boost your Profit by reducing gap between capacity and covers through increasing average check.

Tell us what you thought of the 1 Minute Profit Recipe on Restaurant Table Turnover and any way we can improve it.

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Are you doing online learning the right way?

As a busy hotel manager, time is your enemy.

Despite that, you have to grow professionally to avail of opportunities for promotion and higher success.

But are you placing your entire professional development at stake with the way you learn?

The fact that most learning is uni-dimensional makes it impossible to retain knowledge.

This means you quickly forget what you learned.

This is gross waste of time, resources and money.

I will lay out a case for a kind of learning that you can retain longer and apply powerfully to your operation.

In this process, you will equip yourself with ingredients required for achievement of your targets consistently.

You would want that wouldn’t you?

Let us get to it then.

This Blog Post will cover

Online Learning - The Taste Buds Restaurant Story

Imagine you are owning and managing the Taste Buds Restaurant.

No, imagine for now, it is the next best to actually owning and managing!

Taste Buds restaurant is a 40 seater restaurant serving soups, salads, entree, desserts and select beverages.

The restaurant is located in a vibrant part of New Yore (yes, “Yore”) City.

All your learning of restaurant profitability concepts in the 6 Restaurant Profit Margin Recipes experience will be with reference to the Taste Buds Restaurant which you own and manage.

I can already imagine your taste buds tingling and the smacking of your lips.

Great Start!

You will begin the process by creating a menu of food and beverage items (be a Chef so to say).

You will then perform Menu Engineering analysis.

Kind of turn into a finance guy or gal.

Online Learning - What is the Integrated Content + Video + Spreadsheet Experience?

First, you will learn hands on how to create a Sales Mix or Menu Item Mix (this is Profit Margin Recipe 1) which will boost the Taste Buds restaurant’s revenue and profit.

Second, you will learn about contributors to revenue for the Taste Buds restaurant with particular reference to price.

• Pricing (Profit Margin Recipe 2) is one of the most powerful factors impacting revenue.
• You will learn about developing price leadership and prevent price resistance.
• And how to adopt pricing strategies that will boost restaurant profit margin.

Third, you will understand the relationship of restaurant revenue with its inventories.

• Inventories (Profit Margin Recipe 3) influence revenue and costs thereby impacting profit margin a great deal.
• You will optimize your inventories to boost profit margin.
• You will learn what inventories to hold and what to sell.

Fourth, you will learn how to identify the break even level for the restaurant.

• Break Even Level (Profit Margin Recipe 4) allows you to know at what point of covers served or revenue achieved you will equal first your fixed costs and then total costs.
• This profit margin recipe literally determines the survival capability and profit margin potential of the restaurant.

Fifth, using revenue, costs and profit of the restaurant, you will determine how much of the revenue flows down to the profit also known as Profit Flow Through (Profit Margin Recipe 5).

• Profit Flow Through lets you know whether, how much of your additional revenue is resulting in additional profit.

Finally, you will utilize all the key concepts you have learned in this course relating to your Taste Buds Restaurant .

• And you will identify the Key Performance Indicators (or KPIs) (Profit Margin Recipe 6) of the restaurant.
• These key performance indicators relate to revenue, costs and profit.

Online Learning - Challenges and Problems of Taste Buds Restaurant

What are the main challenges and problems of Taste Buds Restaurant that 6 Restaurant Profit Margin Recipes experience can help solve?

• Know where Taste Buds Restaurant revenue is coming from. – You will learn foundational Menu Engineering concepts.

• Which menu items are producing profit for Taste Buds Restaurant? – You will learn and apply Contribution Margin

• What pricing strategy should Taste Buds Restaurant adopt? – You will learn Pricing Strategies for penetration and focus on volume.

• What are the primary goals of Taste Buds Restaurant that I can help achieve?

  You will learn how to run a successful and profitable restaurant operation using the following key concepts:

  • Menu Engineering Analysis
  • Revenue Sources
  • Pricing Strategies
  • Volume Strategies
  • Cost Strategies
  • Profit Strategies

Online Learning - Increasing Restaurant Profit Margin

The entire purpose and content of 6 Restaurant Profit Margin Recipes course is structured to help you increase restaurant profit margin using integrated restaurant profit recipe experience (yes, experience, it is not just a course!!).

Increasing Restaurant profit margin may be:

• Capacity related.
  • Capacity means the Seating Capacity of the Taste Buds Restaurant.
  • This is the maximum number of seats that can be accommodated at a time.
  • You will be working with seating capacity a great deal in this course.
• Revenue related
  • Earning Revenue is the first goal of the Taste Buds Restaurant.
  • You will look at the sources of revenue which will help produce your profit in great detail in this course.
• Pricing related
  • Revenue of Taste Buds Restaurant is achieved by two factors one of which is price.
  • In this course you will understand pricing strategies that will boost not only your revenue but your profit too.
• Volume related
  • Apart from price, the other factor in achieving Revenue is volume.
  • Volume refers to covers served in the Taste Buds Restaurant.
• Profit Margin related
  • This entire course is focused on boosting profit margin of the Taste Buds Restaurant.
  • You will learn and apply techniques to boost your bottom line.

[Screenshot]

Online Learning - Integrated Content + Video + Spreadsheet Experience

The 6 Restaurant Profit Margin Recipes is an integrated restaurant profit margin recipe experience.

Yes, it is an experience not just a course.

It is a completely different approach to restaurant profitability which we are very excited about.

A 3 Dimensional approach if you like.

Am illustrated content + videos + spreadsheet combination unlike any other!

Watch this video to learn what the 3 dimensions are.

It is the story of Taste Buds Restaurant, a 40 seater restaurant serving soups, salads, entree, desserts and beverages.

You will be owning and managing Taste Buds Restaurant through the 6 restaurant profit margin recipes journey.

During this journey you will know what impacts profit of The Taste Buds Restaurant and learn how to leverage decisions based on that.

