Maintaining and improving an adequate level of profi t are essential for all businesses today to survive – particularly with the increasing level of competition tempting customers not only to change from their usual type of restaurant, but also from the many other types of leisure businesses all chasing the same cus- tomers ’ restricted amount of disposable income.
Among the problems often facing the food and beverage man- ager is how can the profi tability be maintained or increased.
Should the prices for some or all items be increased and by how much, and/or food and beverage items costs be reduced, and/or labour costs reduced, and/or the number of customers increased, etc. Two accepted methods of profi t improvement are PSA and menu engineering.
Profi t sensitivity analysis
PSA is concerned with identifying the ‘ critical ’ or ‘ key factors ’ (i.e. the determinants of profi tability) of a business and estab- lishing how they rank in infl uencing its net profi t. The emphasis of PSA is on net profi t and the examination of those areas that responded positively to change. In order to undertake PSA the ‘ profi t multipliers ’ (PM) of the business must fi rstly be calculated.
The method is:
1. Identify the ‘ key factors ’ , fi nancial and operational of the busi- ness (Key factors may be number of covers, food and beverage costs, labour costs, revenue, price per cover, etc.
2. Assume a change in one ‘ key factor ’ at a time of say 10%, whilst holding all others constant.
3. Calculate the resulting change in net profi t.
4. Calculate the PM:
PM Percentage of change in net profit Percentage of change
iin key factors′ ′
5. List the PMs in order of size.
6. Analyse the results.
Menu engineering
Menu engineering is a marketing orientated approach to the evaluation of a menu with regard to its present and future con- tent, design and pricing. Its origins are based on the famous Boston Consulting Group (BCG) portfolio technique, a matrix specifi cally designed to analyse individual business perform- ance in a company with a range of different business interests (see Figure 8.8 ). The concept of menu engineering requires food and beverage managers to orient themselves to the contribution
that menu items make to the total profi tability of a menu. It high- lights the good and the poor performers in a menu, and provides vital information for making the next menu more interesting and appealing to the customers, and hopefully more profi table. Menu engineering is a step-by-step procedure that focuses on the three main elements:
1. Customer demand – the number of customers served.
2. Menu mix – an analysis of customer preference for each menu item (popularity).
3. Contribution margin – an analysis of the contribution margin (GP%) for each menu item.
The pre-requisites for using this technique are:
1. The standardization of all recipes (including the presenta- tion), so that the food costs can be accurate.
2. The accurate sales analysis of each menu item, daily and by meal period.
3. The use of a personal computer, so that simple spreadsheets, with standard calculations, may be done accurately and with speed.
Using the simple matrix, menu items can be plotted, repre- senting their performance with regard to volume (popularity) and cash contribution (profi t). The four squares of the matrix commonly have names indicating the performance of items in a particular square.
1. Stars : Menu items high in menu mix (popularity) and also high in contribution margin.
2. Plowhorses : Menu items high in menu mix (popularity) but low in contribution margin.
3. Puzzles : Menu items low in menu mix (popularity) and high in contribution margin.
4. Dogs : Menu items low in menu mix (popularity) and low in contribution margin.
The analysis of the data to undertake menu engineering can be done using a standard computer spreadsheet package (see Table 8.8 ). This takes the form of a large grid compromising of rows and columns where labels, formulae and values can be entered. When in operation, the formulae and values can be changed if required, giving instantaneous re-calculations of the fi gures, and hard copies printed and retained for easy reference.
Whilst spreadsheets can be compiled by hand, the time taken would be lengthy and the opportunity to frequently undertake ‘ what if ’ exercises less likely (e.g. What would be the effect on the profi tability of the restaurant with a menu of 30 main items, if the price of all the main items were to be increased by 3% or by 4%?). It should be noted here that the success in being able to move menu items ‘ up ’ the matrix to the status of a ‘ star ’ could
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(A) (B) (C) (D) (E) (F) (G) (H) Menu CM
(G H) CM category
MM%
category
Menu item classifi cation Menu item
name
No. sold (MM)
Menu mix%
Item food cost
Item selling price
Item CM (E D)
Menu costs (D * B)
Menu revenues (E * B) Chicken blue 420 2.7 5.95
Steak 360 4.5 8.5
Lobster tail 150 8 9.5
Tenderloin tips 70 4 7.4
I J M
Totals 1,000 19.2 31.35
K I/J (FC%) O M/N (Av. CM) Q (100%/items) (70%)
Table 8.8
Menu engineering worksheet
have an undesirable effect on the profi tability of the menu, sim- ply because customers do not always behave in a rational man- ner in spite of the wishes of the food and beverage manager.
Activity 3
Complete the Menu engineering worksheet seen on Table 8.8 and determine the Menu Item classifi cation (Dog, Puzzle, Plowhorse or Star).Q is the popularity benchmark andO is the contribution benchmark. For the solution see the end of this chapter.