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Friday, May 26, 2006

Menu Analysis - Decomposed

When I studied Finance in grad school, our textbook Managerial Finance by J. Fred Weston covered portfolio theory. In a chapter appendix, Dr. William Sharpe's Capital Asset Pricing Model was presented and the calculation of beta coefficients was the focus. In my corporate position, I used the CAPM to analyze operating margins of our hard dollar catering contracts in Sodexho Canada. You can find many applications for portfolio theory in everyday business.

Menu analysis lends itself to portfolio theory. Think of your menu as a portfolio of selections offered to customers. Today's POS systems provide lots of great data to analyze. Tracking menu item gross margin vs. total menu gross margin can be quite helpful. Imagine a popular menu item with a volatile ingredient like crab meat vs. another menu item which utilizes a price stable ingredient. CAPM would assign a high beta to the crab cakes.

My clients have some huge concerns when they start tinkering with their menus. One example of this concern: "If I drop this dog, I'm worried the few fans will go somewhere else and take their family with them to a competitor." Some fearlessly raise the price of coffee, iced tea, soda, and bottled water yet dread raising certain items over a particular threshold. Perhaps they can't imagine charging over $10 for an appetizer or over $20 for an entree.

Whether you choose to try CAPM, menu engineering or just use a gut feel, menu changes are huge events. Simple adjustments for inflation can send super price conscious patrons to the competition.

One of the best discussions I ever had regarding menu analysis took place with a person who never attended high school. He was very worried about raising his entree prices at dinner above $9.95. The year was 1993 and many of his competitors had made the move. We discussed the menus of area restaurants all day.

During our discussion, I mentioned one of the low cost competitors ($8.95 and below) seemed to be in decline. Their parking lot was spotty on peak nights and bare early in the week. The response: "Nobody knows why they go there!" We really tore this point up. The menu had zero focus. This restaurant served pizza, pasta, burgers, pita sandwiches, tacos, chicken fingers, 8 oz. steaks and fried shrimp. Simply stated, there wasn't a fad they didn't mimic.

While my client employed a strategy of a tightly controlled 40% food cost on a BBQ menu, this competing restaurant had no formal strategy. They simply added new menu items as eating habits changed. Watching the lines out the door waiting for a BBQ fix on a rainy Tuesday, I quickly converted to the focused menu camp. The competitor closed two years later.

No amount of mathematics can solve the riddle of the restaurant with no soul.

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