This post is the third in a series. Our initial post dealt with Labor Management and productivity, while our second post looked more closely at the tactical trade-offs between menu prices and productivity that operators must make when faced with an aggressive minimum wage environment. This article deals directly with the other alternative options when facing costs pressures that operators can choose should they elect to.
The simple fact that our old tools no longer work in this environment should not come as a surprise. Changes to minimum wage of the magnitude contemplated by our politicians have not been experienced before. As we showed in our previous post, changes to menu prices and corresponding productivity must recognize the realities of the market. Neither can be aggressively raised without parallel reactions by consumers in response to higher prices, or service negatively impacted by aggressive productivity increases. As a result, operators must completely alter our old assumptions about what margins are achievable and under what conditions. In order to survive in this new world new strategic approaches are going to be necessary.
The list that we will consider here is as follows:
- Menu management – restructuring, portion sizes, quality changes, considerations, training, opportunities and dangers, supply chain.
- Personnel enhancements; reshaping your workforce, depending on size and constituency.
- Restructuring operations through technology.
Instead of just raising prices, menu management must be honed to a fine art. Menu management, or menu restructuring, encompasses the concept’s unique combination of price, portion size, quality, flavors and presentation, on the plate, on the menu itself, and in overall brand positioning. As a whole, the menu must deliver value to the customer, while maintaining profitability for the operator. In our previous post, we already addressed the price aspect of this equation; now we look at the following three areas, segmented by response time from near-term, medium term and longer term.
Pricing considerations go beyond just cost of ingredients and the implicit labor required in creating a dish. Here it helps just to posit a series of questions for the operator to think about as they play with the Rubik’s cube of options. Who is included in your competitive set? Who are your customers? What are their expectations for price and time? What is the positioning of an individual item vis-à-vis the rest of the menu: Loss leader? Featured item? House specials? What is the operational complexity of the item relative to all other items on the menu? What is the menu mix of the item; both desired and actual?
In order for an operator to restructure their menu, they need to answer those questions. Every concept and operator’s answers will be different. As an organization, the responses need to be coherent and communicated appropriately.
An effective menu review will often result in reducing the number of menu items offered. Particularly in QSR, many concepts will specialize in specific items. This direction is already occurring as we see the rise of wing only, or chicken tender only concepts. In some respects it is a return to yesteryear, when burger restaurants only sold burgers. Even McDonald’s is following this trend. Operators should find ways to enhance menu diversity without adding complexity. Wendy’s offers the same burger in 3 sizes, (only the Jr. burger is a different size).
Operators also need to be conscious of the specific equipment in their restaurants and the unique layouts. Often, as a chain grows, layouts evolve and may not be quite “cookie cutter”. As menus evolve historically, the equipment requirements may have changed as well as its position in the operational sequence. Any new menu items, must take into account the menu mix between stations such as salad, grill, fry, etc. To overload one station at the peak periods slows service and makes for dissatisfied customers. To alter the menu in such a way as to ignore the impact on the culinary team and its work flow is a recipe to create angst and frustration in the workplace; which often ends up spilling onto the customers.
Build menus around selling more of your higher margin menu items. Theories abound about the placement of items on a physical menu. Do your research and determine which theory works for your concept. Do you want to highlight high margin items, high priced items, high penny profit items, items on which your concept has generated a buzz, new items? All of these approaches have their pros and cons.
There are also purchasing strategies and tactics that can help maintain a low cost structure to offset the impacts of minimum wage. Join with other independent operators in your market to form a purchasing cooperative. Find a reputable food cost purchasing company that shares in the savings that they create. Make sure that the savings are not illusory with regular audits of comparable pricing and competitive suppliers.
The farm-to-table market has popularized seasonal menus, and you can use this to your advantage by trading out menu items which have seasonal cost variability. Seafood and produce often vary seasonally. Even dairy can exhibit signs of seasonality. Seasonal sensitivity must be monitored very carefully, however, to ensure prices don’t change dramatically with little or no notice. Make sure that you have the processes in place to review supplier pricing at least monthly, preferably bi-weekly.
Look for opportunities to make special purchases as vendors try to manage their inventories. Vendors, whether a national or local distributor, often find themselves in a long inventory position and are willing to discount their products in order to sell through them within shelf life. Look for opportunities to buy products at a discount and even develop menu items around these special purpose items when the economics are particularly attractive. But be careful. A chef once acquired 30 ten-pound cans of anchovies because “the price was so good”. So we did the math. How many Caesar salads a day? A week? Usage of anchovies on the salad, and in the dressing? Turns out he bought 5 years worth of anchovies. Now with multiple stores to redistribute the product, it may have been a good idea, but not with one store.
