Historic Costs vs. Future Costs

The role of a food cost controller is much different from the menu analyst. Cost control relies entirely on historic data to prepare reports which quantify results and alert management to possible problems or opportunities. On the other hand, the menu analyst needs to look to the future.

When a menu price revision takes place, the prices need to cover the future costs and provide a reasonable profit. Knowledge of commodity trends, economic forecasts, unique events in the coming year and other future oriented information is helpful. The costs used to arrive at theoretical menu item costs should use these expected prices.

The food cost controller studies purchase data to understand the previous period. Use of theoretical food cost data may help the controller discover a usage problem. Usage problems involve units rather than dollars. There is concern regarding missing steaks or shrimp or perhaps an entire case is gone. Purchase costs are important only when there is a big swing in price on one or more high volume items.

Using the same price data for both menu planning and food cost control is a mistake. The portion sizes for all key items should be 100% exact. It is the prices which need to vary. Many operators simply take an educated guess on overall inflation and raise menu prices across the board with the same % increase.

Ideally, the menu analyst benefits from the ongoing work of the food cost controller. Portion control tests, relative price volatility and other information the controller has at their fingertips is valuable to their counterpart. They should work together to discover how the current menu has performed.

In a highly collaborative organization, the cost control team could utilize information from the menu analysis team (e.g. future menu price revision strategy) to create better budgets.

Three Classic Menu Engineering Approaches

There are 3 classic menu engineering models taught in hotel/restaurant management courses. These models produce much different results when applied to a restaurant with a large number of entree choices.

Many people are familiar with the Star, Plowhorses, Puzzles, and Dogs approach which was developed by Kasavana and Smith. This model uses popularity as a function of gross contribution to split entrees into 4 quadrants. The popularity cutoff is 70% of the average number sold. If you sold 1,000 entrees and had 10 choices, any entree with over 70 sold is either a Star or a Plowhorse. The contribution test uses the mean. If the average contribution per plate is $12, items with higher profit would be labeled as a Star or a Puzzle (depending on popularity).

The second popular method was developed by Miller. He uses a similar popularity test but focuses on food cost % instead of gross margin. His Winners are popular menu items with a low food cost %.

Finally, Pavesic's menu engineering approach uses weighted statistics and looks at profitability as a function of food cost %. There is no 70% applied to his figures since the numbers are weighted by their overall impact on results.

I used the 3 methods to evaluate the menu at a seafood and steak dinner house with 41 entree choices. Comparing the ratings to my initial recommendations to the owner, I find myself most in sync with the Pavesic method. I tend to focus on profitability improvement through tighter food cost control. Someone employing the Pavesic method with reliable recipe cost data would come to many of the same conclusions I reached without running the statistics.



Miller rated a block of popular menu items as Winners when the Kasavana/Smith approach rating was Plowhorse and the Pavesic rating was Standard. Although I like the Miller approach for the current recession, entrees with lower gross margins may not rate a Winner class unless they achieve a low food cost % figure.

[My test data came from work I did in 2008 and the recession was mostly an autumn event in this seashore restaurant. The summer figures were in line with previous boom years and this season dominates the annual sales volume results.]

If I were advising the same operator today, the Miller approach would factor heavily in my recommendations. Since there is a ceiling on menu item prices imposed by the thrifty diners of 2010, restaurants need to rely more heavily on tight food cost control to achieve profits. I would expect to see fewer sales of high ticket menu items with high gross margins and high food cost % figures since the high selling prices which would support this profile have declined in popularity. Fewer diners are trying to impress with their choices. More diners are looking for a lower check at the end of the meal.

Plowhorses or Deterrents?

Anyone who has used the popular Kasavana/Smith menu engineering model is familiar with the term "Plowhorses". A Plowhorse refers to an entree which is highly popular and has a relatively low contribution. My brother Paul is an Executive Chef at a major resort in California. We love to discuss menu engineering theory and we question the characterization of these under-performers as Plowhorses. Paul prefers to refer to the popular items with low profitability as deterrents.

