Use Menu Engineering to Combat Rising Food Costs and Inflation

Hey there, restaurant pros. It’s David Scott Peters and welcome to episode 47 of the Restaurant Prosperity Formula. I’ve been coaching restaurant owners since 2003 and the Restaurant Prosperity Formula is based on what the most successful restaurant owners I’ve worked with do on a daily basis to achieve their success. The basic premise of the formula centers around achieving prosperity, freedom for your restaurant and the financial freedom you deserve. To achieve prosperity, you have to follow a very specific formula made-up of leadership, systems, training, accountability, and taking action. Today’s topic is reducing your food costs by using menu engineering basics.

You are not going to want to miss this one. So let’s get started. If you’ve been following me for any length of time, by now you’ve heard me talk about the rising cost of products fueled by inflation. We as an industry have been raising our prices on our menus just to keep up with this record increase in costs. Heck, since the beginning of 2022, Your costs, your food costs have risen at a pace where if you didn’t make changes to your menu by now, you’ve probably lost one, two, even three points to food cost. Now let me be perfectly clear.

While I have no problem raising prices, especially on your top one, two, or three items in each section, we’re getting dangerously close to a point where your guest looks at what they pay for a meal and it doesn’t equal the value what’s on the plate. This is a dangerous time for us. At some point in time we can’t just keep raising our prices. So what’s a restaurant owner to do? I’m going to tell you right now. It’s re-engineer your menu. Now what do you need in order to take this step, right, to re-engineer? Well it starts with a budget. As I tell you the two most important systems any restaurant should have are budgets and recipe costing cards.

By the way, what are the two systems most restaurants never have? Budgets and recipe costing cards. Why? They’re so hard. Boo freaking who. You pick the toughest business I know to be in. And as the leader of your business, you have a responsibility to think proactively. And that requires a budget to create your plan for success, what numbers you have to hit, what systems you’re going to put in place to achieve those numbers. And the recipe cards, well, you’re going to see in this lesson, they’re critical to your success. Again, both of these are proactive systems, so let’s focus on the budget right now.

What I really care about in this budget scenario is what is my prime cost, total cost of goods sold plus total labor costs, including taxes, benefits, insurance. This is critical. We’re not going to follow the industry standard of 65%. If you do $850,000 for a year more in sales, right? 850 or more in sales, gross sales a year, your prime cost target is not that the industry averages 65, it’s 55%. This is what we have to do to make money because we have all these additional services from third party delivery services to losing one, two points to gloves in the last two years. So we’ve got to make sure we’re making money 55% or lower.

As we approach $2 million, we start to get into 50% and lower. Now, if you do under $850,000 or more in sales, we’re looking at a 60% target. So you’re going to have to know where you are. And I will tell you that there is no magic pill to saying we’re going to use an industry average on food costs or labor costs. I get asked that all the time. your prime cost, you could be in a tip credit state where your labor cost is really low and your food cost can be high. Vice versa, you could be in a $15 minimum wage state and you’re going to have to drive your food costs down in order to keep your prime cost at 55 or under. And so this is why budget is so important.

What systems are you going to put in place to achieve those numbers? Now, why is it important for this argument or this discussion about re-engineering, I should say? Well, how do you know where your food cost should be if you don’t create a budget? Now when we engineer the menu, re-engineer the menu, we have a target to shoot for and we can take the steps necessary to achieve that number. That’s critical. Next, you need accurate, up-to-date recipe costing cards. This is critical. In fact, you cannot re-engineer your menu properly. Period.

What I hate is when the broadline distributors or these menu companies say, just tell us what your most expensive items are or the things you think you make the most money on. How the hell do you know if you don’t have accurate up-to-date recipe costing cards? You’re literally engineering a menu blind and in fact you could re-engineer your menu to lose money faster if you’re merchandising the wrong items. Next, you got to have a point of sale system. By now, everyone should have a point of sale system. I remember when I started coaching back in 2003, I’d still run into one out of 10 operators still didn’t have a POS system like it was brand new technology.

You got to have a point of sale because we’re going to use one of the best reports they can possibly produce. That’s your product mix report. What your customers actually purchased. It’s critical to this process. You are going to need food and beverage software. I’m going to talk about that in a little more detail in just a moment, but I’m going to tell you right now you can’t do it without software properly. And last but not least, if you start looking at re-engineering your menu, you must have a willingness to make changes to your menu.

