Menu Item Analysis and Categorization is the study of the profitability and popularity of menu items and the impact each has on operations. It requires a thorough understanding of food costs, sales, and the subsequent categorization of items. From there, various decisions in connection with menu design, promotions, and pricing can be made. Menu Item Analysis and Categorization is a continuous process, and we recommend this exercise be conducted at least twice a year to ensure the menu is relevant and maximizing profits. The following guidance will help you understand the data needed, the categorization, and action steps to consider with each item.
Food Costs. To calculate the profitability of each menu item, you’ll first need to know the cost of the ingredients that comprise the item. This not only includes the cost of the items, but also the cost to purchase as well as delivery fees, interest, and other related costs to procure the items(s). This value does not include labor costs. For instance, a loaf of bread costs $2.00 plus 50 cents for delivery. Each loaf contains 12 slices, making 6 sandwiches, which equates to 42 cents per sandwich. Then add on another 90 cents of turkey, 7 cents of mayonnaise, 30 cents of tomato, and 20 cents worth of cheese, and you have $1.89 of cost.
Contribution Margin. Once you’ve established food costs, you’ll need to subtract this amount from sales price to arrive at the contribution margin. This number will indicate the gross profit in dollars and gross profit percentage per sale of the item. These two pieces of information will determine if the item is above or below the desired average gross profit percentage for all sales. We generally recommend using 70% as the high/low measure when analyzing whether an item is achieving success. Keeping with the same example, if you retail the turkey sandwich at $8.50, your gross profit for that item would be $6.61 which equates to a 78% contribution margin, making this item profitable.
Quantity Sold. Quantity sold represents the number of each menu item sold and can be obtained from the Point of Sale (POS) data.
Now that you know how to calculate food costs, contribution margin, and quantity sold, you can then create a scatter graph with your menu items’ contribution margin in dollars or percentages as the X-axis and the popularity (quantity sold) as the Y-axis. When performing a menu item analysis, you should analyze each menu category separately (e.g., appetizers, main dishes, desserts, etc.). In addition, you may choose any period to measure this, however, we generally recommend this to be a quarterly exercise and at minimum, twice a year. No matter what period you choose, you’ll want to make sure you use the same period for every category as you complete this process. After creating each graph, draw a trend line through your items to determine which quadrant your item falls under. This will allow you to begin to define, categorize, and develop a corresponding strategy for each.
Example Scatter Graph – Appetizers
Leaders = High Profitability and High Popularity
Leaders are your best dishes as they lead in both profitability and popularity. The menu design should highlight these items and you should keep these dishes consistent and promote them as much as possible. Leaders should be listed near the top of the menu and should be emphasized with color, a special design, graphic, or added verbiage identifying them as a “favorite” or “popular” item.
Enigmas = High profitability and Low Popularity
Enigmas are dishes that have a decent profit margin but don’t sell as much as they should. Assuming your customers are pleased with the dish, consider different or creative ways to highlight, and promote these items more. Potential changes with plating or presentation could help though, you may also consider offering a few specials around them to get more customers to try it. While lowering the price could boost the sales velocity, you will need to be careful to preserve the profit margin at the same time.
Losers = Low Profitability and Low Popularity
Losers are dishes that are not profitable nor popular with customers. You should consider re-working or eliminating these items. However, some of these items may fall under the kid’s menu or be considered special diet items that you may not be able to eliminate. As such, consider de-emphasizing these items or even placing them on a standalone menu that is available only upon request.
Works in Progress (WIP’s) = Low Profitability and High Popularity
WIPs are dishes that customers enjoy and frequently order, however, when analyzing the costs, they are actually costing you more money than they are making you. As such, consider the following ideas to help bring the profitability of these items up to standard.
- Source cheaper ingredients or substitute with a less expensive option.
- Raise the price. However, it is important to remember that these items may be popular because of their price. As such, consider starting off with small increases.
- Reduce portion size while maintaining the price. Observe customers for a few days to see if there is a lot of the dish left on the plate. If so, this could signal an opportunity to reduce portion size.
- Revisit your kitchen to ensure proper portion size is being consistently adhered to and the proper training on measuring utensils, portioning, and recipes are being followed.
The restaurant industry continues to face many challenges. However, with some careful analysis, operators can better understand the items that are contributing to the bottom line and those that are not. From there, strategic decisions on pricing, carry/not carry, and recipe design can be made. To learn more about this process and how it can benefit your restaurant entity, please contact Tim Reynolds at 828.322.2070 or at email@example.com.