Online Learning - Benefits of the Integrated Content + Video + Spreadsheet Experience

The significant benefits for YOU the student of this course are:

• End to end learning
  • The 6 Restaurant Profit Margin Recipes is a complete end to end learning experience.
  • You will begin the process by creating a Menu Engineering Worksheet for the Taste Buds Restaurant.
    • This is the heart of your restaurant revenue.
  • You will understand how to build a menu of items which will optimize your profitability.
    • Moreover, changes you make to your menus will be reflected in your Profit and Loss or Income Statement.
• 3 Secrets
  • The 6 Restaurant Profit Recipes is founded on three secrets – relationships, triggers and cause effect.
  • You will identify relationships between key numbers for the Taste Buds Restaurant.
  • You will then find out which number triggers other numbers.
  • Finally, you will see which number in Taste Buds Restaurant is the cause and which the effect so that you can take effective decisions in your restaurant operation.
• Scenarios for real life examples
  • To solidify learning, you will manage and run Taste Buds Restaurant using real life scenarios which are situations you will face in the Taste Buds Restaurant operation.
• Videos for faster learning
  • A key aspect of the 6 Restaurant Profit Margin Recipes multi pronged learning experience is videos.
  • Through byte sized videos (3 to 5 minutes), you will learn how to operate the Taste Buds Restaurant.
  • The 1 Minute Profit Boosters additionally provide quick analysis of key factors that will boost profit for Taste Buds Restaurant.
• Excel Spreadsheet for practice
  • Last but not least, a fully integrated set of Microsoft Excel Workbooks will allow you to build Menu Engineering Worksheets linked to Revenue, Costs and Profit for the Taste Buds Restaurant.
  • You can conduct menu engineering analysis and watch changes to menus being reflected in the Taste Buds Restaurant Profit and Loss or Income Statement.
  • This is extremely powerful multi-dimensional learning.

Watch this short teaser video to learn about this unique multi-dimensional learning experience.

Online Learning - Learning by Doing

Would you want to manage a restaurant operation (and learn) rather than learn about managing in an online learning course?

Campus based physical learning in schools and universities has become more expensive.

With covid-19 restricting it further, online learning has mushroomed into a multi-billion dollar industry.

The online learning market in 2022 will be worth an astonishing $1 Trillion.

Most Individuals cannot afford the steep campus based courses.

Or are in demanding day jobs (majority would fall into this category).

This means they may need to study simultaneously while working.

These individuals are thus looking to study online courses.

Sign Up below for Preview of the 6 Restaurant Profit Margin Recipes Experience + Amazing Deal!

Explosion of Online Learning

Online Learning has exploded in the past decade as a medium of instruction.

Reputed universities have often replaced a campus based live course with an online learning version with no decrease in enrollments.

In particular, micro courses which are short, say in a week and sometimes even in a single day are attractive to individuals who are occupied with busy day jobs.

They are able to invest some time on personal development.

At the same time they are able to complete online learning courses within a certain time frame.

This is compared to a diploma or degree program which can stretch from a year to two or four years.

The flexibility to be able to self paced study from your home is a great attraction in favor of online learning courses.

Moreover, technology has brought these course material to a smartphone or tablet.

And as said earlier, the fact is that you can complete the course within a time frame.

And pick up some important new elements of knowledge, then apply to your work, is a good draw.

Engagement Challenges in Online Learning

Having said that, online courses have the challenge of striving to engage the student as much as live courses do (or at least profess to do).

Engagement is a big part of live classroom teaching.

A lot of teaching in these classrooms can be tailored to the responses of students.

Eye contact and body language can be used to determine mood of students and so on.

Many times, responses of students can be used to gauge their level of engagement, comprehension.

This can be used to bring in the person to person interaction to overcome that.

Theoretically, all these forms of engagement which are hallmarks of live teaching are difficult in online learning.

But this has changed significantly over the past decade.

Research and surveys are showing that online Learning courses are catching up.

With the help of technology to bridge the gap caused by these engagement challenges compared to campus based courses.

How are they able to do this?

Enter a powerful approach to online learning using the age old storytelling.

Storytelling in Online Learning

Traditional lesson based online learning techniques are being rapidly replaced by injecting the power of storytelling into courses.

Human beings are wired from birth for storytelling.

We respond intuitively to stories.

We are natural born storytellers as well.

So, what is so special about storytelling?

Storytelling is the practice of weaving a plot, characters and narrative point of view into stories.

The fact that a plot and characters are major parts of a story bring in the element of emotion, suspense, drama.

This is why stories can be riveting.

They just innately touch a nerve.

Humans respond spontaneously to the magic of a story.

This power has been tapped into an online learning framework by educators in a big way.

Apart from online learning, business storytelling has burgeoned over the years.

Now it is firmly entrenched as a powerful technique to imparting learning.Consider this:

• Difficult to grasp concepts can easily be woven into a story context and presented to learners.

The amazing outcome of this is that the learners are not even aware as they listened to or watched on a video, stories.

That they have also been learning concepts and frameworks in an unobtrusive but effective way.

Scenarios – Contextual Online Learning

Scenarios are a type of storytelling.

The dictionary meaning of a scenario is:”a description of what could happen.”

You could say that scenarios are contextual storytelling.

This means, first a particular situation is taken in context and then a visualization of what could happen is played out.

Scenarios are powerful contextual storytelling.

In online learning they can be used with concepts that the course is teaching.

In business courses, their application is even more effective.

EXAMPLE

For example:

• Say, you are teaching the concept of “falling profits.”
• Instead of merely defining what that is, if you wove a story around it and
• Brought in a plot and characters involved in that business situation and
• Created an illustration around it,
• the concept will get ingrained in the learner more effectively.

So, a scenario goes far beyond merely an illustration.

It brings in the magical plot, character elements of storytelling.

In the process, it ends up explaining what the concept is.

The learner will be so engrossed in the narrative that they may not realize that they have learned a concept.

Of course, how well the scenario is laid out and is close to a learner’s existing knowledge environment are key to the success of scenarios.

But they do present teaching in an entirely different light.

What is your opinion?