Dr. Kasavana states: "While plowhorses do not help carry the restaurant's "burden of margin," they surely can be utilized to attract price sensitive buyers. These items present an opportunity to create significant price promotions." Later in the Plowhorse description, he offers a suggestion: "...try to shift demand to other, more profitable items through merchandising programs and menu positioning."



Clearly, the fastest way to higher profits would be to convert sales of these popular under-performers to Stars (highly profitable/high contribution items). Playing around with the unpopular Dogs (unpopular/low contribution) and Puzzles (unpopular/high contribution) won't have the same impact due to the relatively low number of orders sold.

My brother Paul argues these "Plowhorse" menu items deter customers from ordering a more profitable menu item. Often he finds servers promoting these menu choices when asked for help by the guest. He courageously eliminated the most popular menu item at the resort. Whether you call it a Plowhorse or a Deterrent, check averages and gross margins are way up.

We find lots of "price sensitive buyers" in the current environment. If you can't bring yourself to completely eliminate these deterrents, consider one other suggestion from the book: "Relocate plowhorse items to a lower menu profile position. Hiding these items may lead to the sale of higher contribution menu item selections." If I am interpreting this suggestion accurately, our aim is to demote these Plowhorses to Dog status.

Treatment of Dogs is straight forward in the book: "TAKE DOG ITEMS OFF THE MENU!"

If you are struggling with one or more highly popular menu items which simply do not carry their fair share of contribution, you need to take action now. You may feel the need to try to hide these items or combine them with more profitable options. Do you have the confidence to eliminate these items now? You may find more money in your bank account.

Menu Planning and Strategy

Our industry is experiencing a shift in the demand curve. Restaurant goers are downsizing from upscale to casual, casual to fast casual and fast casual to QSR and take-out. The regular patrons at many family owned restaurants are watching their checks and eliminating an appetizer or dessert course. If you have a lower priced entree on your menu, you may find the popularity on the increase.

Most of the menu analysis and menu engineering models were built during a time of solid annual growth for our industry. These models focus on high gross margin entrees loved by patrons. Blindly using these models to adjust menu prices may hurt your bottom line. These models are designed to eliminate low gross margin menu items if the popularity is low.



Rather than completely eliminating these dogs, you may want to repackage these items. Take them off your printed menu and try them as budget specials. You may find a winner or two.

The stars need to get your full attention. Are your guests still selecting the reliable cash cows? You may see the high gross margin items slipping in popularity. Chef Mario Batali (one of my favorite chefs) was quoted in a USA Today article: "There's less caviar, foie gras and truffles, but they're still there. They're just not on nine courses. They're on one course." This same article highlights other chefs who have decided to offer more price points for their patrons.

Expense accounts are being scrutinized at every major S&P 500 company. The current earnings season on Wall Street shows companies are slashing costs.

The wine lists are offering guests fewer trophy bottles as demand for the $200 plus bottle of wine has collapsed. Many restaurants religiously ordered their annual commitment from the same boutique vineyards without regard to consumption. Now, these wine cellars are loaded with these high cost bottles. Many have decided to end this practice and they are moving these bottles by the glass.

Are there ways to produce the same gross margins in this new era? Yes. You need more turns on busy nights. Offer early bird specials, table d'hote options, and popular add-ons for your popular menu items. Promote seasonal ingredients which typically offer lower cost of sales.

Customer knowledge (including dining out budgets) leads to effective menu planning efforts. Rather than completely revamping your current menu, you may find a few strategic revisions will help you meet your targets.

Packed Restaurants

I'm just back from a long road trip through coastal North Carolina and South Carolina. Since it was past the peak season, hotel rooms were dirt cheap and I never hit one traffic jam. All you can eat BBQ places were enjoying full parking lots. At lunch time, these spots offer whole hog BBQ with fried chicken and loads of sides and desserts for $7.50. Some throw the ice tea in and others charge ($1.79 for unlimited tea). This has a terrific impact on food cost results.

