Outside Insights | October 2017 | By Guest Author

The Advantage of Penny Profit Menu Analysis

Why analyzing items by their food cost and prime cost percentages might be causing your profit problem.
Reviewing the current penny profit of your menu items can make a huge difference on your bottom line. flickr: Images Money
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Remember the days when restaurant math seemed so simple?

The equation went something like:

Prime cost (food cost plus labor cost) under 60 percent total was good.

Prime cost below 55 percent was golden. 

What’s changed? Only everything below the food cost line.

The rise of minimum wage, employee-friendly laws in many states and the cost of benefits has change much of our once variable labor to a virtually fixed cost. Rent impact is higher with increased space competition and same store sales growth lagging behind lease mandated percent increases. Buildout expenses have risen with food theater and fresh ingredient preparation driven by Food Network expectations and the need for Yelp appeal.

Given the above, it’s more important than ever to focus on the actual dollars being contributed to the bottom line. While percentages provide great snapshots and quick comparisons, evaluating menu items with the same old food cost percentage and prime cost percentage presents profitability pitfalls that must be avoided. Here’s an example below to demonstrate:

ABC Grill runs 30 percent labor.

The grilled chicken sandwich has total plated food cost of $2 and sells for $8.

  • ABC’s Tri tip sandwich costs $4 and sells for $11.

Calculating food cost percentage:

Grilled chicken equals 25 percent ($2/$8)

Tri Tip Sandwich equals 36 percent ($4/$11).

  • Grilled chicken wins food cost percent by 11 percent.

The traditional calculation of prime cost percentage (a bit more calculating needed here):

Grilled Chicken Sandwich equals 55 percent

($2 food cost plus $2.40 labor (30 percent x $8 price)/$8 price)

Tri Tip Sandwich equals 66 percent

($4 food cost plus $3.30 labor (30 percent X $11 price)/$11 price)

  • Grilled chicken wins prime cost by 11 percent as well. A clear winner. Let’s spotlight grilled chicken.

But, before awarding the menu’s sweet spot to the grilled chicken sandwich, a look at actual dollars, provides different results and exposes the fallacies of these calculations.

The food cost percent pitfall:

While the food cost percent (and dollars) of the grilled chicken is lower, the tri tip provides $7 of penny profit (price minus food cost) while grilled chicken only provides $6 to cover our other business costs. (As my grandfather loved to remind us: 50 percent of something is better than 100 percent of nothing).

So, actually, Tri Tip wins penny profit by $1.

Or does it? When we look at prime contribution (price minus prime cost), tri tip only contributes $3.70 vs. chicken’s $3.60. How did the $1 penny profit shrink to only 10 cents?

The prime cost percent pitfall:

By using the same labor percentage (30 percent) in the prime cost calculation for all menu items, a higher priced item will always result in inflated prime cost and an undervalued prime contribution.

Before racing to line up productivity experts to break down the actual labor cost of every menu item, ask a simple, important question: Are extra people or extended hours needed to serve 50 tri tip sandwiches vs. 50 grilled chicken sandwiches?

Spoiler alert: The answer to the above is generally no and, if so, there is no need to include labor in calculating the menu item’s contribution (this situation changes if the addition or deletion of an item would truly have a substantial effect on staffing levels or hours). Once again, the analysis returns to penny profit.

Putting this approach into action:

At a quick-serve sandwich brand I recently consulted with, the menu had been designed with a heavy focus on the lowest food cost sandwich. However, when we took a deeper look at each menu item, we realized the spotlight was being given to a sandwich near the bottom of their penny profit rankings. We re-designed the menu layout—better emphasizing larger penny profit items and as a result added $1 to the average guest and over 50 cents in additional contribution—without taking a price increase.

If you haven’t in a while, review the current penny profit of your menu items and make sure you’re giving enough spotlight to your true profit contributors.

Sean Reiter is the founder and Chief Synthesist of Sean Reiter Restaurant Consulting. The company provides a wide range of services to help restaurants develop compelling and profitable brands. He combines 30 years of restaurant executive and leadership experience in branding, marketing, operations, sales, training, menu development and online commerce design with insights on the present and future of our industry. He can be reached at [email protected]