Cost Control and the Menu—Determining Selling Prices and Product Mix

1. Cost Control and the Menu—Determining Selling Prices and Product Mix • Controlling Foodservice Costs 4 OH 4-1

2. Chapter Learning Objectives • Determine a selling price based on various markup methods. • Explain how market forces affect menu prices. • Explain how the menu product mix is used to determine the composite food cost of a menu. • Explain how the menu helps with food cost control.

3. Menu Prices • If they are too high; Sales suffer • If they are too low; Profits suffer

4. Menu Prices Should • Be directly related to costs • Help predict profitability • Serve as a cost control tool • Reflect realistic markups (the difference between a menu item’s cost and selling price)

5. Pro Forma Income Statement as Budget Standard

6. Industry Standards • Restaurants typically run in the low to mid 30% • Italian - ~ 28% • Multi Unit - ~ 32% • American/Regional - ~35% • Steak - ~ 40% • Prime Cost = 65% (some industry professionals like to see this nearer to 55%)

7. Menu Pricing Methods • The Texas Restaurant Association (TRA) Markup Method • The Factor Method • The Markup on Cost Method

8. The Texas Restaurant Association (TRA) Markup Method Step 1 – Add target percentage values for labor, all other expenses (except food), and profit. Example

9. The Texas Restaurant Association (TRA) Markup Method continued Step 2 – Subtract the total in Step 1 from 1.00. Example

10. The Texas Restaurant Association (TRA) Markup Method continued Step 3 – Divide the standard portion cost of the item by the divisor to obtain the menu selling price.

11. The Texas Restaurant Association (TRA) Markup Method continued The Texas Restaurant Association’s menu pricing formula considers labor costs when determining selling prices.

12. The Factor Method • Determines menu prices based upon the standard (target) food cost percentage • Involves a two-step process

13. The Factor Method continued Step 1 – Calculate the appropriate factor using the following formula.

14. The Factor Method continued Step 2 – Calculate the menu price using the following formula.

15. The Markup on Cost Method • Is popular • Is easy to use To calculate menu prices, use the following formula.

16. Market Forces Affect Selling Prices Menu prices can be affected by a variety of external forces, including • Competition • Price-value relationship • Mark-Up Differentiation

17. Different menu items are typically marked up by different amounts. In general, the lower the menu item cost, the higher the markup (and the lower the food cost percentage). Markups Affect Selling Prices

18. Menu Product Mix Is Important • Restaurants must achieve their standard (targeted) food cost percentage. • If a restaurant exceeds its food cost standard, profits will likely decline. • Menu items sell at a variety of cost percentages.

19. Menu Product Mix Is Important continued • The average food cost percentage is determined by menu mix. • Menu mix significantly determines a restaurant’s food cost percentage target.

20. Composite Food Cost Percent • Wrong way to determine average food cost percent

21. Composite Food Cost Percent continued • Right way to determine is by weightedaverage food cost

22. Menu Product Mix • It is not possible to add unweighted unit costs to determine average unit costs. • It is not possible to add unweighted food cost percentages. • A menu product mix spreadsheet helps determine the total (weighted) food cost percentage.

23. Menu Product Mix Spreadsheet • Lists the names of all menu items sold • Lists the number of times each item has sold • Identifies the unit item cost of each item

24. Menu Product Mix Spreadsheet continued • Lists each menu item’s selling price • Identifies the total cost of each item (number sold x item cost) • Lists the total sales achieved by each item (number sold x selling price)

25. Menu Product Mix continued • The items that guests select have a significant impact on a restaurant’s weighted food cost percentage. • Menu Item Popularity Index is critical information

26. Menu Item Popularity Index • Ratio of portions sold for a given menu item to total portion sales for all menu items • Key element in forecasting sales • Critical in menu evaluation Popularity Index = Portion sales for itemx 100 Total portion sales of all menu items

27. Menu Item Popularity Index

28. Menu Engineering (Contribution Analysis) • Method of menu evaluation or analysis • Considers menu product mix • Considers contribution margin (selling price minus menu item food cost) • Considers popularity (number of items sold)

29. Menu Engineering

30. Menu Engineering

31. Menu Engineering

32. Menu Engineering

33. Menu Engineering

34. Menu Analysis High H/L H/H Popularity L/L L/H Low High Contribution Margin

35. Other Menu Analysis Methods • Miller Matrix • Same process but evaluate food cost and popularity • Weighted food cost is factor • Winners (similar to stars) = low food cost, high popularity • Goal to achieve sales mix with 60% of items in low food cost category • Cost Margin Analysis • Combination of Miller Matix and Contribution Analysis • Methodology includes evaluation of popularity, contribution margin and food cost • Primes (similar to stars) = low cost, high contribution

36. Menu Management Decisions • Must consider more than just sales dollars, item popularity, and contribution margins • Preparation and service costs • Restaurant’s image • Customers’ expectations

37. The Pareto Principle • A few of the top selling menu items account for a large majority of sales in a category. • Removing the two or three least popular items in a category will not likely reduce the total sales of items in the category.

38. Monitoring Menu-Related Concerns • Three factors must be considered and compared when analyzing food cost efficiency. • Standard food cost percentage • Composite food cost percentage • Actual food cost percentage

39. Monitoring Menu-Related Concerns continued • Standard food cost percentage • The expected food cost percentage based upon the approved operating budget or other benchmark. • Calculation

40. Monitoring Menu-Related Concerns continued • Composite (weighted) food cost percentage • The percentage that results from the actual food sales • Calculation

41. Monitoring Menu-Related Concerns continued • Actual food cost percentage • Reported on the restaurant’s income statement

42. Monitoring Menu Related Concerns continued • If the composite percentage exceeds the standard percentage, take steps to manage sales activity. • If the actual food cost percentage exceeds the composite percentage, take steps to improve food controls.

43. How Would You Answer the Following Questions? • A composite food cost percentage is a (weighted/unweighted) average. • A menu product mix spreadsheet is designed to identify a restaurant’s composite food cost percentage. (True/False) • The menu pricing method that considers target profit in its computation is the • Factor method • Markup on cost method • Texas Restaurant Association (TRA) method • Yield percent method • Product mix has very little impact on the ability of a restaurant to achieve its standard food cost percentage. (True/False)

44. Key Term Review • Composite food cost percentage • Factor method • Markup • Markup differentiation • Markup on cost method

45. Key Term Review continued • Menu engineering • Menu product mix • Price-value relationship • Pro forma income statement • Texas Restaurant Association (TRA) markup method

46. Chapter Learning Objectives—What Did You Learn? • Determine a selling price based on various markup methods. • Explain how market forces affect menu prices. • Explain how the menu product mix is used to determine the composite food cost of a menu. • Explain how the menu helps with food cost control.