It’s real dollars and your profitability can suffer if you think otherwise.
Did you ever pay an invoice to one of your suppliers with a check that had the amount being paid expressed as a percentage?
I didn’t think so. When we pay for food (aka, our food cost), we don’t spend percentages we spend dollars and we also deposit our profit as dollars into the bank. Percentages are just one of many analytical tools we should consider in evaluating the financial performance and profitability of our operation. But too often those percentages as analytical tools get more attention than the real dollars they represent and that’s where profitability can get hurt. This is especially true of the dynamics of food cost and menu engineering.
For illustration, let’s take a look at a series of simplified menu abstracts from three different managers pricing the same menu. In the first example, you’ll see that this manager budgeted for a 33 percent food cost and took the safe route to achieve that goal by setting the pricing on each of the individual menu items to meet that same percentage. Safe, because no matter what the customers order, theoretically his food cost should come in on budget and everyone should be happy. Right? Well, before we answer that, let’s look a little further.
Our second manager used a different approach to menu pricing. Using the same menu items, but raising the price on the chicken by $3 and lowering the price on the veal by $12 the natural reaction of her customers was for them to buy less chicken and more veal. And what about the food cost percentage? It went up of course, to a whopping 40 percent, but the profit went up as well, in fact, by quite a bit. She deposited more money in the bank even though her food cost comes in at five points higher than that of manager number one. Manger number two focuses on real dollars, not just percentages.
Okay, so maybe our second manager is a bit more aggressive than you’re comfortable with. Manager number three takes a more conservative approach. Some of his customers consider that $9 chicken dish as an entitlement so he decides to leave that dish and its price alone. However, our manager has simply decided to reduce the price on the veal enough to increase its appeal, moving some customers (two in this example) who would have ordered the chicken to get the veal. The food cost again goes up, this time to 37 percent, but even still, this manager’s profit continues to be best than that of the first manager.
Menu pricing should be more dynamic than setting a percentage based on the budgeted food cost percentage and using that same pricing factor across all items. A lower food cost percentage does not mean higher profitability. And finally, the next time you hear someone brag about their low food cost percentage, you cannot be so sure that their profitability is high.
Our goal is to make as many guests as happy as we can while maximizing profits in real dollars. Setting menu prices and budgeting food cost percentages is more complicated than many think. When we talk about food cost, we must keep in mind that overemphasizing percentages without understanding the dynamics behind them, can actually reduce real profits.
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