Evaluate Restaurant Menu Based on Margin

Evaluate Restaurant Menus Based on Margin

As restaurants are preparing to re-open after the coronavirus shut down, the challenges are substantial and menu changes are inevitable. Many restaurants will not be able to survive the shut down itself, and of those which do re-open, the timeline for financial success or failure is going to be tighter than ever. One of the best practices for success is to evaluate restaurant menus based on margin and then promote your highest margin items by placing them strategically on your menu.

Although there are many factors which go into a restaurant’s success, one of the most important changes going forward will be the need to focus on margin when it comes to budget philosophy and menu item placement on the printed menu. Many larger operations have been doing this for years, but many smaller operations may not be aware of this vital strategy for increasing revenue and therefore increasing the odds of success.

The old paradigm for restaurant menu evaluation revolved around food cost %. The lower your food cost, the better you were perceived as doing. The new paradigm revolves around margin. Margin is what drives revenue to the bottom-line, it improves the chances for profitability. Food cost percentage is only valuable as a tool to compare the relative difference between theoretical food cost (based upon sales mix) and actual food cost. Having a high margin is more important than having a low food cost. If you don’t have a sales mix tool follow that link!

Now more than ever, in a post coronavirus world, restaurants need to know their margins on each menu item, evaluate their sales mix & margins on a monthly basis as part of their P&L process, and implement menu changes to strategically place the most profitable menu items into the “highest real estate spots” on their printed menus.

Below is a breakdown of the sales mix & margin analysis of a menu. It gives a good guide on how to evaluate restaurant menus based on margin and sales mix. You may also be able to see other important things to note, if so, please leave a comment for discussion.

Follow the blue numbers in the chart with the numbered paragraphs below

Important Note: The following analysis is based upon a menu design that has 2 columns per category (appetizers, entrees, etc). With a 2-column menu layout it is believed that there are 4 “high real estate” spots for each category…top left, top right, bottom left, and bottom right. Parts of this article’s analysis is based upon this belief.

Menus with a 1 column layout have 2 “high real estate” spots for each category…top and bottom.

In the image above notice the column header names: Menu Item, Units (sold), Popularity Rank, Menu Price… Margin Rank, etc. They will be referred to frequently.

1. The bright green highlighted items are the top 4 items as ranked by margin in each category (appetizers, entrees, etc). For instance, PRAWN MARY is ranked # 1 for Margin Rank because its Margin $ is $9.96, the highest for the Appetizers category. (See Menu Item Placement for why I’ve highlighted 4 items)

These are the items that generate the most revenue and should therefore be put into the “highest real estate” parts of your printed menu (as determined by common menu engineering concepts for the way eyes roam a menu). The light green highlighted items throughout the form are the items in the #5 Margin Rank slot. There are times when they are worth considering placing in the top 4 menu slots.

2. The light reddish highlighted items in the Margin $ column indicate items that have a lower than average Margin $ for that category. For Appetizers, $7.84 is the average margin for the category. The purpose of this is to try to keep your top sellers (Popularity Rank) out of the red, i.e., have a higher than average margin. Some items will inevitably be lower than the average, but they should not be your best sellers.

In this example, the ONION SOUP is the #2 seller but it has a below-average margin. You should at least raise it $1 from ($8 to $9 ) and see how sales go. Best case scenario would be to raise it $2 and still have it in the top 4 of sales. Alternately, since its Margin Rank (8) is low, perhaps part of its popularity is just its placement on your menu. If it is in one of the top real estate spots on your menu then “bury it” into a less visually captivating spot and put a higher margin item into that spot.

Again, the goal of this information is to evaluate restaurant menu top margin items and then place them into the best real estate spots on your menu, with the hopes that sales of these items will increase simply by using the techniques of menu engineering.

3. The CRAB CAKES offer another potential for revenue. They are already one of the top 4 margin producers. They are also the #1 seller, and they out-sell the #2 item by a significant amount. This suggests that you could raise the price on this item by $1 and not see an impact upon sales. Try it for several weeks or a month and monitor the results.

4. The PRAWN MARY has the #1 margin and is in the top 4 sellers for the appetizer category. It should therefore be placed in the best real estate spot on your menu, or perhaps highlighted or marked in some other way to draw your guest’s attention to it and thereby increase sales. This is one of the items you want your servers to push.

5. In example #5 look at the comparisons between ROASTED CLAMS (#5 Margin Rank) and the OYSTER FLIGHT (#2 Margin Rank). In this situation, the clams are almost in the top 4 margins, do have an above-average margin, and are already one of the best sellers (#3). And the oysters are in last place as far as popularity goes, by a long distance! Because of these factors, I would put the clams in the top 4 real estate menu slots, even though it is in the #5 Margin Rank.

