Hospitality Review
Volume 13
Article 5
Issue 1 Hospitality Review Volume 13/Issue 1
January 1995
Menu Engineering: A Model Including Labor
Stephen M. LeBruto
University of Central Florida, hospitality@[Link]
William J. Quain
University of Central Florida, hospitality@[Link]
Robert A. Ashley
University of Central Florida, hospitality@[Link]
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Recommended Citation
LeBruto, Stephen M.; Quain, William J.; and Ashley, Robert A. (1995) "Menu Engineering: A Model Including Labor," Hospitality
Review: Vol. 13 : Iss. 1 , Article 5.
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Menu Engineering: A Model Including Labor
Abstract
Menu engineering is a methodology to classify menu items by their contribution margin and popularity. The
process discounts the importance of food cost percentage, recognizing that operators deposit cash, not
percentages. The authors raise the issue that strict application of the principles of menu engineering may result
in an erroneous evaluation of a menu item, and also may be of little use without considering the variable
portion of labor. They describe an enhancement to the process by considering labor.
Keywords
Food Science, classify, popularity, finance, labor relations
This article is available in Hospitality Review: [Link]
Menu Engineering:
A Model Including Labor
by
Stephen M. LeBruto
and
William J. Quain
and
Albert A. Ashley
Menu engineering is a methodology to classify menu items by their contribution
margin and popularity. The process discounts the importance of food cost per-
centage, recognizing that operators deposit cash, not percentages. The authors
raise the issue that strict application of the principles of menu engineering may
result in an erroneous evaluation of a menu item, and also may be of little use
without considering the variable portion of labor. They describe an enhancement
to the process by considering labor.
The concept of menu engineering is attributed to work by Michael
L. Kasavana and Donald I. Smith.' It is a methodology that analyzes
the popularity and contribution margin (selling price minus food cost,
or gross profit) of individual menu items and assigns a label to each of
the individual menu offerings for the purpose of planning future mar-
keting and management activities. Kasavana and Smith proposed
classifying each menu item into one of four categories as determined
by a two by two matrix of high and low popularity and above or below
average contribution margin.2
If an item's selection rate exceeded 70 percent of the average pop
ularity (total number of menu selections within a class divided by the
total number of menu items within the class), then it would be classi-
fied as "popular." If the demand fell short of this 70 percent level, then
the menu item was deemed "not popular." For example, in analyzing
a menu with eight items in a particular class, an individual menu
item is labeled as popular if its sales mix is 8.75 percent or greater of
the total sales mix, determined as follows:
(100%/ 8) x 70% = 8.75%
Sales mix is determined by dividing the number of sales of a particu-
lar menu item by the total number of sales within the menu class.
Spring 1995 41
FIU Hospitality Review, Volume 13, Number 1, 1995
Contents © 1995 by FIU Hospitality Review. The reproduction of any artwork,
editorial or other material is expressly prohibited without written
permission from the publisher.
Exhibit 1 depicts the classification of a sample menu into high and
low popularity with the intention to identify to the operator those
menu items that are considered popular by customers. It would be
improper to delete or severely modify a menu item based solely on its
individual popularity. A reaction based on popularity information
only, in this example, the bologna sandwich, chicken a la king, fish
and chips, and spaghetti would receive management's attention.
Fortunately, menu engineering concepts developed by Kasavana
and Smith require that a second dimension be folded into the decision
making process, contribution margin.3 The contribution margin com-
putation is performed by first determining the weighted average con-
tribution margin of all menu items within the class of menu items
being analyzed. This is accomplished by computing the individual
contribution margin (selling price minus food cost, or gross profit)
from each of the individual menu items, and then multiplying the
individual item's contribution margin by the number of sales for each
particular item in the menu class. This total contribution margin is
then divided by the total number of items that were sold within this
menu classification, resulting in a weighted average contribution
margin. Exhibit 2 depicts the weighted average contribution margin
computation.
Those menu items that experienced an individual contribution
margin greater than the menu's weighted average contribution mar-
gin received a classification of high contribution margin. Those that
did not achieve the menu's weighted average contribution margin
were labeled low in contribution margin, as shown in Exhibit 3.
Every menu item is fit into a quadrant on the two by two matrix
of contribution margin (high or low) and popularity (high or low).
Management action using Kasavana and Smith's model is based on
each item's defined quad~-ant.~
Management Action May Be Required
Kasavana and Smith assigned a label and offered suggestions for
management action for each of the four quadrants5. For example,
items that scored high in contribution margin and high in popularity
were labeled "stars." These should be tested for price elasticity by
raising the selling price. "Plowhorse" was the identification assigned
to items nested in the high popularity and low contribution margin
quadrant. An appropriate management action for plowhorses could be
to raise the price to a point where the item's contribution margin
exceeds the menu's weighted average contribution margin. Providing
the demand did not drop below the threshold for classificatior! as pop
ular, the menu item would be shifted to a position where it would be
high in popularity and high in contribution margin. For those menu
items that are low in popularity and high in contribution margin,
Kasavana and Smith assigned them the label of "puzzle." Puzzles
could be subjected to marketing efforts such as lowering the price or
featuring the item on the menu. The fourth label, "dogs," represented
42 FIU Hospitality Review
FIU Hospitality Review, Volume 13, Number 1, 1995
Contents © 1995 by FIU Hospitality Review. The reproduction of any artwork,
editorial or other material is expressly prohibited without written
permission from the publisher.