If you say I will not get rid of any items, I will not raise prices, I will not change product, I will not make any changes to my menu, then don’t even start the process. lose the money hand over fist like you’ve been doing. But you as the leader of your business, I know that’s not you. That’s a fixed mindset person talking. You’re a growth mindset person, which means there’s a challenge in front of you. can outlearn it, you can outwork it, you can outspend it. You can find a way to be successful to make the changes in your business necessary. Now you might be asking yourself, again, I kind of mentioned real quick, software, David, do I really need to have software? You do.

So let me kind of first talk about the process of recipe costing cards using a spreadsheet. This is how I did it back 20 plus years ago. Well, you can build your spreadsheets. You can build your recipe costing cards. And then as I get to one item, let’s say I have a pizza and I know I’ve got cheese. Well, I’m going to look at the invoice, how many ounces I have on there, and I’m going to type the information in static, what the quantity of the product is, the price of the product based on my yield and so on. and I could type in all the data. And then when I do the next pizza, I look up what my cheese cost is again, and this case pepperoni. And then the next case, I do it again.

I look it up one at a time at a time at a time. Well, when I build the next recipe card and the next recipe card, I’ve got to start all over. Well, that’s maybe not so hard because I know I just used that product a minute ago and I can go find it. Well, if you complete your recipe costing cards with a spreadsheet, do you know the day that you’re finished, that next day they’re wrong? Why? Because another truck has dropped off food at your back door and your prices have changed.

And I can tell you that doing recipe costing cards, whether on spreadsheet or on paper and pencil or in software, it’s going to take you 40, 60, 100 man hours of work and to do it right is a whole process that I teach. But the truth of the matter is, for all intents and purposes, if you don’t have software, your products out of date. So what do I mean by this? Well, let’s talk about the process of recipe cost cards using software. Imagine you build your recipes after you build your products. Your products are, number one, the products you buy from all your vendors and you set it up for how you’re going to buy it, how you store it, how you use it. Then we start with our batch recipes.

Batch recipes are any sauces, soups, side dishes, desserts. Oh, dressings, and any components to dishes. So if I’ve diced onions, you took a case of onions, you cut off the top, you got rid of the skins, right, the outside, you chopped them up. Well, wait a second. How many ounces does that case of onions or bag of onions, I should say, yield? And what is the cost of that? So I’ve got to do my batch recipes because that’s now the products I manufacture, the ones I buy and the ones I manufacture. Now, what’s beautiful is it’s a database. So when I go to use that cheese again, I type in the cheese and it pops up and I choose the unit of measure. Done, easy. But more importantly, it’s magic.

You grab your phone when an invoice comes in, take a picture, shoot it up into the cloud, the interwebs, and the next thing you know, your recipe cards are up to date, your next order’s up to date, your next inventory’s up to date. Just like that. And that’s the power of keeping up with your recipe cards because things change on a day-to-day basis. So hopefully you understand you need software. Now, being somebody who created software, in 2003 I started my restaurant training coaching company, seminars, workshops, training products, coaching, mastermind groups, but eventually it turned into a software company.

I’m going to tell you today my members, and this is not my old software because that’s an all-in-one. We’re going to talk just about food and beverage. The one my members choose is MarginEdge. Now, let me be very clear. I’ve got a contact there that I want you to talk to, that he knows you came for me, and I’m going to be dead straight with you. I do not make a commission. I do not earn any money. I don’t get any presents. I don’t get anything. But there’s one person I want you to talk to, Bruce Earle. com forward slash DSP for David Scott Peters. com forward slash DSP. Opt in there so Bruce knows you came through this podcast and he can take care of you.

That’s the software I’m going to recommend right now for you. Now before we go through menu engineering, the techniques involved, let me be sure we understand the concept of ideal food cost. Now, this may be review for you because in the last podcast episode, I talked about how you find the distance between your ideal and actual food cost. So this may be a little bit review, but in that podcast, I also said that I’d be doing this one to help you with menu engineering. So here I am true to my word. So here’s the deal.

If you have accurate up-to-date recipe costing cards, your product mix from your POS system, So what it costs, what you charge your guests for and how many you sold of each, you’re going to find out what your ideal food cost should be. Not some national average of 34%. You could be a pizza place with pasta and maybe run a 22% ideal food cost. You could be a steakhouse and be in the high 30s. It does not matter in this instance. It’s based on what we call a weighted average. It allows me to sell anchor appetizers frozen out of a box like when I was a franchisor into the fryer at a 38% cost of goods sold. But I didn’t sell so many of them.

