How Menu Engineering Helps Control Food Costs and Drives Sales

9th December 2013
Coffe shop menu. A Flickr Creative Commons photo by Dan Lacher: http://www.flickr.com/photos/journeyscoffee/

One of the largest costs in the restaurant industry is food cost. Unfortunately food cost also happens to be one of the most difficult operational categories to manage well. Why?  It is subject to a slew of external and internal variables – everything from inflation, to over-portioning, poor inventory controls, high prep and labor cost, wastage, and employee theft.

What is Menu engineering?

Menu engineering is a combination of psychology (such as removing dollar signs, item placement and item description on the menu) and managerial accounting – methodically selecting, costing, pricing and evaluating your menu items to figure out which items have the highest profitability and popularity.  One starts by taking the selling price of your item and subtracting the costs to determine the contribution margin. Accurately costing your items is a critical, but often overlooked exercise and while the data needed to do so is basic, it can often be difficult to extract from disconnected inventory, accounting and Point of Sales (POS) systems. Learn more about an integration solution to that problem here.

How does Menu engineering work?

On the Accounting end, you need to break menus and recipes down to the penny for portions. That includes delivery costs, carrying costs, food costs (even garnishes and sauces), as well as preparation costs to get the true cost of goods sold. Once this is done, there are further nuances to consider. In this example let’s look at two common menu items.

Take the margin of these two items:

  1. A steak sells for $20 that costs $8 = $12 contribution margin, 40% food cost.
  2. A soup and salad combo sells for $10 and costs $3 = $7 contribution margin, 30% food cost

Before jumping to the conclusion that you want to sell more steaks (higher contribution margin) or soup and salads (lower food cost), one needs to compare the contribution margin against the popularity of each item and check what associated items are sold with it. While it is desirable that steaks contribute $12 per unit sold, is it possible that soup and salad combos sell five times more units, have a higher table turn-over rate and result in more desserts ordered? Understanding both the profit margin, associated costs and revenue of and top selling items allows owners and managers to slot each menu item into one of four categories:

  • Stars: High profit and high popularity.  Give these items preferential treatment on your menu, run promotions and incent staff to recommend them.
  • Dogs: Costly items to produce, and they don’t sell well. De-emphasize or get these off the menu completely and replace with better performing and more profitable dishes. Unfortunately there are often other considerations in carrying these items; for example dietary or faith-based concerns.
  • Workhorses: Consistent sellers, but low profit per unit. These items are where opportunity lies. Dive deeper into production and food costs to find a way to produce a cheaper product without sacrificing what makes it popular.  Conversely, it may be that sales will be relatively unaffected by a price change and an increase is in order.
  • Challenges: High profits, but poor sales. In some cases these deserve a better spot on the menu, a renaming or a merging with other items. In many cases though it may be tough to move the needle. Only a certain type of customer will ever order steak, a fish special or a triple patty burger.  Would a lower price make a difference?  Is it something that your staff isn’t promoting because it is difficult or slow to serve?  Do customers that order it even like it?

Menu engineering allows restaurant owners and managers to proactively manage food costs by tinkering with pricing, incenting staff and working with suppliers.  What techniques are you using and what returns are you seeing? Let us know in the comments section below.

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Performance Expert at LIVELENZ. Sales guy excited by operations and sales strategy for high growth companies. Lover of all things, tech, music, and photography.

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