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Understanding the Profitability of Every Menu Item

HT talks menu engineering and dynamic pricing with Craftable's Senior Director of Restaurant Success Russ Spencer.
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While many operators focus on lowering their food cost percentage, they should instead focus on the profit of an item and its overall contribution to the bottom line, says Russ Spencer.
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HT caught up with Russ Spencer, Senior Director of Restaurant Success at Craftable, to talk about how menu engineering can benefit restaurants of all sizes. Launched in 2014 Craftable integrates with 60+ POS and financial systems to provide real-time data on how product cost increases, variances and labor affect their bottom line. Craftable's clients include José Andrés, Major Food Group, and Kimpton Hotels.

Russ Spencer headshot
Russ Spencer

HT: What is menu engineering?

Spencer:  Menu engineering is the practice of analyzing the items offered on your menu. The most effective way to engineer your menu is to look at the popularity and profitability of each item. Using those two factors, we want to design a menu that influences the customer's purchasing behaviors and drives maximum profitability. The goal is to increase profitability while balancing execution and brand integrity. Increasing profitability is the easy part, but if you can't execute that menu, then it doesn't drive profitably. Not only do we want to influence their purchasing decisions, we want to increase their frequency. Selling high-ticket items is important, but the profit off what you sell is more important, and the increased frequency is what drives the total contribution of profit.   

HT: Who is using it effectively?

Spencer:  Corporate America uses menu engineering very effectively. No decisions are ever made about the pricing or the placement of a menu item until they truly understand the impact that move makes on the bottom line. All changes on the menu will have a consequence, some positive and some negative. It's just like playing a game of chess. Every move I make is going to have a countermove. If I understand what that countermove is, then I'm going to try to stay a step or two ahead to make sure that I achieve the desired outcome. Which is an increased contribution of profit. 

HT: Do you have an example you can share on the bottom-line impact?

Spencer:  By influencing the customer's purchasing behavior on a menu, I have moved overall profitability anywhere between 4 percent and 6 percent. Not everything carries the same profit to the bottom line. While many operators focus on lowering their food cost percentage as a goal, they should instead focus on the profit of an item and its overall contribution to the bottom line.  I'd much rather sell a rib eye at 40 percent of food cost, and make $24 in profit than sell a cheeseburger at 25 percent, and only make $8 in profit, I need three cheeseburgers to equal the same profit as one rib eye. This means I need more customers, and more labor to service those customers, and most operators don't have enough labor right now to even service what they have. So by understanding what drives the profit, and how to leverage that on the menu that will influence purchasing behaviors, I can increase profit without increasing guest counts.

HT: What size restaurant should use this? 

Spencer:  I think every restaurant needs to use menu engineering. Many other industries are using some type of engineering to get customers to purchase what they want them to purchase. For example, if you go to a grocery store, why do you think they put the children's cereal on the bottom shelf? They are engineering the bottom shelf to only hold kid’s cereal, so that it’s at eye-level for children. Why did they put the milk and eggs at the back of the store? To get you to walk through the entire store to get the milk and eggs, which is what is purchased most often, the hope is to grab a few additional groceries in the process.  Due to inflation, cost of goods and labor are at an all-time high, now is the time to make menu engineering a priority to help drive profits.

HT: Some restaurants are considering or already leveraging dynamic pricing.  How does this benefit those efforts?

Spencer:  Dynamic pricing will find its way into more of our operations very soon. Think about how companies like Uber are already fluctuating prices due to the supply and demand of drivers. While it will not be that extreme in our industry, it will be imperative for an operator to understand the cost of goods on each menu item according to the last paid price from the vendor in order to make an educated decision about how to set the dynamic price, otherwise, how do you know if it was effective. It will take too much of a manual process to measure the appropriate price or monitor the impact on the profit due to the fluctuation of commodities without technology. There's a balancing act that goes with it, and this is where many operators struggle without the lack of time and resources to apply to it. You must monitor and measure the impact of the changes to see if it’s actually effective. Just like when a doctor draws your blood, they are looking for unhealthy fluctuations in vitals. And if anything is alarming, they immediately address it with you. I have always suggested that you measure the overall health of your menu at least every 90 days to ensure there was not a negative consequence, and if so, then stop, adjust and move in a different direction immediately.

HT: How do restaurants get started? What tech is required?   

Spencer:  Menu engineering does not require tech. However, most operators don't have the time or the resources to do it manually, especially while working with commodities that can fluctuate from day to day. It all starts with understanding the cost of goods. What did I buy? How am I using it, and what does it cost me to serve it? Now, cross-reference this data with how often you sell the menu items. Can you pull that out of your point of sale and manually run it on a spreadsheet? You can. Can you sit down and cost out your menu on a cocktail napkin? You can. But what happens when avocados change price next week? You're going to have to do it all over again. Restaurants don't have the time, the resources or the labor to do it without technology. For this reason, it is imperative to have tech that can easily connect all the dots and monitor and measure it so you can reach maximum efficiency and profit.


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