Do you think scenarios and storytelling can make you understand a topic better in an online learning environment?

Sign Up below for Preview of the 6 Restaurant Profit Margin Recipes Experience + Amazing Deal! to learn about storytelling and use scenarios.

Action Steps You Can Take Right Now

STEP 1

Ask Yourself whether your learning is multidimensional?

STEP 2

Are you able to retain the knowledge you are acquiring?

STEP 3

Are you acquiring skillsets from your learning?

STEP 4

Are you gaining the ability to problem solve in real life situations?

STEP 5

Acquiring skills and ability on top of knowledge makes learning multidimensional

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Ever heard of Contribution Margin?

Are all best sellers or popular menu items in a restaurant also profitable?

If you had not asked this question for your restaurant, you have just lost an opportunity.

An opportunity to leverage the power of menu engineering analysis to achieve highest restaurant profit.

You would want that wouldn't you?

I will show you in this blog post ways to discover which popular menu items are also profitable.

So that you can maximize your restaurant profit margins consistently.

Sound good?

Let's dive in.

This Blog Post will cover:

This is Part 2 of the 2 part blog post series on restaurant menu engineering analysis. Click below for Part 1 if you missed it for a better understanding of this Part 2.

Menu Item Revenue and Contribution Margin

Menu Item Mix in Menu Engineering Analysis

Here are some typical ways, menu items feature in restaurants as part of a Menu Item Mix.

Buffet [for this blog post we will assume that all menu items are a la carte]

For an in depth look at how buffet operates in a restaurant, read this blog post I have written on restaurant profit.

A la Carte

Your Menu Item Mix is a key element of achieving highest restaurant revenue and profit.

Your Menu Item Mix is the combination of different items or categories of your menu that contribute to your food and beverage revenue.

Your Menu Item Mix may have the following combinations:

• Food and Beverage (separately and together)
• Buffet and A la Carte - Breakfast, Lunch and Dinner [Refer to blog post on restaurant profit margin]
• Individual and Group [Refer to blog post on restaurant profit margin].

Food

The simplest example of a menu item mix will be different combinations of menu items which relate to just food.

These could be:

• salad,
• soup,
• entree,
• dessert

as items of food.

Beverage

Similar to the Food menu item mix, the Beverage menu item mix will be the different combinations of menu items which relate to just beverage.

Beverage could be:

• soft drinks,
• juices,
• wines,
• spirts and so forth.

Food and Beverage

The most common combination of a Menu Item Mix in a food and beverage operation is that of food menu items and beverage menu items.

For example, a soup, entree, dessert (food items) and a drink (beverage item).

Why is this combination important?

Food Revenue normally accounts for 75% or more of the Food and Beverage Revenue in your restaurant.

It could be 75% in your restaurant and say 85% in another.

If Food Revenue accounted for 75% of Food and Beverage Revenue, then Beverage Revenue accounts for the balance 25%.

Did you notice that Food Revenue can thus be 3 times that of Beverage Revenue?

In other words, selling one Food Menu item is like selling 3 Beverage Menu items!

So, why don’t we just sell Food items?

Good question.

The answer to that will be discussed in detail in another blog post on profit flow through.

Contribution Margin and Food & Beverage Menu Items

For the moment, know that:

• not only are beverage costs lower than that of food
• but it also makes sense to sell BOTH Food and Beverage items in your Menu Item Mix.

Why does it make sense to sell BOTH Food and Beverage items in your Menu Item Mix?

This is because of an important principle that operates in the hotel as well as restaurant business.

It applies in different degrees to all other businesses too.

This principle is known as the Contribution Margin.

Cost Point

As said earlier, Menu Item Mix is not just the quantity and price elements of the revenue.

The real power of the Menu Item Mix is:

• when, apart from the Sales Quantity and Price (which become Sales or Revenue in dollar terms),
• we bring in costs and contribution margin too.

We will look at an illustration shortly to show significance of contribution margin.

This will emphasize that a Menu Item Mix is not just revenue.

That costs and contribution margin play a big part too.

Contribution Margin Magic in Menu Engineering Analysis

Contribution Margin is a powerful principle that will allow you to focus on and optimize restaurant profit.

What is Contribution Margin?

Calculation

Contribution Margin is simply Food & Beverage Revenue minus (-) Variable Costs.

Contribution Margin is based on the following principle:

How much of contribution does a menu item revenue make to the total Profit?

In other words, if a menu item contributes to $100 of revenue, how much of that $100 would translate to profit?

It recognizes that to earn revenue, two types of expenses will be incurred:

• fixed expenses and
• variable expenses

However, a change in revenue or sales quantity will normally only affect the variable costs.

What do we mean by that?

We mean that when sales quantity and/or revenue changes, only expenses which are related to earning that revenue will also change.

For example, if you remember, in Part 1 of this 2 part blog post series, we discussed how as soon as a menu item is prepared and served to a customer, the restaurant incurs food cost.

That food cost in the variable expense we are talking about.

Fixed expenses remain unchanged irrespective of sales or revenue quantities.

Let us illustrate this with an example:

Example

Type of Restaurant: 24 Hour All Day Dining / Coffee ShopRestaurant

Seat Capacity: 200

Table Turnover: (February 2021) - 3 times turnover [Refer to the blog post on restaurant profit margin for an explanation of Table Turnover]

Table Turnover: (March 2021) 5 times turnover

Average Check: $25 (February & March 2021)

Service Charge: NIL

Variable Expenses Per Cover: $2.50

FNB Revenue will be calculate as follows from the above:

200 [Seat Capacity] x 3 [Table Turnover] x 28 [No of days in Feb]) x 25 [Average Check] = $420,000

In the above example, Contribution Margin will be calculated as:

February 2021

200 x 3 x 28 x $25 = $420,000 FNB Revenue

Variable Expenses: 200 x 3 x 28 x $2.5 [Variable Expenses per Cover] = $42,000

Contribution Margin = FNB Revenue - Variable Costs so,

$420,000 - $42,000 = $378,000

March 2021

200 x 5 x 28 x $25 = $775,000 FNB Revenue

Variable Expenses: 200 x 5 x 28 x $2.5 [Variable Expenses per Cover] = $70,000

Contribution Margin = FNB Revenue - Variable Costs so,

$775,000 - $70,000 = $705,000

Increase in FNB Revenue Feb Vs Mar 2021 - $355,000 [85% Increase in FNB Revenue]

Increase in Contribution Margin Feb Vs Mar 2021 - $327,000 [87% Increase in Contribution Margin]

Notice how the Contribution Margin in Mar 21 has jumped by 87% when revenue has gone up by 85%.

