Given that narrowing profit margins and rising food costs are part of the norm these days, deciding what should stay, go or show up on menus has become an even more complex task.
In the past, simply looking at food costs alone might have worked in determining the most profitable menu items. Then, operators and consultants began to incorporate labor costs in the mix to determine the effect on profit margins. Nowadays, menu development involves that and so much more.
“Menus are getting more complex and the decision to keep and what to let go is even more challenging,” says Dennis Lombardi, executive vice president of foodservice strategies at WD Partners, a global architecture and consulting firm. “Conducting a rationalization just on ingredient cost can very easily lead to the wrong decisions, whether you’re working with an independent operator or a large chain across the casual dining and QSR segments.”
We caught up with Lombardi, a 30-plus-year veteran of the industry, who explained this concept of “menu rationalization” and the many facets of analysis it now entails.
“At minimum, it’s important to figure labor costs into evaluating the profit margin of a dish,” according to Lombardi. Even better for your restaurant and operator customers if you go beyond food and labor cost analysis to include others.
When consultants simply focused on food costs in the past, they focused on the “stars,” the items that sold the most, and the “dogs,” the items that sold the least. Sounds pretty straightforward, but what if those stars also had high food or labor costs associated with them? “A lot of traditionalists used to configure gross margins on what the food cost was, but one of the issues was you’re not looking at the true cost of the time or labor involved,” Lombardi says.
Scratch cooking also runs a higher price, though restaurants find they can charge more for this food. Comparing assembly time during non-peak prep hours to peak periods helps determine more accurate labor costs associated with cooking from scratch. “During peak times you might have to bring in more people or risk slowing down throughput and speed of service,” Lombardi says. “The best thing to do is manage labor staff to maximize productivity.” It’s a balancing act — more people means more money but faster throughput means higher profits.
Looking at profit margin plus volume is important, too.
In addition to the stars and dogs, it’s important to take into consideration the “puzzles,” high-margin items that operations don’t sell a lot of, and the “plough horses,” low-margin items that you do sell a lot of, Lombardi says.
By focusing on the puzzles it’s possible to determine how to increase sales for these high-profit margin items to earn more revenues overall.
In determining menu profitability, it’s easy enough to examine food costs versus labor costs, but what if you’re wasting food at the end of the day? Waste and spoilage costs play an important role, too, Lombardi says. Considering batch requirements, secondary uses and cross-utilization of ingredients and the shelf life of certain items are all key factors in determining these potential costs.
“Let’s say you have a slice of homemade chocolate cake versus a cheesecake you buy pre-made,” says Lombardi. “You might be able to buy the cheesecake for $3 and sell it for $5 for a $2 profit margin. In the case of the chocolate cake, you could make it for 75 cents and sell it for $5 a slice, but factor in the labor costs required to bake the cake and then the spoilage factor if you don’t sell it all and you just lost the profit margin.”
Seasonal menus can actually help operators boost profit margins. Serving tomatoes in the winter when they’re out of season costs more than if you simply swapped them for in-season items — plus it’s more sustainable, says Lombardi.
And, as more operators focus on local, seasonal ingredients, considering fluctuating food costs for these items year over year is important. “If you serve something pumpkin each fall you can look at what sold the most and the margins on it from one year to the next,” says Lombardi.
Waste costs come into play here, too. Local, seasonal foods tend to have shorter shelf lives so foodservice operators should use them for multiple menu items. Once again, studying year-over-year sales helps operators figure out how much of the ingredient to buy.
In determining if a menu item should stay or go, operators should consider the veto vote — items that you need to keep or risk losing customers. It’s worth conducting more consumer research to determine if those customers would simply order something else, or not come back at all if they lost their favorite items, says Lombardi.
Sometimes, introducing a close replacement to the item being removed can help avoid the loss in traffic.
The days of quick and dirty menu development are over as restaurants look for more ways to pinch pennies. Consultants are in a unique position to help their customers even more by focusing on the multiple facets of menu development and rationalization versus on just the food costs of the past.