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Menu engineering

Menu engineering

 is a step-by-step process through which management can evaluate current and future menu pricing, design and content decisions. The menu engineering approach requires that attention be focused on three critical elements: -

1. Customer Demand - the overall number of customers served.

2. Menu Mix (MM) - an analysis of customer preferences in menu item selection (related to demand elasticity).

3. Contribution Margin (CM) - an analysis of the contribution margin (gross profit) for each menu item (related to price elasticity).

Menu Engineering process

The first step in menu engineering is determining the highest- and lowest-selling menu items, followed by figuring out which dishes are the most profitable.

A matrix, using the following four categories, is then created to determine which items are driving sales and profitability.

Stars are menu items that not only are the most popular but also the most profitable. They are the moneymakers, so they should receive the best placement on a menu. They are often signature dishes.

Plowhorses These are the dishes that sell well but are not highly profitable.

Puzzles Puzzles are menu items that are the opposite of Plowhorses. They aren’t popular but are highly profitable.

Dogs Just like the name states, these menu items are “dogs” to get rid of. They are not in demand and their profit margins are minimal. These are the dishes restaurants should seriously consider deleting from the menu.

Establishing Popularity of a Dish

Determining a menu item’s popularity can easily be established. Simply add up the number of items you offer and divide 1 by that sum to determine a percentage. For example, if you have 25 menu items, you would divide 1 by 25 (.04) to get average popularity. In this case, 4 percent. Any dish that represents more than 4 percent of sales would be considered popular.

Determining Profitability

Calculating the profitability of menu items is easy, as well. Subtract a dish’s food cost from the menu price to get its contribution margin. Divide the sum of all the contribution margins by the number of menu items to get an average contribution margin. Anything above that number is “profitable” and a star or puzzle, depending upon its popularity

Solutions for Stars High Profitability, High Popularity

 1. They shine, so they deserve the best placement on your menu.

2. Keep them consistent, so your guests will continue to come back for more. 3. Sell more by encouraging waitstaff to offer them as table suggestions.

Solutions for Plowhorses Low Profitability, High Popularity

 1. The ultimate oxymoron, these dishes are always in demand but profitability is too low. Can you find a way to reduce the costs, like alternative products, without sacrificing taste or quality?

 2. Since these dishes are popular, raising the price a bit may cover the extra costs.

3. Too large of a portion may be killing your profit margin. Are customers leaving a lot of these menu items on their plates? If yes, you may be serving too much. Consider reducing the portions.

Solutions for Puzzles High Profitability, Low Popularity

1. The first step with Puzzles is to find out why they are not selling. Start with your customers. Get their feedback.

2. Is the dish too spicy? Inconsistent? Not a big enough portion? If yes, the recipes can easily be corrected and possibly turn these dishes into best sellers.

3. Check out where these items are placed on a menu. Do they get lost or are the descriptions boring?

4. Think about creating similar dishes with the same profit margin and give them a try.

Solutions for Dogs Low Profitability, Low Popularity

1. If they’re neither in demand or making money, consider dropping these dishes completely from your menu.

2. It’s always a good idea to find out why these items aren’t selling well, though, so as not to repeat the same mistakes in the future. Ask both customers and staff. Their answers may surprise you.   

Quick Menu Tips

A menu should tell a customer what you want them to buy. The font you use, the size of print, boxes and shading are all elements that help you sell on a menu, along with the following guidelines.

Tuck your prices into paragraphs. This makes your customer read about your menu item and think less about the price.

Never use a dotted line to the price. This leads your customer right to the price and allows them to shop your menu. People will always look for the median price when price shopping your menu, driving them away from some of your most profitable items.

Don’t use dollars signs. When you use a dollar sign, it equates more heavily in your customers’ minds the cost of the menu item. If you don’t use a dollar sign, they are less likely to focus on the price and more likely to focus on your menu item.

Don’t be afraid to adjust your prices. Most customers will not remember what your price was compared to the restaurant down the street. If you offer great food and excellent service, your customers will keep coming back. Remember, a great restaurant is about the overall experience, not just the menu price.

Multi-use items. When looking over menu items, are there items a restaurant currently has on its menu that changed slightly would offer a higher perceived value

If you are pricing a menu item at $7.25, why not get $7.89 or $7.95? You can even add a buck if you need to. Most customers do not see the difference in pricing.

The Miller Model

The first model, the Menu Analysis model (MAM), was developed by Miller who attempted to

identify menu items that were both popular and low in food cost. He introduced a four quadrant matrix

for analyzing menus. Quadrants were segmented based on the product mix and food cost of the menu.

The average food cost axis is defined as the line of division between high and low quadrants

Miller segmented high/low volume using the 70/30 percent mark with 30 percent defined as high

volume and the remainder defined as low volume

The division of the food cost axis between high and low was determined based on the average

food cost of all menu items included in the analysis.

