Wink Research

I feel like one of my favorite restaurants could be doing better financially. I think it’s a great application for menu analytics.

Three direct competitors have opened over the past two years. There are of course other indirect competitors that have roared into the area: a Tim Hortons on the corner of Spadina and Adelaide and the ‘take lunch to work’ alternative. The biggest competitor, as I see it, is the “take lunch to work” alternative, which has really reared its head in the area. And understandibly too.

I estimate that two years ago there were around 10,000 daily workers in the area. The area is filled with advertising agency folks, a few fashion houses and design agencies, a couple of software firms, and quite a few architecture firms. This service and knowledge industry wasn’t hit as hard by the high Canadian dollar as the manufacturing industry was, but $150 oil had an impact. Then the bubble really did burst and the area has undergone a lot of contraction. Entire floors of buildings that once housed architects are empty. I estimate that even though the Canadian economy has really undergone at 10% fall in GDP taken altogether, the impact on the advanced service sector has been cuts in employment as high as 30%. One architecture firm I know collapsed from a headcount of 40 down to 5 over the course of 2 months.

The area does have some population density to it. It’s generally an area that attracts many younger tourists from abroad, but it suffers from a relative lack of cheap public parking. Tourist numbers seem to be down. Lunch is a major money maker for the restaurant and a market that it can’t afford to ignore.

The menu there hasn’t changed in two years, except for a few stickers written over a few of the items. Stickers are absolutely horrible practice because it alerts the reader that a price has really changed and gone up. The menu also suffers from too much selection, and I know the 80/20 rule is strongly in effect (80% of the people order from the same 20% area of the menu) just from seeing what people order. And I’m there very often. In fact, my behavior isn’t all that uncommon either – a patron will commonly select one restaurant to patronize more than 50% of the time.

For them, I would:

• Enter their menu, and their competitors menus, entered into a database.

• Enter volume of each item sold and the food costs for each item for their restaurant.

• Identify which menu items are sleepers, primes, standards and problems based on the statistics.

• Recommend which items should be deleted, at least from the lunch menu, to ensure efficient food service.

• Run the competitive analysis, and based on the facts, the owner could decide what sort of a price point would be appropriate: while not competing on price alone.

• Look for keywords and ranks that should be used to draw attention to the items with the highest dollar margin.

• Look for and suggest keywords that communicate value and comfort.

There are opportunities for that restaurant to get an edge on the competition. And it’s a case that I’ll get to make more directly – soon.

The cost of food, as a variable cost percentage, is frequently a key input into menu mix modelling.

Many customers do a mental accounting of what is on the plate versus what they think it should cost at home. And, in general, much of ‘menu engineering’ and pricing models are based off food cost percentage.

What of the cost of the experience as an input?

If the cost of food was all that really mattered, we’d all be eating the best lobster off of paper plates, sitting on fold up chairs in some damp basement, by a the meanest person in the world, but at least it would be at cost + 20%.

The customer experience in a restaurant should be an important factor in the menu pricing. The list of factors is incredibly long, but includes factors like noise, table density, linen, cleanliness, comfort, quality of the china and cutlery, decor and really importantly: the quality of the service.

How these elements in the front of the house come together is as important as how all the input costs at back of the house come together.

Consider all the capital that goes into the front of the house experience: tables, chairs, lighting, and carpets all have opportunity cost and depreciation. There is the variable cost associated with maintaining a larger front of house staff to assure solid minutes per cover rates that allow staff the chance to provide good, and preferably, exceptional service along with the managerial time and budget to inspire, supervise, and incentivize staff to keep it up and keep it consistent.

Eating in a restaurant is an experiential good. Prices should, in some way, factor in the cost of the experience – and attempt to factor what people are willing to pay for such an experience. No restaurant, with the exception of a cafeteria, can really compete on food cost alone.

I talked extensively about labor cost versus rent cost over the weekend. My friend contended that restaurant rent had a much greater impact on menu prices than labor. He was half right.