6. The DINNER SALAD is the #2 seller in the SALADS category but it has the worst margin. This may be a situation where it is popular simply because it is the cheapest item in the category. Try raising the price and tracking its impact upon the DINNER SALAD sales. But also track the impact upon the percentage of the SALADS category sales (i.e. total salads sold) and also track your average check.

If you see that the percentage of SALADS sold stays about the same that’s good. But if the percentage drops and is not replaced with another appetizer or dessert sale, then you will see your guest check average drop because instead of purchasing 3 course (appetizer, salad & entrée or whatever), they have cut out the salad course and not replaced it with something else. This tracking process is a good way to evaluate restaurant menu trends and determine whether your changes have had the impact you are looking for.

7. The BERRY SALAD has both a below-average margin and very poor sales. This combination designates it as a “Dog” menu item and it should be 86’d from the menu. It doesn’t matter if it’s in the #4 Margin Rank slot (there are only 5 items in the SALADS category), if it is both a poor seller and has a low margin for the group, remove it and drive sales to the other higher margin salads.

7. Similar to the BERRY SALAD, the PISTACHIO HALIBUT and ROCK FISH are also on the chopping block to be removed from the menu due to the combination of poor margin and poor sales. Either remove them without a replacement to drive sales to your other items and save on prep time, or replace them with a new dish.

8. The NY STEAK is a perfect example of why a “bad” food cost % isn’t necessarily a bad thing. The steak has a 43.6% food cost, but a margin of $27.62 (the highest margin item on the menu). And it is the #2 seller of all entrees. This is the item which drives the most amount of revenue towards the bottom line.

If the food cost % budget for this restaurant is 39% then traditional menu analysis (which places the importance of food cost % above everything else) then the steak would be considered a failure, an item to either remove or raise the price on to bring it in line with the budget food cost. Raising the price to be close to a 39% would mean raising the price $5 and charging $54. Sales would probably drop, your food cost % would improve, but revenue would likely drop as guests purchase the less expensive items which also have a lower margin. This item is a great example of the intricacies of how to evaluate restaurant menu items by margin.

9. Similar to #5, SOCKEYE SALMON is in the #5 Margin Rank position but has over twice as many sales as the #4 Margin Rank item VENISON OSSO BUCO. Since the salmon is #6 as far as Popularity Rank goes, I probably would not try raising the price to get a better margin. But with twice the amount of sales I would consider putting it in the number 4 real estate spot on the menu. This is especially true since venison is a bit tricky to sell in most parts of the country. Its Popularity Rank is probably low simply because it is venison, not because of the recipe itself.

10. The top two best selling desserts are not in the top best Margin Rank items. Increase the price of both by $1 and monitor its impact upon sales.

11. 15% of guests purchased a dessert for this particular month. If you are getting more table turns by not up-selling desserts then it can be beneficial to “lose” a dessert sale during peak business periods. But if you have tables available then up-selling desserts will add revenue. Work with the servers to increase their check averages.

Also, post COVID-19 perhaps offering a “Desserts To Go” option on your menu could increase sales while giving guests the opportunity to feel safe by minimizing their time having to practice social distancing. Let them eat their dessert in the comfort of their own home.

Menu analysis for margin

12. Try to get rid of the OPEN FOOD key! Or at least minimize its use. If there are items which servers need to “open food” on a regular basis then add those items (along with the correct price) to your POS system. And make sure that a manager or supervisor have to authorize all OPEN FOOD transactions so a server can’t sell a lobster dinner to their friend for $10!

13. The theoretical food cost for this restaurant for this particular month was 37.2%. This means that no matter what the budget food cost was, there is no way that the actual could have been better than a 37.2% And in reality, the actual food cost % will be roughly between 1.5 to 3 points higher (38.7% to 40.2%) because the theoretical food cost does not include all the things which impact food cost (waste, theft, inventory errors, accounting errors, incorrect recipe pricing in costing software, over portioning, etc all).

Going through all these steps to evaluate restaurant menus takes a lot of time and commitment, but making this process a monthly habit will increase your profits and increase your restaurant’s chance of success. A good time to do this process is the first week of each month. The prior month’s inventory has been completed, your recipe database should be up to date with the most current invoice pricing, you can pull your sales from your POS system, do the sales mix work, and start the new month with modified menu placements based upon current pricing and customer trends.