I know there are lots of people who want to debate gross profit vs. food cost percentage. With regard to the tea included issue, it doesn't matter what camp you are in since the impact is huge. At one place, I paid $10 and another $8 for basically the same style food and service. I'm guessing the $10 (includes tax but no tip) spot is on target for a 33% cost of sales since they charge for the tea. If the same costs were incurred by the operation with no charge for tea, their cost % would be over 40%.

Both parking lots were jammed.

Down in Myrtle Beach, the dinner buffets offer all you can eat seafood spreads for $19.99. The calorie count was pretty high at lunch and I skipped the dinner buffets. A couple of the owners let me in to observe the buffets. One had a raw bar with lots of shrimp, oysters, crab claws and clams. They also had just about every style shrimp entree and lots of dishes with fin fish and vegetables. Drinks were extra at the places I visited.

The number one issue in Myrtle Beach is the selections. It seems a competitive advantage is held by restaurants offering more selections. One marquis: "Over 170 selections..." Another: "We have 120 selections..." The people who spoke with me said the customers liked to try a little bit of everything and they all like dessert.

Several operations highlighted their bakery offerings. I didn't actually see a baker but there was a prominent bakery at one place. They offered take-out bread, rolls and desserts.

The place with 170 offerings in the off-season scared me a little. They had a light crowd due to the heavy rain and it was a Wednesday night. Still they presented the 170 menu items (some with dairy) in the huge buffet area. Some operators run the cream soup and bisque over several nights bringing the food from cold to hot and back several times.

If I was in the market for a big meal, I probably would have tried the place with the raw bar and a mere 100 menu items. Their lot was about 50% full.

Nobody offered an all you can eat breakfast buffet. I'm sure many of the hotels offer breakfast. The places I visited mostly opened at 5 PM.

Menu Driven Specials

When menu specials compliment the base menu offerings, there is an opportunity to significantly drop the level of waste and spoilage. The reasons are many for this phenomenon. Cycle menus are always developed with the future in mind. The second choices are often based on the previous day's primary choice.

The ability to utilize the same protein items used every day in your base menu in specials is a great advantage. Your wait staff may promote menu offerings which help minimize waste. Small forecasting errors won't create spoilage since the base menu uses the same ingredients. You'll focus your purchases on fewer protein items. Its possible to save on these key items as the purchase volume increases.

Contrast this style of menu specials with the policy of presenting new and innovative menu items on your specials board. This strategy implies a wider range of protein items. I have observed operations where the chef offered 5 to 7 completely different specials each night. Imagine trying to forecast and manage usage on 35 different protein items (in addition to all items required by your base menu) when the number of covers is uncertain. In addition, you need to forecast your guest's preference each evening to utilize all the expensive center of the plate items.

Not every operation has the ability to make this transition. If you use a cycle menu as a base, your offerings need to change each day to allow long term guests to enjoy a diverse selection. As mentioned previously, talented cycle menu writers take great interest in eliminating waste through careful menu design. I recommend following this style of menu design whenever you need to provide more protein options than called by your base menu.

Managing The Check Average

Is this a great time to push your average check higher?

For over a decade, the economy has been buoyed by cheap money and big equity gains. Now the consumer sees tight money markets and capital losses. Company T&E reports are being scrutinized. Tourists are staying closer to home. Regulars are showing up less frequently. Dining rooms have lots of mid-week tables available.

When your place is packed this weekend, do you push the expensive entrees? High check averages may attract the same scrutiny as the $75 gas fill ups. This may be the time for a complimentary cup of coffee or even a slice of pie.

These decisions are rough on the food cost percentage. A complimentary menu item on your busiest night is risky. Will the customer return next week? If the strategic move gets a repeat visit, you win. If they go to your competitor or eat at home next week, you missed some marginal profit with no immediate gain.