Labor cost in Canadian restaurants account for anywhere between 20% and 40% of gross revenue: higher than food costs. Rent costs, in contrast, make up between 5% and 15%.

Labor comes out on top.

But labor costs are highly tied to another type of rent: real estate and rental prices.

Much of the labor input in a restaurant cannot be outsourced overseas to lower priced labor markets. I say “much” because many financial functions and reservations can be sent overseas.  However, most of the food must be prepared onsite, or within a fairly tight geographical area, and the remainder of the in-restaurant experience must take place within the restaurant.

A few urban areas in North America cannot sprawl very efficiently. Vancouver and San Francisco are good examples of cities whose growth are restricted by natural barriers. Less land where people want to live means higher real estate costs. The relative price levels for local labor within a city are tied to the relative price levels of real estate. Somebody has to pay the rent. And that somebody is the restaurant owner who passes the costs onto the consumer. Similar impacts can be observed in the prices for services like salons and spas.

In cities that can sprawl effeciently, site rent varies on commute times (traffic), public transit efficiency, fuel prices and local employment levels. If traffic is bad, people will spend more to live closer to work: the additional time recovered from traffic has a cost. Density also carries unique benefits to it. (New York springs to mind).

If real estate prices are high, restaurant rents will be higher. Rent cost does impact the prices on the menu, to be sure, but the volume of people in the catchment area of a restaurant is also that much higher. What really drives up menu price levels up in a city are the labor input costs. All the labor has to live within a given range of the restaurant, and that’s typically reflective of the price levels in that given city. Where labor costs make up anywhere between 20% and 40%: it’s as important as food cost.

Labor costs, rent costs, and menu prices are linked.

There’s a lot of talk about Twitter.

Twitter enables a single person to maintain a microblog: to post a message 140 characters or less. You can subscribe to other people’s microblogs, and they can subscribe to yours. In fact, through services like Monitter, it’s possible to keep track of a large number of topics. Many people can see what others say based on specific keywords.

A survey by Sysomos is fairly enlightening as to who actually uses the service: 50% of the users are between 20 and 29 years of age. A survey from the CBC reveals that 74% of Canadians are unaware of Twitter. It’s a young technology to be sure.

Should restaurants care about such an early, young platform?

I’d argue: “yes”.

Take, for instance, Jeffrey Merrihue, who tweeted about how he got food poisoning at a New York Restaurant. He even took a twitpic (a picture service that works well with twitter) of the offending shrimp. Twitpic works incredibly well with the iPhone. Basically, somebody can take a picture and write a review while in that very restaurant. And there’s real reach here. At the time of writing Jeffrey has 135 followers.

The old adage “one customer will tell 20 people about a bad experience” has a ring of truth to it – right? Well, because of Twitter, which increases the convinience of blogging, this one customer just told 135 people. Granted, not all 135 people will actually see that message, but enough people will.

While this amplication of word of mouth has a dark side, it also has a very good side for restaurants. The spread of positive word of mouth, in particular about dishes.

Restaurants that are in young, hip areas might be interested in encouraging customers to take twitpics of their food to share with their friends. Good restaurants might even want to suggest, on the menu, that they use a ‘hashtag’ when doing so – such as #reddevil . A wise restaurant might even incentivize people to do so, an extra shot of liquor in exchange for a tweeted reviews of the restaurant, for instance.

The use of twitter by young tourists to find out where the locals go is a rising trend as well.

New technologies open doors for restaurants, especially with marketing budgets being under as much pressure as they are. There’s opportunity there.

A menu item has two variable costs: the direct food cost and the associated direct labor cost. The direct labor cost is the one that is harder to quantify – but it’s probably worth it.

Certain items – like a home made chicken soup – have a longer prep time (potatoes, carrots to be peeled, chicken to be deboned, bones to be bagged and boiled) than say pre-packed french fries. French fries have a longer cooking time comparatively (throw into deep fat fryer, fry, pat dry, season, serve) than chicken soup (insert ladle, ladle into bowl, garnish).

