In the food-and-beverage arena, it’s not always easy to understand the value and impact of a single dollar. Yet spending a dollar here, rather than spending it there, can make an enormous difference to a hotel’s top and bottom lines. To generate profits, hoteliers need to spend money the right way. That means selling one menu item at a higher price to have a better top line, while selling more of another item at a lesser price to be profitable. Each menu item has a specific effect on the business. Having costs in line and expenses under budget does not mean that the operation is making money efficiently. In other words, the question isn’t “How much money did I make on these menu items today?” but rather “How much did it cost me to make money today?”
Naturally properties should always take the needs and preferences of a particular hotel’s guests into consideration when making purchasing decisions. Yet F&B operators should also establish a pricing and distribution strategy that takes market fluctuations – based on foreseen or unforeseen circumstances – into account. For instance, a shortage of boats in the South China Sea means a shortage of available crab for restaurants. If F&B teams aren’t analyzing this product and watching the market closely, they can cause a hotel to lose thousands or a management company to lose millions of dollars in lost profit opportunity. Market-price increases also have a direct impact on revenues. When the cost of goods rises, hoteliers often react by cutting labor or swapping out a lesser-quality menu item. Neither option is good for guests.
An effective way for a hotel’s F&B outlet to generate a profit and ensure its guests are satisfied is by understanding and implementing these four strategies:
1. Price Engineering
This common practice examines what items on a menu sell or do not sell. By examining the volume of sales, the average sale price of an item and the extended sales total of items, hotel managers can quickly identify areas of opportunity for the property.
Here are a few examples:
- The Wagyu Burger is the most popular item on the menu but contains below average profit margins. If the hotel increases the price of the Wagyu Burger by $2, it will increase profitability of the product by 17%. In other words, anything below a 16% “decrease” in sales is more profitable.
- Sales show that the Harvest Corn Flatbread is not popular among guests. If the price is still above the median cost margin, decreasing the cost by $1 will put the margin at the median and may result in a more appealing product for the guest.
- Shrimp and Grits has a very low mix of sales, with an unfavorable cost margin. Remove Shrimp and Grits from the menu or revamp a shellfish alternative with a new recipe and better cost margin.
2. Break Even Points
This strategy estimates how much an incremental price increase would decrease the overall volume of the sales for an item, aiming to influence guests to buy a different product due to perceived value. This redirecting of sales increases the volume of sales of items that can be more profitable, while still costing less from a production standpoint.
3. Profit vs. Profitability
To understand the difference between making a profit and being profitable, F&B operators must first have a solid grasp on their food cost percentage and contribution margins. Would you rather make a profit of $30 on an item that cost $10 to produce or one that cost $20 to produce? The answer depends on the contribution margin – the difference between the cost to produce the item and the end selling price – of each menu item. The goal is to engineer a venue’s menu to influence guests to order items with the best contribution margin.
- When a menu item has high volume and a high individual contribution margin, the restaurant should consider increasing the price of that item.
- When a menu item has a high volume but a low individual contribution margin, the venue should increase the price and/or decrease the portion size.
- When a menu item has a low volume and a high individual contribution margin, the F&B team should lower the price and increase its sales effort (i.e., upselling or placing the item in a different section on the menu).
- When a menu item has a low volume and a low individual contribution margin, it may be wise to eliminate or reformulate the item to make it more appealing.
Selling a $20 steak for $50 nets the venue $30 dollars at only a 60% profitability against the cost. Selling a $10 steak for $40 nets the same $30 but at 75% profitability. Again, the question is not how much money was made, but how much it cost to make that money.
4. Weighted Margins
F&B teams must determine how much of an effect each product’s sales have on overall revenue and cost lines. Think of the property’s food-cost goal as the center point on a tug of war rope; many forces are pulling it from both directions. One force may decide to price the menu out on an individual basis, making the average cost of items on the menu near the percentage goal. Understanding how to build a menu with balance and counter balance is key. What is the expected volume of Steak A that is to be sold in the period? How many of Salads A, B and C need to be sold to pull that cost back toward the food cost percentage goal?
Using the $20 steak above as an example, obtaining a net profit of $30 means the item cost is 40%. If the venue’s food-cost goal is 25%, a salad would need to cost $5 and be sold for $50 to achieve the same margins. That’s not realistic. Instead, there needs to be an understanding of how many $5 salads sold at $25 (20% food cost) need to be sold for each steak. The answer is selling six salads at $25 dollars with 20% cost brings the food cost to the goal. This means that each individual steak carries more weight in the sales mix than the salads do.
As the above strategies show, one cannot simply just raise menu prices in an attempt to make more profit in F&B because this risks pricing higher than the local market will sustain. Therefore, an F&B operator needs to realize that the opportunity may be to spend less to make more. Price engineering, break even points, menu modification and weighted margins collectively enable F&B operators to heighten revenues the right way.