Playing well on the margin is more art than science. It helps to measure results. If you want to encourage a repeat peak visit, a complimentary coffee and dessert could be offered to guests who reserve a table for the following week. Policy could be changed to make this semi-permanent. There would be very little wrong if the process repeated itself week after week during this economic downturn.

Would you sacrifice a coffee and dessert sale to get a table filled next week?

Typically, the after dinner drink and dessert course is very profitable. This action will have a significant impact on your check average. You can control the cost of this promotional gambit. Restrict the complimentary items to coffee, tea, and low cost dessert options. Loyal guests are the target in this exercise.

Menu Specials Strategy

The economy continues to make consumers jittery. Discretionary income is in decline in many regions of the country. Restaurants featuring quick and cheap meals are holding their own while formal dinner houses see large drops in check averages and covers.

If a restaurant's sales dropped from $2.5 Million to $2 Million and average ingredients cost increased 15%, their gross profit will plunge - over 25%. Trying to make up the difference in labor is impossible.



As customers watch their check totals closely, it may be tough to sell profitable extras. If your menu concept relies heavily on specials, the answer could be a conspicuous value oriented option each meal period. By changing to menu selections which require lower cost ingredients, you would position yourself to eliminate the impact of higher commodity costs.

There are plenty of moves possible in every segment: Kobe tenderloin to Kobe sirloin; Shrimp Scampi to Linguine with Shrimp; Veal Marsala to Chicken Marsala; Omelets; Steak to Chicken Breast; Chilean Sea Bass to Flounder, etc.

You can close the gross profit gap with smaller portion sizes. Customer friendly, lower check averages result from smaller portion sizes and less costly ingredients. Menu selections should be offered a la carte and as a table d'hote option. The table d'hote choice could include profitable appetizer and dessert choices which can be added for a $5 to $10 bump in price over the a la carte entree price.

Put your free bread basket under a microscope. Lower check averages increase the cost impact of any fixed meal component. Try to keep the perceived value with less costly alternatives. Wheat prices are sky high. On a recent trip to New York, I paid $1.20 for a bagel. You could try baking your own flat breads or foccacia. Shop around for lower cost bread options and mix them into the basket. Every little bit helps.

Offer Dessert Early in the Meal

Years ago, my brother Paul invited my wife Jackie and I to dinner at the American Bounty Restaurant. The restaurant is run by the students at The Culinary Institute of America. They have a great program where you take a student to dinner and Paul was our student guest. Although the entire dinner was exceptional, I still remember the dessert over a decade later. It was a delicious Berry Cobbler served fresh from the oven.

After our server greeted us he promoted this special dessert option. He said he needed to take the order NOW because the fresh baked cobbler required over 20 minutes in the oven. We ordered the cobbler and the locally produced wine he recommended. He rushed to the kitchen to put in our dessert order while we read the menu.

The entire meal was marvelous. After our entree dishes were cleared, the warm cobbler was served with ice cream. It was excellent and I told many friends about the meal.

Out of curiosity, I recently ran a Google search ("American Bounty" "Culinary Institute" cobbler dessert) to find out if they still offered dessert early in the meal. They still have this policy in place. A restaurant review of American Bounty mentioned the dessert order policy:

"Rick's dessert was an apple cobbler with cinnamon ice cream they made him order with his entree because they bake it fresh right then."

This policy is ideal for fine dining operations with long meal times. The guest orders a high profit item with plenty of add on potential immediately after being seated. We all ordered coffee later when the cobbler arrived. In addition, we tried a local dessert wine. The dessert course produced 25% of our total tab. Our check increased by 33% through the dessert course we decided on at the beginning of the meal.

Chronic Waste

Do you feature lots of specials? If specials account for over one third of your volume, you probably experience a significant waste expense. Forecasting is much more complex with menus featuring market-based entree specials.