But we did sell the hell out of our hand cut, fresh cut, daily cut French fries at 5% cost of goods sold. So the more I sold French fries, the more the 38% did not affect me. So the best way to describe it is let’s say we have a two item menu. That’s all we have. One item has a 99% food cost and the other one has a 1% food cost. And in a calendar month you sell 100 items, 99 of them at 99% food cost and one at 1%. What’s your food cost? 99%. What if the same menu next month, 100 items, 99 items are sold at 1% food cost and one at 99? What’s your food cost? 1%.

See, you can’t know what your food cost should be in your restaurant without accurate up-to-date recipe costing cards, your product mix, period. Because this is based on your restaurant, the food you should have used for the money came in. Now this is called ideal cost. Meaning there’s no waste, no theft, no spoilage, perfect restaurant, which does not exist. So I want to be perfectly clear that you will never hit your ideal food cost. It is impossible. If you do, then somebody screwed up the recipe cards on purpose or by accident. So the key is, I will tell you, that most restaurants run seven to nine points above ideal. So we have all this room to fix things.

But that’s not what we’re going to talk about. We’re going to talk about, just as a reminder, a rockstar kitchen manager or chef will run 1 1/2 to two points above ideal. So our threshold when we re-engineer our menu and we’re trying to reach a certain food cost, we know our ideal food cost needs to be at least two points lower and that we have our **** together in the kitchen, reducing theft, stopping ******* mistakes, training. You get the picture? Now let’s dive into menu engineering basics. To start off, we’re going to talk about the three different kinds of menus.

We have a single panel menu that do you know that if from the middle up, if you eyes hit the middle of the menu and go up, you’ll sell more at the top of that single panel menu. Do you know if you have a two panel menu that opens side by side, right? So you have two panels in front of you that in the upper left hand corner, all the way up in the upper left hand corner to 1/4 way down on the right side, anything in this upper right hand side will sell more. Do you know if you had a three-panel menu, one that opens to the left, then opens to the right, that there are three panels dead in front of you?

That your eyes start in the center and then move to the upper right, across to the upper left, down to the bottom left, back up to the upper right, down to the bottom right, and finally to the middle of the center panel? That means in that upper right hand side of the third panel to your far right, anything in there has three eye movement passes to it. also means that in that center panel all the way at the bottom, our eyes barely ever got there. This is where we put our sodas, our side dishes, our food warnings, our health warnings, right? So by putting things in a certain spot, you can influence what your guests are going to buy, thereby changing your food cost. menu copy is so important.

So for instance, we don’t want… In the sandwich section, breast of chicken sandwich. 95. That’s a grocery list. Who wants to spend money on that? Or you could say we have a teriyaki chicken burger. 50. Which one would you rather buy? I’d spend the $2 more on that item because it makes me want it. So descriptive copy matters. I want you to think about make it easy for me to read. I’m 55 years old. I do not like to travel with my reading glasses, so I don’t. And so when you see me turn on the light on my phone to read your menu, you got a menu problem. If you see my hands reaching away from my body as far as I can because I don’t have my readers, you got a problem.

But along with that, one of the things that makes it hard for me to read menus is when you have cutesy fonts. I’m going to tell you now, the principles behind this are don’t use more than three fonts on your menu. So in your section header, say appetizers, I want to use a sans serif font. That’s like a Helvetica, an Arial. They’re straight letters. Where when I talk about the item, I like a sans serif as well. But when I do the descriptive, I like serif fonts. Serif shows little curlicues on the edge like Times Roman. It makes life so much easier for me to read the items, which ultimately means I’m going to buy it. I want you to avoid having a price list.

That’s when you have the menu item going straight across and sometimes you have dot dot dot dot dot bold dollar sign and price. You train your guests to find how much they want to spend or what they don’t want to spend and they hone in on certain items ignoring the rest of your menu. You do not want to have a price list. It will crush your food cost. Did you know that if you have 10 items listed 5 side by side that the first, second on the right, if I look at it on the left hand side, the first item, the second item and the last item on the right hand side, Do you know those will outsell anything else? The first, second, and last?

So, if I know what I want to merchandise and I can put it in the right spot, I can outsell anything. I want you also to think about labeling your prices. So when we have the descriptive copy, I want you to have a space, no dollar sign. I don’t want you to make it so large, so small that it’s either screaming, that would be a capital letter, right? If I text message you in all caps, 795 yelling at you, or I don’t want it so small that I’m whispering and I can barely see it. I want you to think your prices are one space after the descriptive copy, no dollar sign, not bolded, but a half font size to full font size smaller than a capital letter.

