Question

Identify the different types of strategies used in cost analysis/restaurant industry. Explain how these strategies add value to the decision making process for specific clientele base of business that purchase products or services.

Answer 1

To offer a good price/value relationship to customers and operate profitably in a restaurant, first look at the following factors when developing your menu:

• What the market will bear – You must analyze the demographics (income, population, age, etc.) of your market to determine if your proposed concept, menu, and pricing is correct. Minimum rules of thumb for casual theme chain restaurants (e.g. TGI Friday’s) for demographics include a median household income of at least $35,000, population of over 50,000 within a 3-mile radius and median age of about 35 years old.
• Who is your target market? - It is important to understand who your target market is and develop and price your menu accordingly. If you are opening in an area that would support a casual theme restaurant - one that serves pastas, pizzas, sandwiches and burgers - you must develop a menu that is moderately priced. An upscale theme restaurant will carry a higher-priced menu. However, your target market for the casual restaurant will be larger due to its affordability and therefore will appeal to a broader base of customers.
• What are your competitors charging and offering? – You should compare your menu prices with your potential market competitors. Simply perform some market research by visiting these competitors and taking note of their menu prices. Use this competitive pricing analysis as a test of reasonableness to determine whether your menu and prices are in line.

After you have determined the type of menu you want to serve that will provide the best price/value for your target market, even better that your competition, you will have to price the items on the menu. You have probably already started this thought process because it is related to and overlaps the preceding points.

The following factors affect menu pricing for food:

• What Should Your Food Cost Percentage Be? Successful restaurants typically generate food costs in the 27 to 32 percent range of Food Sales. However, different types of restaurants typically run higher (steak houses) or lower (pizzerias) percentages. Comparing your cost percentage to restaurants with similar menus and service levels provides a more accurate perspective. It is important to include all ingredients when calculating food cost. You must cost out each recipe for each menu item. Don’t forget to include things such as spices and garnishes in the recipe cost. After you have determined total recipe costs for items and sales prices, you can determine if your food cost is in line with industry averages. Sources for industry averages include The RAS Report, a report on restaurant industry operations published annually by RAS and the National Restaurant Association annual report.
• How Can You Use Your Food Cost Percentage? Monitor your food cost and compare it to previous performance and industry averages. Consistent analysis can prove very helpful in identifying problems and trends. It is important to determine why food costs increase as well as decrease. Ideally you should be able to determine a consistent overall food cost which, when combined with properly pricing your food menu items, positively impacts your profitability.
• Other Costs of Operation – Keep in mind there are other costs of operating a restaurant that a customer does not notice that need to be factored into the mix to determine optimal pricing for menu items. These costs such as labor, rent, and debt service will be discussed in greater scope in the second part of this article.

The following factors affect menu pricing for alcoholic beverages:

• What Should Your Beverage Cost Percentage Be? Successful restaurants generate beverage costs in the mid-20 percent range of Beverage Sales. However, different types of operations typically run higher or lower percentages - fine dining establishments may run up to 40 percent. Sales of bottles of wine, which occur primarily in fine dining restaurants, are usually less profitable than other alcoholic beverages and could be marked up as little as two times cost. This would result in a 50 percent beverage cost. Alternatively, restaurants that serve primarily draft beer may run as low as a 15 percent beverage cost. Comparing your cost percentage to restaurants with similar menus and service levels and industry averages is important. As with Food Costs, sources for industry averages include The RAS Report and the National Restaurant Association annual report.
• How Can You Use Your Beverage Cost Percentage? As with food cost, beverage cost must be constantly monitored. Comparing costs to previous performance, comparable restaurants (if the information is available) and industry averages will help. Always look for problems and identify trends that will enable you to stabilize this cost (meaning consistently achieving the same percentage). Controlling beverage cost to the point where you can predict what it will actually be on a consistent basis will allow you to competitively price items and increase profitability of your total operation.
• Taxes – Be wary of additional taxes in your local jurisdiction which may impact beverage pricing. For example, in Philadelphia, there is a beverage tax of 10 percent either added to or included in the menu price. It is up to you the operator to be aware of this and make a strategic decision on how to present the recovery of this tax in your pricing.

There are many factors that come into play when attempting to operate a restaurant profitably. The most important are the initial factors such as knowing your market and understanding menu pricing and food and beverage costs. These issues need to be addressed in the beginning of your endeavor and constantly adjusted to the prevailing market conditions. The next part of this article will address the other hidden costs of restaurant operations that affect menu pricing and the profitability of a restaurant operation.