I find many menus focused on specials create chronic waste. The cost of each bad decision is not immediately recognized most of the time. These mistakes are frozen, rehashed, served on buffets and fed to employees. Some executives praise chefs and kitchen managers for their talent with using leftovers. There is nothing wrong with creatively using a modest amount of over-production. Chronic waste starts when the over-production becomes routine.

Once your operation starts producing too much product due to poor forecasts, you eventually begin to focus more on mistakes than successes. Wait staff are asked to recommend last night's poorly received 5th choice rehashed into tonight's number one choice. Freezer space is used to store items which will become an expense of some future period. At an extreme, I have witnessed companies spending capital resources on greater freezer capacity.

So how do you end this cycle of progressive and chronic waste? The simple way is to develop and feature a solid slate of popular entrees on your base menu. Use specials judiciously to highlight seasonal favorites (preferably using low cost seasonal ingredients).

It's OK to offer some variations on a theme but try to utilize fewer meat and seafood raw ingredients. Waste expands as the variety of protein ingredients increases in your walkin cooler. Operators with limited menus experience very little waste because they offer the same entrees and sandwiches day after day. Study this simplicity before revising your menu strategy.

Hidden Profit Potential

One sure way to a lower food cost percentage is a strategic menu price hike. If you need to disguise this activity, find all the top sellers (by count) hidden in your product mix. Look for soft drinks, coffee and tea, side salads, add-ons, substitutes and extras. Check the all modifiers with high counts and little or zero sales.

Too often, operators give away the extra slice of cheese, two strips of bacon, sauteed mushrooms, lettuce leaves and tomato slices. You'll often see a burger menu category with these add-ons listed after the choices. A common charge is 25 or 50 cents. The two strips of bacon can easily cost 25 cents. These low profit items will hurt your food cost percentage.

Take a second look at your burger category. I see many menus with a basic burger for $8.95 and 5 to 6 options priced $1 higher. Sometimes, the menu will list a bleu cheese burger for an extra dollar. There are plenty of excellent quality bleu cheese options in the market. If your spending $5 a pound for the cheese and your portion size is 3 ounces, your add-on cost percentage is 94%. Charge an extra $1 and reduce the portion to 2.5 ounces and the same bleu cheese will run 39%.

Soft drinks, coffee and tea are high volume choices. An extra quarter or half dollar a drink will produce major revenue increases. Often, the menu does not have to be changed at all to increase the prices on these beverage items. Soft drinks can be priced to hit a 15% cost of sales (or lower).

Finally, I see many excellent side salads offered for a modest charge with a sandwich or burger. Often, the price is $1.95 or $2.95 (sometimes 99 cents!). If you charge $1.95 for a 6 ounce salad with dressing, your cost of sales could be over 50%. Cost out your salad mix and add the cost of your most popular dressing and garnish.

Would you offer a customer this choice as a substitute for fries? Some menus offer this substitute.

On the other hand, I once saw a menu with chips, potato salad or cole slaw included with the sandwiches and burgers. The waitress asked: "Fries?" and I said yes. My check had a $1.95 charge labelled Substitute Fries for Slaw. The fries were excellent and over 50% of the customers had taken the bait.

Phenomenal Sides

A quick way to attack food cost issues in almost any operation is through a simple menu upgrade. Rather than attacking entrees, take a hard look at your sides. A few mouth watering sides prepared with less costly ingredients will boost profits every time.

Buffet guests will consume fewer meat and seafood items if they can't resist a great side dish or salad. A la carte operations should charge for the extra special side dish whenever possible. If you offer guests a full meal with their entree choice, offer the top side dish as an upgrade option.

Whenever the guests ask for help ordering from the wait staff, the side should be mentioned along with the entree choices. Perhaps, the dish requires a last minute preparation. Bringing this to the guest's attention can increase orders. Special optional toppings can be used to make an impression.