That is mainly due to the higher Table Turnover [5 Vs 3] in Mar 21 compared to February 21.

If you wish to enhance the Contribution Margin in your restaurant, boost Table Turnover!

Did you also notice also that Variable Expenses per Cover were the same in Feb and Mar 21.

This is normally the case.

Variable Expenses per Cover remain constant (mostly) while Variable Expenses themselves change all the time.

Let us look at a Flow Chart of Steps.

On How to Use Contribution Margin in a Menu Item Mix to Achieve Highest Restaurant Profit.

Leveraging Contribution Margin - a Flow Chart of Steps

STEP 1: Start with Revenue

STEP 2: Find out Revenue Contributors

Revenue Contributors are Covers and Average Check

STEP 3: Determine how Covers and Check move with the Menu Item Mix

STEP 4: Analyze information over this period versus previous period

STEP 5: Detect patterns, trends in both Covers and Average Check

STEP 6: Re-align Menu Items Mix to those that contribute to higher profit

STEP 7: Optimize Menu Item Mix [Go back to Part 1 of this blog post series and watch the video on how to do this - Boost, Review and Replace Strategies]]

As you saw from the above illustration, contribution margin is critical to the path of highest revenue and profit.

However it all begins with a solid menu engineering analysis.

Do you know the best sellers from the laggards in your restaurant menu items?

That is the first question you need to ask yourself.

Revisit Part 1 of this blog post to understand how (if you missed that post).

Next, it is critical that you use the menu engineering analysis process to manage two elements:

• menu item popularity and
• menu item profitability

And now let us move on to some specific measures which will tell you whether your contribution margin strategy is working or not.

Contribution Margin and Key Performance Indicators You Must Watch

In this application of menu engineering analysis magic, you will take a close look at some of the powerful triggers to restaurant profit.

These are your Key Performance Indicators (KPIs).

These KPIs allow you to measure and monitor your performance and course correct where necessary.

They show you how your Contribution Margin is performing and how to tweak that to achieve highest profit.

You could say that KPIs empower you to attack the cause of any performance strength or shortcoming and then address them for optimum effect.

Let us deal with these KPIs one by one.

REVENUE PER SEAT

Revenue is the starting point for any business activity which wants to earn profit.

Revenue generation happens when you use assets in the operation.

The single most critical asset in a restaurant operation is the Seating Capacity.

Restaurant outlets are divided into sections, sections consist of tables and tables have seats.

It is the total of these seats that goes by the term Seating Capacity.

Seating Capacity is the maximum number of guests who can be seated at any one time.

It is the highest level of revenue capacity.

If a restaurant outlet has a seating capacity of 200, it thus has a maximum point.

Thus the calculation for Seating Capacity is:

Maximum Number of Seats in a Restaurant Outlet

COVERS SERVED

An empty seat in a restaurant adds nothing to the revenue.

So, knowing the capacity of seats in a restaurant is important.

However, it is only when a guest is seated and is served, that a revenue process starts.

Covers served however are a bit more complex than just having a seat.

It is normally the responsibility of the manager to determine and define what a cover served is.

For example, if you serve coffee to a guest, is that a cover served?

What about when 5 guests at a table order 7 different menu items or categories (soup, salad, entree, dessert, beverage and so forth)?

These are critical questions that need to be answered before a standardized definition of a Cover Served can be arrived at.

This is because getting this wrong would distort the average check calculation (see later in this section).

Covers served can be considered the quantity element of the revenue generation process, the other part is the Average Check.

You learned this briefly in Part 1 of this 2 part blog post series.

Thus the calculation for Covers Served is:

Standardized (per management definition) unit of a menu item served in a Restaurant Outlet

AVERAGE CHECK

Even once a cover is served, revenue will not follow unless there is a price attached to the menu item served.

Price when averaged out among all the covers served will become what is known as Average Check.

Just like different menu items and item categories have different prices, when all these prices are applied to quantities in which they are served (covers served), you arrive at revenue.

Thus the calculation for Average Check is:

Average of all the prices of different menu items served to guests.

However, the above calculation becomes clear when we apply the revenue formula which is:

Covers Served X Average Check = Food and Beverage Revenue

Pricing is at the heart of revenue generation.

Price of a menu item must be set carefully after considering direct expenses of preparation of food and a profit margin.

This is technically the way an item should be priced.

However, often it will become necessary to make the price more competitive.

To do this price may barely include a profit margin.

The real power of the pricing strategy is realized when a menu item is of such value to the guest that they demand it again and again which results in more covers served.

It is a misconception to think that we can price a menu item whichever way we think and the guest will buy it.

First comes value perceived by the guest and then only profit will follow.

The above formula can also be stated as below:

Food and beverage Revenue / Covers Served = Average Check

In the above formula if we now bring in Seating Capacity, you can see that Covers Served has an upper limit - number of seats in the restaurant at any one time.

Given this limitation, it is even more important that the pricing is right.

Two related KPIs to the above are:

• Table Turnover and
• Meal Period Analysis

Both address the limitation of seating capacity to a great extent.

Table Turnover Ratio is a simple ratio which measures the number of times a table in a restaurant is turned over during a particular meal period.

In effect, how many number of times the same table in a restaurant is sold.

Obviously a high turnover ratio means higher incremental revenue for the restaurant.

Meal period analysis requires accurate identification of specific meal periods that are applicable to each of a hotel or resort’s restaurant outlets.

