Today we welcome a special guest blogger, Central Product Consultant Michael Williams. More information about Michael is included at the end of the blog.
One of the most pervasive industry-wide misconceptions I’ve seen, in large and small operations alike, is an obsessive focus on food cost, even at the cost of overall profitability. And almost as soon as I’ve said this, I hear the objection, “But… if my food costs are in line, I’m MAXIMIZING every penny, right?” Well…. not quite.
The truth is, while food cost is an important measure of cost management, it is more of a tool for waste reduction, than the maximizing of profit.
Average overall food cost goals vary widely from concept to concept and restaurant to restaurant (if you’re unlucky, even month to month), but the average restaurant strives for a goal somewhere between 28 and 33 percent.
If you’re already comfortable with your food cost percentage (which is, of course, the percentage of each sales dollar that goes directly toward purchasing the food product used to make that sale possible), then you must get comfortable with contribution margin as an equally essential figure for your continued success.
Contribution margin (abbreviated as CM for the sake of this article and my fingertips) is the actual dollar amount left over from each menu item, after you account for food cost.
If I sell a burger and fries for $8, and the cost of all food items on that plate (plate cost) is $2.50, then my food cost is 31.25 percent and my CM is $5.50.
On the other hand, if I also feature a sirloin steak with all the trimmings on the menu for $17 and plate cost is $9, then by conventional wisdom my food cost is an outrageous 52.9 percent! On the other hand my CM is $8.
Here is where a lot of operators misstep:
They would rather promote the burger to maintain their food cost goal and you can see why, at first. If I’m already struggling to make my food cost for the month, I’d sell the 31 percent burger over the almost 53 percent steak, right? Not quite.
Which one would I rather sell? Well I’d rather make $8 on one plate of food than $5.50, wouldn’t you? After all, you don’t pay your bills with food cost percentage; you pay them with actual money. In short, CM is a far more useful tool for determining which menu items are going to bring in the most money at the end of the day.
So, how can we apply this information? In three easy steps!
First: Find the current food cost and CM of every menu item you offer.
This is easy enough if your menu is already costed out. Simply subtract your cost of food from the sale price of each item and voila: Contribution margin! Don’t forget to include garnishes, optional condiments and a waste factor into every dish. After all, you may be selling them a hamburger and fries, but they’re taking ketchup, salt and pepper, too. Those pennies add up! If you’re unsure of your waste, add at least 3 percent of the total plate cost back as a waste factor to account for over-portioning and other profit killers. At an absolute minimum, you should be re-costing your menu every six months, because in these tough times, you can’t afford not to know where you’re spending your hard-earned money.
Second: Rank your menu by CM in each menu category (Starter, Entrée, Salad, Dessert, etc).
Once you know the items with the top CM in all categories, it becomes a lot easier to make off-the-cuff recommendations if a guest is looking for something new. You might be surprised to find that a lot of traditional favorites are also pulling in great margin!
Third: Feature and up-sell your guests on the category CM leaders you discovered above.
In addition to your standard wait staff competitions and guest recommendations, your new-found category CM leaders deserve prominent placement on table tents, nightly specials and most importantly, menu design and layout. By featuring a picture of these profitable items near the top of the page, or highlighting it with a special border or icon, you’ve taken a HUGE step in making your food service more money without any day to day effort.
Of course, as useful as contribution margin is for determining what to sell, it works best when used with your regular inventory and food costing procedures to make sure you’re actually achieving the amount of revenue you’ve planned on. So, just as you wouldn’t let your manager schedule a shift without servers, you shouldn’t rely on food cost without contribution margin to tell you if you’re actually making the most of your sales.
Michael Williams is an experienced foodservice manager who contributes to the Central Restaurant Products blog, while primarily serving as a one- on-one Product Consultant for our customers. For more menu engineering tips, general feedback or to seek an additional opinion on any foodservice plans, email him at email@example.com or call directly at 800-222-5107 x8439.