I believe Durgin Park does a phenomenal job of highlighting mouth watering sides, soups and desserts. Whenever I dine at this historic Boston landmark, everyone in the party raves over the traditional accompaniments. The Corn Bread, Baked Beans, Indian Pudding and Clam Chowder are frequently ordered. Newcomers don't have to guess "what's good?" at Durgin Park. The management offers their recipes for all of these favorites on their website. Whether you enjoy the line upstairs, communal tables, waitresses with an attitude or not, the Yankee favorites are top notch.

The best of the breed barbecue shacks get this concept. Brunswick Stew, hush puppies, slaw, beans, sauces and tea need to be first rate. These dishes will bring customers back and help keep your food cost percentage in line. When we drove to Atlanta last year, my family went 50 miles out of the way to try a BBQ shack recommended by a friend. We still talk about the sides.

Doug's Fish Fry in Upstate New York features fresh fish fried to perfection with three main sides: fries, onion rings and cole slaw. All three are tremendous. This is another place we drive out of our way for whenever we're near the Finger Lakes.

My favorite steak houses all have phenomenal sides. We go for the rillettes on baguette at Les Halles in New York. Sometimes the sauce is the draw. Michael Jordan's Steak House was out of Bearnaise sauce on one trip. We waited until a new batch was made.

America's favorite ethnic restaurants all get it. The Italian style greens in Carmine's New York (huge platter) or Tony Luke's in Philadelphia (optional filling for sandwiches) make the trip worth while. Here in Fairfax, Anita's Bean Dip made with Hatch Valley Chili Verde is a winner. Moby Dick's Kabobs hooks you with the flat bread and yogurt sauce. Char Siu Bao (buns stuffed with barbecue pork filling) are a must when we go for dim sum. Cha Gio (Vietnamese spring rolls) make our visits memorable at our favorite pho shop.

Don't crowd your menu with too many of these fantastic side ideas. You want a few carefully selected winners. Position the items on your menu so they can't be missed and don't keep secrets. The baked beans at Durgin Park are listed as an appetizer. You can get them separately or with your meal.

Constructing The Value Menu

Back in 1992, New York City hosted the Democratic Party Convention. Many of the restaurants offered a special menu for $19.92 to the conventioneers. I worked with several chefs to create profitable menus given the $19.92 constraint. This exercise helped these chefs to continue offering full meal options well after the convention ended.

The best place to begin a value menu is with your most popular entrees. Any menu revision impacts the popular items more than the less popular choices. Rather than taking guests in a different entree direction, allow them to enjoy a more complete meal.

Every operator should know the profile of menu choices per cover. This profile includes the percentage of covers choosing a starter, entree, dessert and coffee course. If you enjoy a large percentage on starters and desserts, you may wish to avoid offering the table d'hote option.

Most table d'hote menu authors include a dessert and coffee course. The dessert options include 2 or 3 low cost items. These items are frequently offered at cost - 100% - to the guest. It's important to properly cost the dessert and coffee course.

The entree course often includes a slightly smaller portion size for the center of the plate choice. Since the diner will have a starter course, the smaller entree portion size will suffice. Try to develop a starter course with a cost equal to the savings on the center of the plate portion.

For example, a well trimmed filet mignon steak may cost $1.00 to $1.50 per ounce. If you reduce the portion from 8 ounces to 6 ounces, you'll have $2.00 to $3.00 with which to create the starter course.

Include the same vegetable, starch and bread courses as the base menu.

To cost the table d'hote meal you'll start with the entree price on the menu. To this number, add the price of the lowest starter course on your menu. Finally, add the cost of the dessert and coffee option (try to keep below $2).

If you charge $25 for the entree and your low cost starter is $5, the table d'hote may be offered for $32. The additional 28% rise in revenue over the entree will produce a very good food cost percentage. The cost of the starter is covered by the decrease in entree size. We have included enough revenue to cover the cost of the dessert and coffee.

You're a winner if the overall check average increases. Track this statistic by day of the week to fine tune the table d'hote strategy.