Generically, the standard meal periods for a city hotel are breakfast, lunch, snack, dinner, supper although this is more applicable to a Coffee Shop.

Read the blog post on restaurant profit margin to know more about meal periods.

REVENUE PER SEAT AVAILABLE

Earlier, you learned about Seating Capacity in a restaurant outlet.

You learned that there is an upper limit to the number of covers that can be served within meal period because of the number of seats available.

You also saw how table turnover allows you to measure how many times you have used a table to sell during a meal period.

But the key measure for a restaurant outlet as far as utilization of capacity is concerned is Revenue Per Seat Available.

The calculation for this is:

Total Food & Beverage Revenues / Seating Capacity

This ratio will also indirectly tell you how many times a seat has been used for earning revenue.

It is a powerful KPI.

REVENUE PER SQUARE FOOT

Often a question arises whether a food and beverage facility (more particularly banquet function space) can earn more revenues by treating it as real estate space and renting or leading it out.

This is compared to holding events and earn food and beverage revenue.

Even if that strategy is not actually pursued, there is a KPI that measures what revenues you earn currently from your banquet function rooms by holding events.

That is Revenue Per Square Foot.

The calculation is:

Total Banquet FOOD AND BEVERAGE Revenue / Total square Foot of Space of Function Rooms

The above KPI can then be compared to the rentals that you may get by leading it renting that space.

Of course, costs of renovating and preparing the space for such leading and so forth also need to be considered in the comparison.

Many times this comparison leads to a rethink of the function room space and it's earning capacity.

However, it must be remembered that if the banquet function room space is part of a hotel's key facility offerings, it may have to remain that way.

REVENUE / PAYROLL COSTS PER EMPLOYEE

The above two KPIs are often used together to determine how much of a gap exists between revenue earned by and cost of payroll for an employee.

These two KPIs will give an indication whether you are over staffed, your payroll costs are too high (or too low as well) and whether productivity levels are good.

It is a generalized KPI and must be used with care.

Employees cannot be hired or fired just based on this KPI.

So, there you are.

An end to end solution beginning from the menu engineering analysis and ending with higher contribution margin and profit.

This is Part 2 of the 2 part blog post series on restaurant menu engineering analysis. Click for Part 1 if you missed it for a better understanding of this Part 2.

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

As you saw from the illustration, contribution margin is critical to the path of highest revenue and profit.

However it all begins with a solid menu engineering analysis.

Here are the steps you can take right now for your restaurant.

STEP 1: Start with Revenue

STEP 2: Find out Revenue Contributors

Revenue Contributors are Covers and Average Check

STEP 3: Determine how Covers and Check move with the Menu Item Mix

STEP 4: Analyze information over this period versus previous period

STEP 5: Detect patterns, trends in both Covers and Average Check

STEP 6: Re-align Menu Items Mix to those that contribute to higher profit

STEP 7: Optimize Menu Item Mix [Go back to Part 1 of this blog post series and watch the video on how to do this - Boost, Review and Replace Strategies]]

Your Key Takeaways

So, what did you think of Contribution Margin?

Are you utilizing its power and magic in your restaurant?

What are your strategies on achieving highest restaurant profit?

Leave your comments below. I will be keen on knowing your thoughts

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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

1. DOWNLOAD above Excel Worksheet 
2. USE Excel Worksheet to input your restaurant menu item names
3. INPUT Quantity Sold (or Targeted to be Sold), Unit Price and Unit Cost
4. READ through instructions on how to organize the information for identifying Best Sellers
5. 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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Do you know why Restaurant Contribution Margin is superior to Restaurant Profit Margin? 

Two business concepts often confused with one another are Restaurant Contribution Margin and Restaurant Profit Margin.

If you mistook one for the other, the result could well be decrease in overall restaurant profit.

So, how to increase restaurant profit margin? 

In this blog post, we unearth six secrets of achieving incremental restaurant profit margins.  

• Secret 1 - The Sales Mix
• Secret 2 - The Seat Capacity
• Secret 3 - The Buffet
• Secret 4 - Table Turnover Ratio
• Secret 5 - Restaurant Contribution Margin
• Secret 6 - Meal Period Analysis

Let us dive into the first secret right away.

SECRET 1: SALES MIX

The first secret of incremental restaurant profit is the Sales Mix. 

What is that you ask?

Restaurant Sales Mix is the foundation on which restaurant revenue is generated.

Profit concepts between a hotel and a restaurant are broadly similar. However, they are not the same.

A restaurant’s profit margin model is different from a hotel’s. 

The former has to deal with higher direct variable costs per unit than the latter.

In later parts of this blog post, we will examine how a restaurant profit margin is significantly influenced by a well thought out sales mix.

This should be in sync with customer expectations and tastes as well.

Secret 2: SEAT CAPACITY

One of the most critical elements of a restaurant revenue generation strategy is the Seat Capacity of the restaurant. 

Knowing the maximum number of seats in a restaurant is critical to keeping the restaurant full over different meal periods. 

Again, seat capacity plays a different part for each meal period.  

More so if some of the meal periods have a buffet offering.

Buffets are fully discussed shortly in this post.

Seat Capacity plays a huge part in a restaurant profit margin. 

It plays as important a part as Rooms Available for the profitability of the rooms department.

The current volume of covers served by a restaurant is always compared with the Seat Capacity.

At the time of designing and conceptualizing the restaurant and the seat capacity, it is important that demand estimates be accurate.

It may mean the difference between a largely empty restaurant (too high Seat Capacity) or one that is always full (too low Seat Capacity).

This has repercussions for the stakeholder return in investment.

Secret 3: THE BUFFET

The next secret is that of the powerful concept of a Buffet spread which is central to optimizing sales mix in a restaurant.

This is a popular approach adopted by hotel restaurants.

We will see how this approach boosts restaurant profit margin.

The Buffet Philosophy

No Restaurant Sales Mix analysis is complete without an analysis into whether menu items are a-la-carte dishes or a buffet spread.

A-La-Carte dishes are single menu items sold separately.