It is not an easy task to develop, systematize and train your culinary personnel in new recipes, techniques, flavors, plating, and expectations. Training manuals, videos, travel and expenses add up when rolling out new menu items. Most new concepts are digitizing training. There are several companies that will help create multi-media digital training manuals. All new recipes have to be analyzed for calorie count and other attributes that the consumer and regulatory authorities require. Typically, only the larger chains can afford to leverage these costs against a larger store base. For smaller operators with fewer than 100 stores, these efforts cost real money. As a result, try to keep future changes to a minimum by doing the legwork on designing the product mix and flow so that these kinds of costs are kept low.
Reducing portion sizes, while maintaining, or raising, the price level is a strategy adopted with some peril. Customers will recognize the changes, and may change their consumption behavior as a result. Some may speak out in person, or in on-line reviews, but many will simply alter their consumption behavior without expressing their unique reasons for doing so. The unit staff must clearly understand why changes are occurring, what impact the changes may have, and most importantly, how to communicate the changes to customers. An operator cannot just slap “new” or “improved” on the box, like retail products, or grocery products. However, menu presentation can include a lighter section, or lunch portions that can communicate the changes in portion size meaningfully.
Changes in purchasing may also involve changing specifications. The appearance of reducing quality is risky, but some changes can be made simply by changing menu positioning. Most operators recognize that the difference in real quality between a tenderloin steak or a rib roast graded “Prime” is very small when compared to the same product marked “Choice.” The real difference is the ability to use the word “Prime” on the menu. When margins are healthy, the $3 per plate difference may be worth the ability to use the word “Prime” on the menu, but in times when margins are challenged by regulatory pressures, the cost advantage of using the less expensive, yet high performing spec may be worth omitting the mention on the menu.
Reducing quality is one we hope most operators avoid. We have seen too many examples where reducing quality and the reduced attendant costs can stabilize profits; maybe even improve profitability in the short run. However, offering lesser quality cuts of meat in times of high commodity prices, have often led to the cyclical demise of the budget steakhouse segment. These budget steakhouses were then replaced by other similar concepts using a higher grade product as the price of the commodity retreated. Quality reductions that the consumer can readily identify will erode the value of previous brand positioning.
The second potential response to higher costs is looking at the systems, equipment and technology that exist in your restaurants today. Everything from ordering, stocking, cooking, holding, etc. with, or without, technology is fair game.
Cost of Goods Sold can be an excellent source of offsets made necessary by minimum wage increases. Use of an inventory management system or a theoretical food cost generator, can be an excellent way to capture costs. There are many good ones available, some from POS vendors venturing into more back office functions. There are many popular solutions, some of which also integrate purchasing, payables, inventory and theoretical food costs. Inventory management should always include those items to which the consumer has access, like salt & pepper, ketchup, butter. These costs can be significant and are often omitted from inventory management systems and are therefore omitted when performing cost analysis.
It is important to know the food cost structure of every menu item, but it is equally important to identify the labor costs related to each item. Identify those menu items that can be handled with minimal labor. You may be willing to accept a higher food cost menu offering because there is so little labor involved in producing it. Conversely, you may have a labor intensive, but lower food cost item, which you now need to charge more for because of the labor involved in producing it. By value engineering your menu, you may encourage the consumer to trade out of labor-intensive menu items, while introducing more profitable items. Profit can be measured in both percentages, but also in “penny profit”. An item can have a low margin, but due to the higher selling price may carry an acceptable penny profit. Steaks are typically an example. If priced at the same margin as everything else, the product would not sell, but with a lower price and a generally higher penny profit, it makes sense to include on the menu for variety, flavor, etc.
The preceding information is the work of NRCP. It cannot be copied, or reproduced without the express written consent of NRCP.
National Retail Concept Partners, LLC is a full-service consultancy based in Denver, CO. working with a variety of industries, including the automotive, retail, restaurant and hospitality industries. Partners Larry DeVries and Dean Haskell wrote the preceding post. These recurring posts can be accessed at their LinkedIn profiles. NRCP recently shared its labor optimization success at the Restaurant Finance Conference. The partners can be reached by email at firstname.lastname@example.org and email@example.com. Mr. DeVries is based in Denver, Colorado and Mr. Haskell is based in Nashville, Tennessee.