Value Added Meals

In lieu of cutting menu item prices, many companies decide to bundle several popular menu items into a value meal. When I lived in Montreal, we often ordered the table d'hote option at dinner restaurants. These prix fixe dinners typically included a soup or appetizer, an entree with vegetables, dessert and coffee. If ordered separately, the total price of these menu items would be higher than the house's suggested meal.

Customers may actually spend more money on the table d'hote option. Most people do not order four or five courses during their restaurant visits. By enticing these customers to order a full dinner at the reduced price, the savvy manager may exert an upward pressure on the check average.

If you can change the dynamic and increase customer spending through a perceived value meal, higher revenue and increased cost control may be the result. Prix fixe options are typically limited. Restaurant managers select the table d'hote options carefully each day.

In addition to attracting more dollars from current clientele, new customers may try your restaurant.

The QSR segment offers both value meals and value menus. Value menu boards are loaded with many low cost selections which may be combined to create a meal. Their value meals are constructed around a larger beverage and an extra item (usually fries). Value meals have a set price. The value menu board options may be ordered in any number the customer desires.

I like their value meal strategy far more than the value menu boards. You can work hard to construct attractive and profitable table d'hote meal options. Your check average and food cost will be more predictable and stable.

Selective Menu Revision

If the higher fuel prices and dropping home values are cutting your covers, you may still see full dining rooms on the traditional busy nights. Keeping the menu intact will allow a baseline business volume to be established each week. Try to use the revenue from these nights to cover all fixed expenses.

Cut fixed costs to the bone.

On the slower nights, use cost-volume-profit models to determine special prices. If your fixed costs are already covered, you could afford to offer free appetizers, two-for-one entree deals, a free glass of wine, prix-fixe menus, etc. (early in the week). You absolutely need to understand and cover any variable costs.

If you know your key cost components through standard recipes and tight flex schedules, it's easier to target your lost leaders. For example, don't choose labor intensive entrees for the two-for-one specials. Any specials should use ingredients with stable pricing which fit your menu. Avoid menu specials which require long prep times and precise forecasts (e.g. prime rib or other slow cooked roasts).

You could offer busy night customers an incentive to return during the slower nights. Special offers could be included with the check.

When I travel in the evening, I often swing by client operations on my way to the hotel. Many times I see employees at the bar late in the night consuming drinks and food. Zero patrons in the dining room should signal it's time to close the door. Cutting dining room hours on slow nights is a win-win solution. Service employees avoid longer hours for little pay, the kitchen staff gets extra rest and management saves the added labor and overhead expenses.

In summary, stable menu prices will allow you to cover overhead costs with your busy night customers. Slow night tactics (discounts, flexible cost strategies and selective incentives) will put profits in the bank.

Avoid Slashing Your Menu Prices

Economic conditions are rapidly changing with worldwide demand for energy at an all time high and rising interest rates in the USA. Higher costs are functioning as a tax on discretionary income. Borrowers and drivers are paying a lot more for money and gas. Restaurant expenditures often depend on patron's discretionary income. With the home equity line of credit option disappearing rapidly, credit card expenditures will be tightly monitored by more consumers.

Recently, I went for a walk on a Wednesday evening at 8 PM in my neighborhood. I passed by 4 restaurants and dining rooms had lots of available tables. The best of the four was a popular chain steak house concept. Let's try to put ourselves in the shoes of management.

Last year, our example steak house had annual covers of 50,000 and sales of $2,000,000. Covers in the current month are off 30% vs. the same month last year. The current average sales per cover is $40 and management is studying options.

One manager favors a 5% across the board cut in menu prices. The hope is to keep the drop in covers at 20% vs. last year. Sales would drop to $1,520,000 and the food cost % would increase 1.84% (to 36.84% up from 35%). Labor expenses and other operating expenses are forecasted to hold at the current cost per cover.

The general manager sees danger in the drop and favors holding menu prices at the current levels.

So who has the better plan?


Across the board menu price cuts are always risky. As covers decline, we would also see a drop in the contribution per cover. This is a very difficult plan to manage.