In a traditional menu list, each menu item priced separately is thus an a-la-carte menu item.

The most popular and common offerings of restaurants are individual menu items or a-la-carte items.

Hotel restaurants often offer a buffet spread apart from a-la-carte orders.

A buffet spread is a bundle offering which brings together the following generic menu items (also available a-la-carte):

• salad
• soup
• entree
• dessert

The above is a generic buffet composition for lunch or dinner. 

There can be more items added to the above depending upon the selling strategy. But these can be considered basic.

Rationale for Buffet

Why are buffet spreads offered?

The most obvious reason for a buffet spread is ease of access to the customer or guest. 

A guest can pick up any item on the buffet that they like.

Quick turnaround, visual attraction, more choices, unlimited quantity are other reasons.  

A powerful phenomenon is at work in buffets relating to Restaurant Sales Mix.

Buffet Power in Restaurant Revenue

A buffet which is well conceived of and priced attractively is a major contributor of revenue in a Sales Mix.

Let me give you an example of what this means.

ILLUSTRATION

Let us consider a Lunch Buffet in a All Day Dining Restaurant (Coffee Shop)

Items included are: salad, soup, entree, dessert.

Individual prices of a-la-carte items included in buffet:

• salad $3.50
• soup $4.50
• entree $11.75
• dessert $4.75
• Total of a la carte items (without taxes): $24.50

Now, assume that the buffet spread is priced at $20 (without taxes).

Let us list the advantages of this strategy:

• Saving - Most obvious one is the saving of $4.50 (this amounts to 18% discount based on a la carte total and more than 20% based on the buffet price)
• More Sales Quantity - Instead of selling the salad, soup, entree, dessert individually, in one shot, all items have been sold through a buffet offering. This has (as said before) powerful implications for the Sales Mix.
• Consumption - Not all guests who choose buffet spreads consume every part of the meal.
  • Some may just have the entree and dessert or the soup, entree and dessert and similar combinations which do not include all the items. This has implications too.
  • The most immediate effect is that revenue contributions are higher when a buffet is sold than when individual a-la-carte items are sold. Simply put, revenues are higher with buffets sold.
  • Apart from this increased revenue, there is a strong impact on margins.
• Manning - With a buffet laid out, the restaurant outlet can operate with less number of service employees. This reduces payroll costs and boosts restaurant profit margin
• Breakages - With a buffet laid out, there is less movement in and out, of the operating equipment (plates, dishes, chinaware, glassware and so forth) between restaurant and the kitchen. This brings down breakage, increasing profit margin of the restaurant.

It is quite obvious that a Sales Mix that shows individual a-la-carte items sold (not all of them all the time) is less effective than a buffet sold.

As said before, the buffet works like a bundle.

Let us use the bundle metaphor in the related food processing industry.

The McDonald’s Meal Combo model

McDonald’s is a fast food outlet serving pre-portioned and processed food.

This is different from a hotel restaurant outlet (primarily the all day dining restaurant).

However, the Sales Mix principle involved in the Meal combos is similar to the buffet spreads offered in hotel restaurants.

By selling Fries and a Soft Drink bundled into a Meal combo with the entree that is the Burger, McDonald’s has successfully boosted revenue contribution by optimizing their Sales Mix.

Buffet Power and Contribution Margin

The increased revenue contribution from a buffet sales mix compared to individual a-la-carte items is clear from the above comparison.

But that is not the only benefit.

Buffet Power in Restaurant Profit Margin

The most powerful implication on Sales Mix of the buffet spread offering is that more buffets sold in a particular meal period result in a higher restaurant profit margin.

This is owing to a better contribution margin than when compared to individual items on a-la-carte basis.

Secret 4: TABLE TURNOVER RATIO

In effect, how many number of times the same table in a restaurant is sold.

Obviously a high turnover ratio means higher incremental revenue for the restaurant.

A Table Turnover ratio is a great KPI (Key Performance Indicator) which is used extensively for restaurant revenue budgeting and forecasting.

WATCH this video for understanding the power of a Restaurant Table Turnover Ratio.

Secret 5: RESTAURANT CONTRIBUTION MARGIN

Contribution Margin is a powerful principle that will allow you to optimize both hotel and restaurant profit.

What is Contribution Margin?

Contribution Margin is simply Revenue minus (-) Variable Costs.

Contribution Margin is based on the principle of: the extent of contribution a revenue item makes to total profit.

It recognizes that to earn revenue, both fixed and variable costs will be incurred.

However, a change in revenue or sales quantity will only affect the variable costs.

Fixed costs remain unchanged irrespective of sales or revenue quantities.

Let us illustrate this with an example:

ILLUSTRATION

Type of Restaurant: 24 Hour All Day Dining / Coffee Shop

Restaurant Seat Capacity: 200

Table Turnover: (February 2018) – 3 times turnover (Refer to Secret #4 on Table Turnover)

Turnover: (March 2018) 5 times turnover

Average Check: $25 (February & March 2018)

Service Charge: NIL

Variable Costs Per Cover: $2.50

FNB Revenue: (200 x 3 x 28) x 25 = $420,000

In the above example, the Contribution Margin will be calculated as:

February 2018

(200 x 3 x 28) x $25 = $420,000 F&B Revenue

Variable Costs: (200 x 3 x 28) x $2.5 = $42,000 Variable Costs

Contribution Margin = F&B Revenue – Variable Costs so,

$420,000 – $42,000 = $378,000

Food & Beverage Cover

Food and Beverage Cover is one of the two basic ingredients of revenues (the other is Average Check).

The Food and Beverage Cover can also be called the quantity element of revenues (the Average Check is called the price element).

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.

 All of them though follow the above principle in some way or other with some variation.

Remember the following formula:

Restaurant Revenue = Food & Beverage Covers X Food & Beverage Average Check

Average Check

Secret 6: MEAL PERIOD ANALYSIS

Why is it critical to know and analyze meal periods?

There are two paths to restaurant revenue growth.

The first one is Table Turnover which we saw in Secret #4 of this post.