Menu items falling into the quadrant named

1.     Winners   the most desirable quadrant, are high in popularity and low in food cost

2.     Marginals II  are high in both food cost and popularity

3.     Marginals III  quadrant are low in food cost but lower in popularity

4.     Losers  are high in food cost and low in popularity

Since menu items are categorized into quadrants based on average food cost and popularity, any

retooling of the menu will cause menu items to shift relative to the original analysis. Some previously

suitable menu items will fall into less desirable regions. No ideal distribution of Winners, Marginals II,

Marginals III, or Losers was reported in the literature, however Miller suggested that 60% of the menu

items in the Winners and Marginals III, the low food cost categories, was an appropriate goal.

Kasavana and Smith Model

A modification to the MAM was developed by Kasavana and Smith in 1982

Food cost on the x-axis was replaced with individual menu item contribution margin and average

contribution margin replaced average food cost as the axis between quadrants. Contribution margin was

defined as sales price subtracted from direct costs. Because contribution margin only consists of sales

price less food cost in this analysis, contribution margin should be considered gross profit as defined by

Generally Accepted Accounting Principals (GAAP)

When using contribution margin (gross

profit) instead of food cost, the quadrants shift locations in the matrix relative to the MAM. The ideal

menu item location in the Kasavana and Smith model is in the upper right quadrant instead of the upper

left quadrant in the Miller model. This shift conceptually occurs because the higher the contribution

margin of the menu item the more profitable the menu item. Conversely, in the Miller model the lower the

relative food cost the more profitable the menu item. Average contribution margin, the x-axis in the

Kasavana and Smith model, was calculated by taking the total weighted contribution margin (gross profit)

and dividing it by the total number of units sold. The total weighted contribution margin (gross profit)

was calculated by summing of the total contribution margin (gross profit) for each menu item and dividing

the contribution margin by the total number of menu items sold. Total contribution margin (gross profit)

for each menu item is calculated by multiplying individual menu item contribution margin (gross profit) by

the number of units sold. The objective in using contribution margin (gross profit) to replace food cost

was a shift in emphasis from raw costs to the profitability potential of a menu item.

Kasavana and Smith renamed the quadrants in the revised model which became known as the

Menu Engineering Model (MEM).

1.     Stars ( Winners in MAM ) high contribution margin (gross profit) with a high sales

Volume

2.     Plowhorses (Marginals II in MAM ). These menu items have a

high sales volume but a low contribution margin.

3.     Puzzles (Marginals III in MAM ). These menu items have a high contribution margin (gross profit) but a low sales volume

4.     Dogs ( Losers in MAM ). These menu items exhibit a low contribution margin (gross profit) and a low sales volume.

The primary limitation of both the MAM and the MEM relates to sales volume. Below an

established minimum sales level, a menu item with a favorable contribution margin cannot generate

sufficient profit to cover the total costs since contribution margin is not weighted by sales volume

second limitation is an inherent danger of using contribution margin

in an effort to increase sales. This strategy may favor higher priced menu items that eventually decrease

demand and total operational profitability

Pavesic Model

Pavesic incorporated a weighted average contribution margin (gross profit),

also called “profit factor,” and food cost into the Cost Margin Analysis Model (CMAM). The profit factor

variable combines contribution margin (gross profit) and sales volume previously addressed in the MEM.

According to Hayes and Huffman and Pavesic, CMAM encompasses the three key elements of sales

volume (popularity, food cost percentage, and dollar contribution margin). Including these three elements

provides an unbiased perspective for making menu-pricing and positioning decisions

The CMAM model

contribution margin is again defined as sales less food cost. The y-axis values are redefined as the weighted

dollar contribution margin and the x-axis was renamed the potential food cost percentage. The weighted

contribution margin accounts for the popularity of the menu item and the contribution margin (gross)

profit) by multiplying the contribution margin (gross profit) by the number of items sold. The average

weighted contribution margin is the point of dissection on the y-axis from the high quadrant to the low

quadrant. It is calculated by summing individual contribution margins for all menu items together and

dividing that total by the total number of menu items sold. The potential food cost along the x-axis is

used to segment the high and low food cost quadrants. Potential food cost is calculated by dividing

weighted (total) food cost into the weighted (total) food sales as described with previous models

1)     Primes (Winners in MAM and the Stars in MEM) low food cost and a high weighted contribution margin (gross profit).

2)     Sleepers(Marginals III in the MAM and the Puzzles in the MEM) low food cost and a low weighted contribution

3)     Standards(Marginals II in the MAM and the Plowhorses in the MEM.) high food cost and a high weighted contribution margin

4)     Problems (Losers in the MAM and the Dogs in the MEM.) high food cost and low weighted

Hayes & Huffman Model

Hayes and Huffman developed a method of menu

analysis that focused on meeting net profit goals by creating profit and loss statements for each menu item.

