In the restaurant business there are really only two ways to view profit: a very small amount of profit balanced by very significant volume, or a significant amount of profit on far less volume. How you approach the design of your restaurant in this regard will determine nearly everything else. How you approach profit will determine what your physical plant will look like, the scope of sophistication in your kitchen, who your vendors will be, how many employees you will hire and the depth of their experience, where you advertise and how much you invest in that, your table top appointments, and even your hours of operation. So, if you are in the process of ideation with regard to a restaurant – then start with one simple question: “How do I want to measure profit?”
In those restaurants where profit is measured in terms of smaller numbers with significant volume then concerns such as food cost percentage are of paramount importance. When profit is measured in more significant profit from fewer sales then I will make a statement that may cause many chefs scratch their heads in disbelief: “Food cost percentage is far less relevant – it’s all about contribution margin.” In both cases it is sales (the top line) that sets the stage for success.
So what is contribution margin? Simply stated it is what a menu item contributes to the financial success of a restaurant. This can be direct (the menu item itself contributes working funds) or indirect (because the item is present on the menu – other items are more likely to sell). So let’s look at this through an example or two:
Chicken Saltimbocca vs. Beef Tenderloin with Wild Mushroom Demi Glace.
The Chicken breast (6 ounce flattened) may cost in the neighborhood of $3, the additional slice of Prosciutto, Provolone Cheese, and sauce reduction another $1.50, and complementary vegetable/starch combination another $.75 for a total plate cost (not actual costs, but fair estimates) equals around $5.25. The baseline formula for determining selling price using an acceptable food cost percent of 30% would be:
SELLING PRICE SP) = PLATE COST (PC)/FOOD COST %(FC%)
SP = $5.25 / .30
SP = $17.50
The available funds left (contribution) = $17.50 – $5.25 or $12.25
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The Beef Tenderloin might look something like this:
Beef Tenderloin (trimmed) (8 oz.) at around $18/pound = $9.00, the wild mushroom demi from stock to finished reduction around $1.25, mélange of wild mushrooms (chanterelles and morels) at approximately $2.00, and a standard vegetable/starch combination at $.75 for a total plate cost of around $13.00. If we use the same baseline formula for determining selling price:
SP = $13.00 / .30
SP = $43.33
The available funds left (contribution) = $43.33 – 13.00 or $30.33
Now the first question is: Can you sell this steak at $43 or does this exceed what the market will bear?
If we chose to use 50% as the desired FC% then the result would be:
SP = $13.00 / .50
SP = $26.00 (A price that guests would be more willing to swallow)
The available funds left (contribution) would be $13 or $.75 greater than chicken at 30%. But now the contribution potential goes even further if we consider general psychology and human behavior.
1. It would not be a stretch to consider that a steak person is different than a chicken person (behavior considerations are generalized). The steak person may very well be less “price sensitive” and more willing to listen to recommendations by the server for adding appetizers, desserts, and even a nice bottle of wine. The chicken person might be of the same mindset, but could be considered more cost conscious and a tougher sell. So, in this example – even though the steak (at a 50% cost) falls outside of the norm for food cost percentage, it stands to contribute more in terms of available gross profit as well as the ability to encourage ancillary sales of other items.
If, in fact, you understand that the success of a restaurant leans on the ability to generate sales, then it becomes obvious that getting all wrapped up in food cost percentage pales in comparison to driving the “top line”.
2. The “soft issues” that go beyond measurement of dollars and cents point to a more robust overall “dining experience” when a guest is able to enjoy a broader spectrum of dishes and complementary beverages. When the “experience” is driven by turning tables to reach a desired volume then something will likely be missing. It should always be the restaurateur’s goal to encourage return business and ambassadorship when happy guests recommend what you have to offer to others.
Now, what about those operations that rely on a smaller amount of profit enhanced by some serious volume – can they create an experience that is worthy of a return? Absolutely! But, in this case you need to rely on the uniqueness of an atmosphere that also encourages shorter dine in times, signature items that create excitement and buzz (think Chick fill-A chicken sandwich), systems throughout the operation that are geared for speed (think about the order/delivery system at Panera), and the ability to maintain a high level of volume.
In the higher profit/lower volume model there will be a requirement for higher levels of skill from both front and the back of the house, a greater understanding of ingredients and their source, cost appropriate table top items (more expensive china, flatware, and glassware), and a level of finesse that rises to the level of the menu pricing.
At a time when pandemic restrictions dramatically impact typical top line initiatives for both methods of measuring profit, it is easy to see just how challenged restaurants are to find a profit scenario that works.
BRING VALUE INTO THE FORMULA
The magic of a great restaurant and one that yields profit potential for the operation lies in those factors that go beyond costs and selling price determination. These are the elements of a food experience that create “value”. Every restaurant should embrace, as part of its goal structure, a feeling among its customers of: “That was well worth what I spent.” Whether it is a $5.00 quick service meal or a $100 fine dining evening – there is always room to create experiences and in turn – great value. The most common components of the value approach are:
- UNIQUE, MEMORABLE FLAVORS
It may very well be that one item or a few signature menu choices that just knock people’s socks off. Excitement around flavor is one of the most compelling reasons to support a restaurant. People come from all over the country to New Orleans with a clear commitment to stand in line at Café du Monde for their beignets.
- A SPECIAL LOCATION
Those restaurants that are fortunate enough to physically sit in proximity to a breathtaking view, a center of exciting activity, or in a community of other restaurants will always enjoy a steady flow of value seeking customers. The Union Oyster House in the middle of Quincy Market – Boston; The Slanted Door on the edge of San Francisco Bay; or Spiaggia overlooking Chicago’s Magnificent Mile and a view of Lake Michigan are all prime examples of locations that create an experience for diners.
- BEAUTIFUL FOOD PRESENTATIONS
A chef knows that he or she has succeeded in engaging a guest and creating visual value when the presentation of a plate of food causes the table to stop, focus on the beauty before them, and pull out their cell phones to take a few pictures to remember.
- TRUST IN CONSISTENCY
Those restaurants that consistently create food flavors that are expected, presentations that are anticipated, and service that lives up to previous experiences will always be viewed as a place that offers special value.
- REAL SERVICE
There certainly is value in proper technical service, but it will always be those restaurants that offer that warm sincerity, the welcoming attitudes, and those friendly connections with guests that build the most important reasons to return.
- COMMUNITY RELEVANCE
Finally, when a restaurant is engaged with a community, supportive of neighborhood efforts and causes, and there to make a difference – true value becomes incredibly obvious. Why would guests patronize any other operations when yours is part of the neighborhood family? This is value.
In the end, creating compelling reasons for guests to patronize your restaurant is complex, but it can be narrowed down to building value. Building value will always lead to healthy top lines (sales) for restaurants.
PLAN BETTER – TRAIN HARDER
Create Value Experiences
Harvest America Ventures, LLC
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