Several of our previous restaurant cost control articles have been dedicated to the topic of recipe cost and menu development. This article will continue on that trend by examining the principles of menu engineering and how they can help improve restaurant profitability and food cost control. Today’s concept of menu engineering is a product of Michigan State University’s School of Hospitality, and the goal of the exercise is to comparatively rank your menu items according to both profitability and popularity and to then graph these results using the BCG Matrix. This matrix utilizes four quadrants, and though the names have changed a bit during their application to the hospitality industry, their meaning has remained generally consistent.
“Stars” are those menu items that are both the most popular and the most profitable. These are often house specialties and are the menu items that you want to sell most frequently due to their high contribution margin.
“Plowhorses” are menu items that are above average in popularity, but not in profitability. Overall, these items produce consistent profit for the business, but are not stars because their contribution margin is below average.
“Challenges” are the converse of plowhorses. They are highly profitable menu items, but not very popular.
Finally, “Dogs” are those items that are neither popular nor profitable, in comparison to your other menu items. Serious consideration should be given to eliminating these items from the menu.
The Mechanics of Menu Engineering:
To determine the correct quadrant for each menu item, menu engineering looks at both the average popularity and contribution margin of your menu items. Based on the results, each menu item is plotted on a graph, using the average profitability and popularity as the x and y axes. Each quadrant corresponds to a particular menu engineering label, as illustrated below. While menu engineering labels can be assigned to menu items without actually completing a graphical representation, we do not recommend this. Completing a graphical menu analysis in addition to simply labeling each menu item with the appropriate quadrant tag will provide a more exact and complete picture into how each menu item ranks in comparison to others. A plotted menu item that is on the border of another quadrant may require a different approach than one that is firmly situated in a specific quadrant–a subtlety that is only noticeable when menu items are actually plotted on the graph. While this may seem complicated, it can actually be quite simple once you become familiar with the process. Further, by downloading our free menu engineering spreadsheet you will be able to execute many of these functions and graphs automatically.
Determining the average popularity is relatively simple, just take the reciprocal of the total number of menu items, expressed as a percent. For example, if you have twenty menu items, the average popularity would be 5% (1/20). Any menu item that represented more than 5% of the overall product mix sold would be considered a popular item, making the item either a star or a plowhorse, depending on the contribution margin of the item. To keep things simple, both popularity and profitability are automatically calculated in our free menu engineering spreadsheet.
Menu engineering uses contribution margin as the metric for defining profitability. To calculate the contribution margin of each item, one simply needs to deduct the ideal food cost from the menu price for each menu item. For example:
Menu Item Contribution Margin
Once the contribution margin is calculated for each menu item, the average can be easily calculated–divide the sum of each menu item’s contribution profit by the total number of menu items. Any menu item that has a contribution margin above this average would be considered “profitable,” making it either a challenge or a star, depending on the popularity of the item. Some schools of thought advocate the use of prime costs in contribution margin calculations, including incremental labor costs into the food cost figure, but unless this is a typical internal cost accounting practice for your operation, we do not recommend it.
Once you have determined the comparative popularity and profitability of each item, you can then graph the results using the specific calculations into a four quadrant graph and identify each item with the corresponding matrix label, as discussed previously. Again, to assist with executing the above steps, we recommend that you download our free menu engineering spreadsheet that will do these calculations for you. You can also develop your own restaurant spreadsheet with a little work or purchase one from various restaurant consultant agencies. Once this process is complete, however, the real work begins.
Analyzing the Results of Your Menu Analysis
The primary benefit of using menu engineering as your menu analysis tool is that after only a little preliminary work and calculation, you are …