Their goal was to account for fixed and variable costs to overcome flaws of the three aforementioned

matrix menu analysis models. Variable costs were included to assess the profitability of each menu item.

To simplify cost allocation, fixed costs are divided evenly by the number of menu items. The profit and

loss method relied on allocation of both fixed and variable costs. However, the allocation method to assign

variable costs was not explained. The basic formula used by the Hayes and Huffman model was as

follows:

Sales of menu item – (cost of food + fixed costs + variable costs) = net profit for menu item.

In this formula sales were determined as the total sales of a menu item for a predetermined time

period such as a month. Fixed costs in the formula were calculated by dividing total fixed costs from the

operation by the total number of menu items. The same amounts of fixed costs were allocated to each

menu item regardless of any other considerations. Variable costs in the formula were allocated based on an

assigned average variable cost for the entire operation established at 35 percent.

Additionally, Hayes and Huffman argued that the matrix approach and use of averages to

segment menu items into groups was undesirable since minor modifications to the menu could cause

menu items to change ranking. An endless evaluation process would result. They argued that every menu

item must stand on its own from a profitability perspective regardless based upon each menu item

compared with other items on the menu. If an individual menu item met organizational financial goals,

then it remained on the menu. Conversely, if the menu item did not achieve an adequate theoretical return

the menu item was discarded.

Bayou and Bennett Model

Bayou and Bennett argued that the previous menu analysis models for the most part lacked one

or more of three essential ingredients: analysis by menu groups, analysis by meal periods, and not

differentiating between the short run (special order pricing) and long run (make or buy items) profitability

analysis. They argued that allocation of costs was not as simple as evenly assigning costs to all menu items.

Simplification was especially pragmatic when various menu items were sold in different categories at

different meal time periods. Although Bayou and Bennett disagreed with the methodology of the Hayes

and Huffman, conceptually they agreed that labor factors must be considered in the analysis. Bayou and

Bennett stated that cost allocation was essential in any analysis of menu items however; they did not

propose a solution to the allocation problem in the Profitability Analysis Model (PAM). They proposed

first to subdivide the menu into simple parts. Meal periods were assigned as breakfast, lunch or dinner.

Product groups were assigned as appetizers, entrées, and desserts. Finally, the menu items in each group

were analyzed. The PAM included direct fixed costs in the individual menu item analysis but excluded

other fixed costs that Bayou and Bennett defined as common fixed costs from the primary analysis. They

defined direct fixed cost as those cost that can be directly attributed to a meal period. In their study, direct

costs consisted of full and part-time labor. They concluded that advertising and utilities directed to a

specific meal period could also be included. They further defined common fixed costs as those costs

remaining regardless of meal period. Examples of common fixed costs included non-shift specific labor,

utilities, advertising, and total maintenance costs.

Cohen, Mesika, and Schwartz Model

To solve limitations of two dimensional matrix menu analyses, Cohen, Mesika, and Schwartz

developed a multidimensional approach. They included food cost, price, labor cost, popularity, and

contribution margin into the menu analysis by incorporating a multifactor dish approach combined with

normalizing the input data. Normalization of data to a scalar variable ranging from 0 to 10 combined with

analyses of the five menu variables created a polygon dish. The menu variables were evaluated by three

ranges. The ideal range was defined as 8 to 10, the acceptable range was defined as between 4 to 8 and the

unacceptable range was defined as between 0 to 4. Menu items could be either evaluated independently or

compared to other menu items based on the item distribution within the polygon dish. Labor cost was

included as a factor in the multidimensional analysis similar to by Hayes and Huffman, Bayou and Bennett,

and LeBruto, Quain, and Ashley. Although labor was a factor in this model, Cohen, Mesika, and Schwartz

provided no explanation of how the labor cost was measured or calculated. As with others who developed

menu analysis approaches, Cohen, Mesika, and Schwartz did not specify how the variables including labor

would be calculated nor did they consider other factors of production. Incorporating labor as well as other

costs into the menu analysis has been difficult

LeBruto, Quain and Ashley Model

In an effort to incorporate variable labor costs, LeBruto, Quain, and Ashley modified the MEM.

They proposed that errors in the analysis of menu engineering data could result from ignoring the profit

factors while relying solely on the placement of menu items in the MEM. Additionally they acknowledged

Looft’s (1989) observation about the difficulty in determining labor costs on a menu item basis. As an

alternative to separating labor into fixed and variable components and subsequently attempting to allocate

specific labor costs to each menu item, LeBruto, Quain, and Ashley took the Kasavana and Smith model

and subdivided each quadrant into high and low labor quadrants. The resulting matrix model contained

resulting in a total of eight sectors. Labor was separated in half into high and low segments with the menu

items falling equally into each category. They recommend that labor assignment of the menu

items be made by either a food service professional or through employing a jury of execution, a technique

used in qualitative forecasting. The sectors of the quadrants were renamed to reflect the labor component.