I prefer the GM's solution. No menu reprint is required and there are plenty of tactical options available. Selective price drops may be implemented using specials to promote entrees using lower cost seasonal ingredients. Specific days of the week could be targeted for selective price cuts. As long as the covers on busy nights and busy seasons stay close to plan, the strategy will succeed.

In our example, the GM's solution would produce a higher profit despite a steeper drop in covers. A 5% cut in sales per cover would not produce a bigger profit despite 5,000 more covers. The drop in sales per cover of $2 is not a simple to implement strategy. All income statement accounts would feel the impact. Waitstaff would see their tips per cover decline. Careful study is needed to predict the impact on your operation.

Entree Pricing-Dollars vs. Percentages

The adage says "We put dollars in the bank NOT percentages." So, should you run some higher priced entrees with a corresponding higher food cost percentage to boost profits? Maybe. You should be prepared for some unplanned possibilities.

I'm going to use an example steak house with current annual covers of 50,000 and sales of $2,000,000. The average sales per cover is $40. Management has decided to introduce two new entrees priced $10 above the current average entree price. These entrees are costlier and will raise the food cost percentage.

Let's say 20% of patrons choose the new entrees and covers remain stable. Sales increase $100,000 and food costs go up $50,000. We should have another $50,000 going in the bank account. It's a good thing...right? Maybe.

All too often, managers forget to follow through with the dollars vs. percentages concept in the other cost components. If they track labor cost and other operating expenses on a percentage basis, a big chunk of the $50,000 could leave the bank even though operating reports look solid (percentage viewpoint). These cost components are fairly difficult to manage on an entree basis. Few companies track utilities on a per cover basis.



If we had variable labor costs of 25% and other operating expenses of 15%, you could see $40,000 (40% of $100,000) in higher labor and operating expenses creep into the income statement over time. We'd still be $10,000 ahead of the status quo.

If the raw ingredients used to prepare the pricier entrees are more volatile in price, you could actually see months with zero change in the bottom line despite a nice sales jump. How often do you read articles about publicly traded restaurant companies with higher check averages and average unit volumes with little to show on the bottom line? Management explains the disappointing profits are due to higher prices for key entree items. It happens all the time.

I'm all for more dollars in the bank. Don't ignore percentages when implementing these strategies.

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.

Utilizing Specials

When the walkin cooler gets overloaded with one or more perishable items, the chance you won't turn your inventory dollars into tomorrow's profits increases. Several tactics may be employed to deal with this issue. My least favorite is the blowout. A blowout is typically the top special promoted aggressively by the waitstaff. It is common to offer the special at a discount to the median entree price.

Most blowout menu items involve an ingredient about to spoil. You're actually motivating your sales team to sell an entree made with ingredients well past peak. This picture is very different from the ideal special.

Specials can be excellent devices for testing new menu ideas. Many chefs try to promote super fresh, seasonal items using their top special of the night. On the customer side, lots of people like to try new items and everyone can be persuaded to order a popular seasonal dish.

As you ponder the use of a blowout as your special of the day, try to imagine the impression you will make on the customers. Those customers who frequently order a suggested menu item are statistically most likely to be disappointed. Unlike the customers who normally order off the main menu, they may be less forgiving of one substandard meal.

Too many competitors are effectively utilizing specials. A poorly executed blowout could cause negative word of mouth and hurt future business.

Don't Destroy Your Stars

One of the absolute and totally rigid laws of effective food cost control almost never to be challenged: Do NOT alter your signature recipes with lower quality alternatives strictly to create a lower cost.

After years of new and improved commercials, corporate brand managers watched the results of the New Coke campaign. My friend (a huge Coke fan) wrote to Coca Cola. To Coke's credit, they brought back the old formula.

A great article "If A Little Cost Cutting Is Good, Then Can A Little More Be Bad??" was presented in the February 2004 Newsletter of the Operations Management Center. The article demonstrates the key difference between value enhancement and cost cutting as a strategy.