The second path is Meal Period Analysis.

This is closely related to the table turnover ratio seen in Secret #4.

In fact, we can go as far to say that the optimum path to restaurant revenue growth is a combination of both these factors.

But what then is meal period analysis?

It is a study of data and information on what contribution each meal period in a hotel or resort’s restaurant outlets is making.

This depends first on the type of outlet.

Meal period analysis requires accurate identification of specific meal periods that are applicable to each of a hotel or resort’s restaurant outlets.

Generically, the standard meal periods for a city hotel are breakfast, lunch, snack, dinner, supper although this is more applicable to an All Day Dining Restaurant type (also called a Coffee Shop).

Having understood factors which affect table turnover and meal period analysis, how then are these considered powerful operationally as well as from a point of view of financial analysis tools?

How do these actually contribute to restaurant revenue growth?

As we saw earlier in the post, revenue contribution in restaurants is made by two key elements – food and beverage covers (number of guests) and the average food & beverage check.

These are also known as the quantity (or volume) and price contributions. The formula, if you remember is:

Restaurant Revenue = Food & Beverage Covers X Average Food & Beverage Check

When the above formula is applied for each meal period, they become the building blocks of a revenue estimate.

However, this revenue estimate is on the assumption that each guest or cover is based on a turnover of one.

If we are to assume different table turnover ratios for different restaurant types and meal periods, then we need to multiply the earlier revenue estimate with this ratio to arrive at the final revenue estimate.

For example, taking the earlier formula further:

Restaurant Revenue = Food & Beverage Covers X Table Turnover Ratio X Average Food & Beverage Check

An alternate way of calculating restaurant revenue is:

Restaurant Revenue = Restaurant Seating Capacity X Table Turnover Ratio X Average Food & Beverage Check.

One important aspect to remember in using Table Turnover ratio is that the ratio must be accurately applied.

When applied to full seating capacity, the factor will be less than when computed based on covers.

So, the approach is to estimate revenue assuming table turnover ratio is 1.

Then you multiply actual cover count (or seating capacity) with the table turnover factor (number of times a table is turned over) to arrive at the final estimate.

This is why table turnover and meal periods in tandem are such powerful elements of budgeting or forecasting restaurant revenue.

New Hotel Revenue Projection

Another area of financial analysis where table turnover and meal period are used together is for new hotel revenue projections.

This is done by actually applying table turnover ratio to the full capacity of the restaurant.

Moreover, table turnover can be generically used to determine other factors like manning requirements, supplies etc.,

Restaurant Contribution Margin vs Restaurant Profit Margin

In the beginning of this post, I asked a question:

Do you know why Restaurant Contribution Margin is superior to Restaurant Profit Margin?

Let me address that now.

Contribution Margin deducts only Variable Expenses from revenue for its calculation.

Restaurant Profit Margin deducts Total Expenses (both Variable and Fixed) from revenue for its calculation.

Why does that make Contribution Margin superior, you ask?

All in good time.

When a restaurant sales quantity (covers served) increases, it brings with it only Variable Expenses.

Fixed Expenses do not accompany it simply because they do not move with sales quantity movements.

In other words, incremental revenues because of increase in sales quantity only have Variable Expenses increasing.

Since, Contribution Margin deducts only Variable Expenses from revenue for its calculation, it is a reflection of how much profit is affected. 

Departmental Profit, by deducting Total Expenses from revenue is not able to give you that one level deeper analysis of what is happening to profit when sales quantity is increasing or decreasing.

This is the reason why a Restaurant Contribution Margin is superior to Restaurant Profit Margin. 

Strategies you can apply right now

Go back to your hotel or restaurant Income Statement.

See how Contribution Margin for a current period compares to the previous period. Compare with Restaurant Profit Margin.

Use the Table Turnover Ratio to find out how well you are utilizing the restaurant seat capacity asset.

Select meal periods where you think you can push up sales quantity to boost revenue and contribution margin.

Be aware of price resistance challenges when you embark on increasing prices. 

As a general rule, price changes should only be made when actual and/or perceived value has become better for the customer.

When value (even perceived value) falls below price, you may lose the customer forever.

What is your strategy going forward?

If you are an aspiring general manager, build The Ultimate 10 Tools in a Hotel General Manager Business Toolkit with the Mastering Hotel Finance Online Course.

Your Takeaways

What were the takeaways for you from the blog post? And from the video?

Are you leveraging your Sales Mix in your restaurant to improve Contribution Margin?

What is your average restaurant profit margin?

What topics would you like to see as future blog posts?

Tell us in the comments section below.

Related Posts

In this post, we will look at leveraging the Catering profit business model from the following angles:

• Diversity - Catering's strong suit
• Catering - a unique animal
• Low Price, High Volume Syndrome
• The Catering Volume Phenomenon
• Catering Pricing Power
• Catering Buffet Spreads - Profit Vehicles
• Catering Beverage Costs and Prices
• Catering Third Party Services / Equipment
• The Owner Perspective

On with the analysis..

Diversity - Catering's strong suit

The food and beverage operation which includes Catering is diverse.

It has a multitude of outlets each boasting a bewildering variety of permutations, combinations of food and beverage fares.

A restaurant outlet can be an All Day dining outlet, a bar, a fine dining outlet, a snack outlet, a lounge, a deli or gourmet shop, a patisserie, to name some types.

However, these are purely from the dining outlet operation category.

A major part of the food and beverage division is the catering or banquet operation, quite different from the dining outlet types. 

It is thus apparent that diversity is indeed the strong suit of the food and beverage operation.

The types of outlets listed above are diverse not just in their nature. The diversity ranges from the kind of fare they serve, through to being food or beverage oriented or both, right down to customer profile and price points.

They differ in virtually every facet of their respective operations.

Catering - a unique animal

The Catering or Banquet operation provides yet another set of varied dimensions to the food and beverage operation.

The Catering operation is that chunk of the food and beverage operation, which is driven by market segments more than the traditional meal periods.

Although the Catering operation can and does support meal periods, its source of business is derived from market segments.