It should be in between a capital and lower case, just making it a little more subtle. And I also don’t want to orphan it, and that means it’s on its line by itself. Now, I want you to create price flexibility by using what I call odd cent pricing. This is something that I learned a long, long time ago. With odd cent pricing, you make it harder for your customers to detect an increase. Now, this doesn’t work for those of you who use 00, right? If you’re going to raise the price, you’re going to raise it a dollar. That’s just the way it is. But if you’re using pennies on your prices, I like having 25 cents, 50 cents, 75 cents and 95 cents.

Because let’s say I’ve got my burger now at $15, which blows my mind, right? Do you think we’d ever come to where we were selling a burger for $15. 50, does my guest really notice? No. If I go to $75, do they notice? No. If I go to $95, do they notice? No. When I go to $16, then they notice. So this gives me the opportunity to kind of hide my increases without shocking the guest. Now I’m going to tell you this is an important one. I like 50% white space. White space is literally white space. I don’t care if it’s a red menu on the background, black or whatever, but white space, meaning there is space around each menu item that I can see that half your menu should not have text on it.

Now I will tell you warning, this does not mean bigger paper. It means fewer items, which is a whole other topic we can talk about another time. I also, remember we talked about 10 items, first, second, last, outsell anything else? Did you know if you put a box around something, it will outsell the first, second, and last item? Do you know if I put a picture on it, if you’re a concept, a restaurant concept, that pictures are applicable, they’re appropriate for your restaurant? That picture will outsell the first, second, last, and any boxed item? Like we can influence what our guests actually purchase. And I will tell you the power of pictures is unbelievable.

Put a picture on the menu, one in each section, maybe 2 in each section if it’s appropriate. Watch those items get sold like crazy. So how do you decide how to use these engineering basics? you’re going to use something, you’re going to have to create a spreadsheet, one that I’ve created and had programmed that operates kind of like software, like many of my systems, called my menu profitability monitor. It allows you to put your category name from appetizers, salads, soups, sandwiches, and so on. Your item names, and then you have the recipe cost, what the recipe costing card says it costs to make that item.

Then you have what you sell it for, the gross sale price before discounts, and then you have how many you sold of each. That comes from your POS system. And by doing so, we can find out a ton of information, what our food cost is by section from appetizers, soups, salads, sandwiches, entrees, and so on. We can find out what percentage we sell that we find we’re a burger restaurant and that 35% of every item we sell is a burger. We know that section is where we can make the biggest impact in our business. We can also find out how many we sell a day so that if I have items I don’t sell at least two, three a day, they might be on the chopping block and I can change my food cost.

So a menu profitability monitor Otherwise, a sheet to help you find your ideal food cost is critical to this process. So once you have the spreadsheet, what we’re going to do is we’re going to sort it. We’re going to sort it in my world is quantity in descending order. What we sell the most to the least. This allows me to identify my top sellers right away and my bottom at the same time. I want you to look at both your cost of goods sold and your cash contribution. What is cash contribution? Well, that’s the cost of the product subtracted from the menu price. So let’s make life easier for me. I said sold an item for $15, but I had a $5 recipe costing card.

Five minus subtracted from the 15 says I’m going to make $10 gross profit before my labor is paid, before I paid any other bills, just cost of goods sold. This is important because sometimes we want to be purchasing items or selling items, I should say, that raise our cash contribution because I don’t know about you. Profits don’t pay my bills. Cash does. That’s a whole, yet another topic for us to discuss in the future. I need you to understand the effect of your menu mix, that if you change your mix, if I sell more of 1 item, will it drive my food costs down or will it increase my cash contribution or both?

Because knowing that, can help us decide what we’re going to merchandise to change our bottom line. Then I want you to start to create scenarios, determine the best changes for the best results ranging from raising prices, reducing costs, reducing portions, adding and subtracting items, and manipulating your menu mix. So once you’ve created your MPM, once it’s done, it’s ready to go, I want you to again, I’m going to do this slower this time, use the following steps as your guide. One, know your goal. Is it lower food cost or higher cash contribution and sort accordingly? In my case, most of the time we’re going to be looking at food cost.