If it takes a prep cook thirty minutes a day to produce a decent amount of potatoes, carrots and chicken just for the soup alone (alright: the soup shouldn’t be the only dish that uses potatoes, carots and chicken. Take an apportioned share. If there is an associated direct food cost with a particular menu item, there is most certainly an associated indirect food cost.) then that’s 180 hours a year that is spent on prepping – just for the soup.

The amount of time that goes into baking, pre-cooking, peeling, washing and trimming – under the Pope Prime Cost model, would be classified as a direct labor cost.

Most restaurants are very good at calculating food costs – from the delivery door to the prep table and the wastage into the bin – and the amount that gets onto the plate. Minus shrinkage. It’s harder to estimate the real labor input costs simply because there’s so much overlap in ingredients and prep.

Ranking menu items on a scale from 1 to 5 in terms of labor intensity, then assigning weight to each menu item: then tracking direct labor cost from a kitchen perspective, might be the easiest way to estimate direct labor cost in a more efficient manner. Labor can then be considered as an input when considering additions and deletions to the menu.

What’s more interesting is the impact of direct labor costs on what the customer is willing to pay.

To many customers: chicken soup is chicken soup. It typically comes from a can and very often it’s chunky. Unless the menu description of the soup plays up the homemade benefits and love: it’s unlikely anybody would be the wiser. We know that customers mentally calculate value based on food costs alone: they’re less good at calculating labor costs. There’s something about the perception of labor on food (quality presentation as an important factor) that influences overall quality/value perception. But there’s so much that happens on the other end that isn’t seen.

It’s something to consider in terms of both architecting the menu, the menu labor mix, and price. Direct labor cost is easy to neglect because it can be very messy to attribute effort to individual items, to quantify, but well worth it.

There’s an excellent article in the Wall Street Journal on how New York restaurants are weathering the downturn.

Demand is off 25% and food input costs are down 10%. “The bottom line is that there are too many restaurant seats relative to the number of people able to dine out.”

Demand in Canada, based on CFRA estimates, is off 9% for fine dining, and it’s looking gloomy for foodservice as a whole for the balance of the year. Not quite as bad as New York, but still bad.

There are a few trends at work here: people tend to source more of their meals from home as the consumer confidence indexes fall. Consumer confidence is in the toilet.

The second trend, which is bad for fine dining, is that people don’t want to be seen flouting their wealth. The rule of the nineties and up until 2008 was: ‘got it flaunt it’. Now it’s ‘got it? hide it’.

That 10% decrease in food costs doesn’t just come off the 25% collapse in demand – it doesn’t cushion all the blow. Food costs tend to run at 25% of gross, so, at most, a 10% decrease in food costs translates into a 2.5% variance off gross revenue. (100 dollars in revenue normally falls to 75 dollars. Food costs on that would have been normally 18.75 dollars assuming wastage didn’t outpace demand [and it probably did for most restaurants], so, the decline in food costs actually translates to a 1.87 dollar saving. It doesn’t adequately shield the restaurant from labour and rent costs.) In sum, a 25% collapse in demand and a 10% fall in food input prices doesn’t make a 15% gap. It’s worse than that.

Danny Meyer is bang on about the solution not being just about discounting menu prices. The food cost side of the equation needs to change too. Several restaurants in Toronto responded to the decreased demand by changing their lunch menus: less labor intensive food (a burger is still a burger, even if it is labelled ‘gourmet’ – and a french fry is still a french fry, even if it is carved out of ’sweet potato’) at lower price points. As a result, people haven’t pulled back from restaurants all the way, and I strongly suspect that headcount cuts have not been a bloodbath.

It’s gloomy outside, but there are solutions other than slashing menu prices – plate costs can move too. The customer experience can shift as well.