This is because the convention and meeting segments pre-dominantly drive the Catering operation.

Conventions and meetings are the bread and butter of the Catering operation.

The best way to distinguish conventions from meetings would be to simply call the former a mega meeting normally with a big chunk of rooms business at the forefront.

Conventions are big events - examples are conferences, workshops, retreats, and so on.

They may be held in city hotels which are convention oriented. 

Or as is more and more the trend, at resorts away from the hustle and bustle of the offices.

Low Price, High Volume Syndrome

The food and beverage is (particularly when it is compared to the rooms operation, as it often is) a low price, high volume operation.

For example, make a broad comparison between the average room rate of a medium sized hotel and the average food and beverage check of its restaurant outlets and catering operation. 

It is fair to say that the average room rate will be anywhere from 5 to 10 times that of the average food and beverage check.

It is also safe to say that this ratio could be higher in favor of the average room rate if not for the catering operation.

An explanation is in order.

The Catering Volume Phenomenon

The Catering operation is one that thrives on volumes.

How is this achieved?

It is through a universal principle that works with cost behavior.

This principle says that once fixed costs of an operation are covered, additional sales over and above the fixed costs will only incur variable costs.

This enhances profitability.

Conventions and meetings dominate the catering operation.

The minimum number of people involved in a meeting function could be 10.

Conventions can go right up to and sometimes more than 1000.

Most of the time, meetings, while providing function room space also serve food and beverage for the group.

This basically means that while a restaurant outlet serves individuals of one at a time, the catering operation serves a minimum of ten at a time. 

Covering fixed costs is quicker in a Catering operation.

If fixed costs are covered faster, additional sales will only bring in variable costs.

This pushes up profitability.

Catering Pricing Power

While the regular dining part of the food and beverage operation is low price, high volume driven, the Catering operation can soon become a high price, high volume operation. 

The Catering operation is one where pricing power rules. 

By virtue of the enormous numbers that are served in this operation, significant economies of scale are achieved.

This combined with the huge volume pulled in boost the bottom line in a major way.

For a deep dive into the complete set of follow up steps toward achieving the highest hotel profit, enroll in the Mastering Hotel Performance Analysis Online course (currently at a limited time offer of 50% OFF).

Catering Buffet Spreads - Profit Vehicles

Most convention and meeting events are accompanied by food and beverage service.

Almost all these are buffet spreads.

Why are buffet spreads offered?

Tthe obvious reasons are ease of access to the customer or guest, quick turnaround, visual attraction, more choices and unlimited quantity.

However, there is a powerful principle at work relating to a sales mix.

• Instead of selling the salad, soup, entree, and dessert individually, in one shot, all items have been sold through a buffet offering. This has (as said before) powerful implications for the sales mix.
• Not all guests who choose buffet spreads consume every part of the meal.
  • Some may just have the entree and dessert or the soup, entree and dessert and similar combinations that do not include all the items.
  • This has implications too.
  • The most immediate effect is that revenue contributions are higher when a buffet is sold than when individual a-la-carte items are sold.
  • Simply put, revenues are higher with buffets sold. 
  • Apart from this increased revenues, there is a strong impact on margins and profitability.
• With a buffet laid out, the catering operation can operate with less number of service employees.
  • This again reduces labor costs and boosts profitability
• With a buffet laid out, there is less movement in and out of the operating equipment (plates, dishes, chinaware, glassware and so forth) between banquet function room and the kitchen. 
  • This brings down breakages thereby also boosting profitability of the operation.

The increased revenue contribution from a buffet sales mix compared to individual a-la-carte items is clear from the above illustrations.

But that is not the only benefit.

A huge factor that boosts margins and profitability is when the buffet is sold as a bundle. 

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The additional variable costs for the revenues achieved are lower thereby increasing profitability.

Finally, the most powerful implication on sales mix of the buffet spread offering is this. 

More buffets sold result in higher profitability (owing to better contribution margins as seen earlier) than compared to individual items on a-la-carte basis.

Catering Beverage Costs and Prices

An example of economies of scale is a simple but a common one.

Soft drinks and juices are normally the staple beverages accompanying food items in a convention and meeting event situation.

This is because alcohol is normally not served as part of the beverages.

Sometimes beer may be included but almost always it is the soft drinks and juices that are featured.

ILLUSTRATION

• A 600 ML Bottle of Coca Cola costs approximately $3.50 at a retail shop and contains between 6 and 8 glasses of the soft drink.
• When this is served and charged per glass, it will be priced at a minimum of $1 per glass.
• At 8 glasses per bottle, the sales will be $8 compared to $3.50 cost.
• That works out to be more than 100% profit margin.
• This is a simplistic example but true with almost all types of catering events and it addresses just one soft drink item.
• Thus economies of scale are huge when it comes to beverages served in catering function.

Consider this kind of profit margin over an event with more than 1000 guests.

It is also the reason why the catering operation is considered the breadwinner for the normally high volume, low price food and beverage operation.

..

Catering Third Party Services / Equipment

Yet another area where the catering operation achieves a profit margin coup is in the provision of third party services.

This normally is for huge events where simultaneous electronic translation services, rentals of computers or servers and so on are arranged by the hotel through third parties.

The hotel normally charges a hefty margin while the third party vendor does all the work.

This boosts catering profitability even more.

The Owner Perspective

The Catering operation is thus a different kind of food and beverage operation. 

It takes the normally prevailing low price high volume characteristic of the typical food and beverage operation and turns it on its head. 

It thus becomes a high volume high price operation with enormous boosts to revenue and profitability owing to the numbers it manages to pull.

The high contribution margin it enjoys thus makes it the venerable breadwinner for the food and beverage operation.

Owners can laugh all the way to the bank for having the foresight in building a top notch offering of function rooms in the catering operation within their hotel premises.

If you are an aspiring general manager, build The Ultimate 10 Tools in a Hotel General Manager Business Toolkit with the Mastering Hotel Finance Online Course.

This article was first published for www.hotelexecutive.com

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