We’re going to pay attention to cash contribution as we price items, but it’s usually food cost. Number two, raise the prices on your top one, two or three menu items. Now there’s a little flexibility in that, but with that said, if it’s that damn good, it’s that damn good at any price. So if my top seller is flying off the shelves and it’s to die for, then it’s a value at any price. By raising the price on the top one, two, three items because the volume is so high, maybe the price of tomatoes has gone through the roof. And there are no tomatoes on those three items. They’re on other items.

But because I sell so many items and I’ve raised the price of these top sellers, I don’t have to raise the price on every menu item. In fact, I don’t have to raise the price on those that have tomatoes on them. I’ve already made-up for the cost difference. Three drop losers. When I sell one a day or less, you don’t sell one a day. You sell one on a Tuesday, three on a Thursday, and the rest on a Saturday, which means you have a cook that can go three weeks and the printer comes up and they put it up there on the rail and go, oh, I’ve made that item in three weeks.

And then reinvent the dish, which throws your food cost off, changes your guest satisfaction because it’s now an inconsistent product. So we’re going to get rid of those losers that we don’t sell a lot of. But we don’t get rid of the customer. Instead, we take, let’s say 50 items were sold in this time period that we’ve got, less than one a day. Where do those people go? So if I had a tuna fish salad and I had a salmon salad and I got rid of the tuna, odds are those 50 people are going to salmon. If I have an appetizer sampler, I may have to split those up amongst the other items that were in the sampler to begin with. So you just got to use your best judgment, your gut feel, if you will.

Number 4, you may decide to add new menu items. This is where being willing to change your menu is critical. All too often we get stuck in our way and many of our menus today are producing too high a food cost, 36, 37, 38 percent. And what we’ve got to do is say, hey, I may get rid of some of these sections or some of these items and I need to bring in pizza, flatbreads, pasta, saute, something that makes sense for my menu because by adding those to the menu, I can drive my costs down. Now, guess what? If you add a menu item, you have to steal those customers from other items saying it’s going to change or influence my mix.

Five, You need to reduce the cost by buying smarter, changing products, or reimagining a dish. So if I look at my menu costs and it’s got a 38% food cost, maybe I can talk to my vendor, my purveyors, and say, hey, if I could… get a better price for this product. Is there a light quality or better quality product at a cheaper price? Right? So by changing the product, never dummying down and buying a ****** product, but maybe less expensive, same or better quality, I can reduce the cost of that item, changing my profitability. Or maybe I have to reimagine a dish. Instead of the chicken sandwich, I now take the mayo and I put Chipotle in it.

It’s now a chicken, Chipotle mayo sandwich, whatever it may be. name it something different, and now I can recharge something much better. So you’ve got control, but you’ve got to remember what your priorities are. Now, I used to promise my members by using menu engineering basics for the first time, most restaurants could drop their food cost by three to seven points. It was magical. But things have changed. In today’s high inflationary environment, to get that kind of change, that kind of movement may require real change to your menu.

Again, being willing to not only use the menu engineering techniques, but to actually make some fundamental changes to your menu without changing your concept by staying true to your core values and still providing your guests the best value possible. So this takes me back to the beginning that you as a restaurant owner, what is your job? To work on budgets. To train your managers, lead your team, hold them accountable, lead the business forward, marketing, to think strategically. Menu engineering or re-engineering your menu is one of the biggest strategic planning things you’ll ever do. And with the right information, you can make this happen.

But for many of you listening to me right now, you may have to start working on your recipe costing cards. com forward slash DSP. Talk to Bruce Earle. Get it in place because when you have accurate, up-to-date recipe cost cards, not only do we have the ability to order on budget, do we have the ability to look at ideal versus actual product usage, we have the ability to what, take inventory easily, accurately in less than an hour on every Sunday. We have the ability to engineer our menus to make the money we deserve. Start down the path of proactively managing your business today and start on your recipe costing cards and then menu engineer your business to success.

Hey, that was an awesome episode. I want to thank you for taking the time to take action on building a better, more prosperous restaurant. Before you go, I want to give you these three thoughts. One, by combining leadership and taking action with systems and training being checked by accountability, you are on your way to creating prosperity for you and your restaurant. Two, I have something I need from you. Please leave a review on Apple Podcasts, Spotify, or wherever you happen to listen to podcasts. By leaving us a review, other restaurant pros seeking out this information are able to find it. I read the reviews and hearing how this information has benefited you does wonders for me.

And three, if you find any of the discussions helpful, share them. The more restaurant pros who have access to them, the better we become as an industry. com. Be passionate about what you’re doing. Be persistent, but more importantly, become better and help everyone around you become better. And your restaurant is going to kick some ***.