By Rene Artz

About the menu

Break down hospitality profit and you will appreciate the need for measurement from prime costs through to menu sales.

How to improve menu profit

Everything in business exists because of sales to customers, and a menu drives hospitality sales from the moment a customer walks in the store.

So we cannot lose sight of our menu. In fact, you want to break down each item in the menu to understand the contribution it has to driving business performance.

To do this we need to understand two key aspects of every menu item;

  • contribution to gross profit percentage
  • contribution to gross profit dollars

By weighting each item by contribution to both margin and dollars we uncover opportunities to improve profit.

Weighing up menu gross profit

Let me illustrate gross profit margin and gross profit dollars.

Store customers come in and choose a few items to eat or drink from our menu. In choosing, they substitute one menu item for another within our range.

Now to keep our story simple, our range has just scones and paninis, and these two products are pure substitutes. In other words, our customers will purchase either one or the other.

The scone has a high gross profit margin of 80% and sells for $4. A desirable margin, it is well within our prime cost benchmark. The panini has a lower gross profit margin at 60% and sells for $8.

We sell 200 units a day. Day 1 we sell all scones.  Day 2 we sell all paninis. Which is more profitable?

The result. Day 1 earns us $640 gross profit dollars. Day 2 earns us $960 gross profit dollars. Assuming the same payroll costs, the panini makes our store 50% more gross profit per day, even though its profit margin is 20% lower.

Consider this simple illustration within the context of a menu. We want all our items to power profit. To do this we want to benchmark each items contribution to both margin and dollars.

This does not mean we remove low price menu items, we simply want to rank items for relative menu power so we can uncover what to do.

Weighing up the data points

Modern point of sales (POS) systems will break down sales to units sold, the time they were sold, and average transaction value. All very well, but not the actionable data we need.

POS will often lack the sophistication to rank menu items based on their weighted profit contribution.

However, a modern POS system should track the following for each menu item;

  • units sold
  • cost price
  • sale price

These three data points are the ingredients for weighing relative profitability of our menu items.

Weighing up menu options

So ideally we want menu items with high gross profit percentage and high gross profit dollars.

Measuring the relative strength of a menu shows us where to work – from high dollar low-profit items to low dollar high-profit items, to combinations in between.

For example, a standard sausage roll may show high margin but low gross profit when sold at $4. Realising this, we can ask the question – with high margin but low dollar contribution, could we double the size or re-design the sausage roll so it becomes the equivalent of a pie that sells for $8?

What if an item is simply unpopular. What if an item had high margin and high unit pricing, but low popularity. Can we adjust its price slightly down, rebrand the item with an interesting name, introduce it with a limited time special? Could this be a star simply through better menu positioning?

Weighing the relative strength of our menu items allows us to ask these questions.

The reality is we may have little price elasticity on certain goods. For a popular but price sensitive item with low margin, we may simply turn to better inventory management, lower priced substitute ingredients or adjust portion size to lift its relative performance.

Weighing up item profit contribution also shows up the dogs on our menu. These are our items with both low percentage and low dollar contribution. An option here may be to remove them for new opportunities.

Weighing up measurement

With tight industry margins, hospitality success rests on your regular measurement, this is true for both prime costs and sales.

When you feel too busy to work on your business, heed these celebrated words by Peter Drucker;

What gets measured gets improved

Want more profit operating your hospitality business? Contact Rene Artz, Business Development Manager at Mathieson Chartered Accountants Ltd on 027 66 44 943 or rene.artz@myca.co.nz

Mathieson Chartered Accountants Ltd
“your tax and Xero connected business advisers”
www.myca.co.nz