Exhibit 1
School Cafeteria Menu
Analysis of ltems Sold
Menu Popularity Worksheet
Menu ltem Menu Mix
Name % Popularity
Turkey Sandwich 10.66 High
Bologna Sandwich 8.20 Low
Spaghetti 5.92 Low
Pizza 24.59 High
Chicken a la King 3.28 Low
Grilled Cheese 14.75 High
Hamburger 26.23 High
Fish and Chips 7.38 Low
Totals 100.00
Note: (100% Iitems) x (70%) = Average Popularity
(100% 18) x 70% = 8.75% (Average Popularity)
Exhibit 2
School Cafeteria Menu
Analysis of ltems Sold
Contribution Margin Worksheet
Menu ltem No. Sold ltem ltem ltem Total
Name (NM) Sales Variable Contrib. Contrib.
Price Cost Margin Margin
Turkey Sandwich 2.20 1.10 1.10 143.00
Bologna Sandwich 1.60 .76 .84 84.00
Spaghetti 1.20 .33 .87 52.20
Pizza 1.25 .19 1.06 318.00
Chicken a la King 1.75 1.25 .50 20.00
Grilled Cheese 1.10 .66 .44 79.20
Hamburger 1.75 .90 .85 272.00
Fish and Chips 2.10 1.20 .90 81.00
Totals 1,049.40
Note: Weighted Average Contribution Margin; $1,049.40 I1,220 = $0.86
Spring 1995 43
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FIU Hospitality Review, Volume 13, Number 1, 1995
Contents © 1995 by FIU Hospitality Review. The reproduction of any artwork,
editorial or other material is expressly prohibited without written
permission from the publisher.
Exhibit 3
School Cafeteria Menu
Analysis of Items Sold
Contribution Margin Worksheet
Menu Item No. Sold ltem Item Item Contrib.
Name (NM) Sales Variable Contrib. Margin
Price Cost Margin Class
Turkey Sandwich 2.20 1.10 1.10 High
Bologna Sandwich 1.60 .76 .84 Low
Spaghetti 1.20 .33 .87 High
Pizza 1.25 .19 1.06 High
Chicken a la King 1.75 1.25 .50 Low
Grilled Cheese 1.10 .66 .44 Low
Hamburger 1.75 .90 .85 Low
Fish and Chips 2.10 1.20 .90 High
Totals
Note: Weighted Average Contribution Margin = $0.86
Exhibit 4
School Cafeteria Menu
Profit Factor Computation
(a) (b) (c) (dl (el (f) (g)
Menu ltem No. Menu ltem ltem ltem Profit
Name Sold Mix Food Sale CM Factor
(NM) % Cost Price (e-d) (fl.86)
Turkey Sandwich 130 10.66% 1.10 2.20 1.10 127.9%
Bologna Sandwich 100 8.20% .76 1.60 .84 97.7%
Spaghetti 60 4.92% .33 1.20 .87 101.2%
Pizza 300 24.59% .19 1.25 1.06 123.3%
Chicken a la King 40 3.28% 1.25 1.75 .50 58.1%
Grilled Cheese 180 14.75% .66 1.10 .44 51.2%
Hamburger 320 26.23% .90 1.75 .85 98.8%
Fish and Chips 90 7.38% 1.20 2.10 .90 104.7%
Note: Weighted Average Contribution Margin = $0.86
44 FIU Hospitality Review
FIU Hospitality Review, Volume 13, Number 1, 1995
Contents © 1995 by FIU Hospitality Review. The reproduction of any artwork,
editorial or other material is expressly prohibited without written
permission from the publisher.
those items that were low in popularity and low in contribution mar-
gin. Kasavana and Smith suggested that they be alternated on the
menu with similar items, or eliminated.
Early avoidance of menu engineering can be attributed to the
necessity of management being required to know each menu item's
selling price, food cost, and quantity sold. This data collection process
was tedious until technological contributions to the industry allowed
for the adoption of mechanized point of sale devices as the standard.
Now, virtually every operation has this information, and more, at its
fingertips. In fact, Dougan contributed a spreadsheet example to help
facilitate operators in the use of menu engineering.6There are three
reasons why menu engineering has not become a standard manage-
ment tool: managers are often compensated based on food cost per-
centage rather than contribution margin; the model fails to discrimi-
nate between items in the same quadrant; and the model does not
consider other variable costs and labor costs.
Disciples of menu engineering are often forced to retreat from
their position of support of this system because they are working
within a personal measurement system and performance reward sys-
tem that is based solely on attaining a specific food cost percentage,
which ignores contribution margin. Therefore, it is not hard to under-
stand why menu engineering would not be embraced by these individ-
uals. In order to succeed in applying this concept, commitment to the
process is required by upper management. Without this commitment,
measured in terms of managerial salary and bonus, managers cannot
be expected to promote the sale of a menu item for $10 with a food
cost of $5 (50 percent food cost percentage and a $5 contribution mar-
gin) over a menu item selling for $6 with a food cost of $2 (33 percent
food cost percentage and a $4 contribution margin).
An expansion of the menu engineering worksheet developed by
Pavesic computed the individual menu item's contribution margin as
a percentage of the weighted average contribution margin.7This com-
putation is also called the "profit factor."
Profit factor looks at the profitability of a particular menu item
relative to the weighted average contribution margin of the sample
menu items. Therefore, an item with a profit factor of 100 percent or
higher would represent the menu items that the operator would prob
ably want to sell, and, correspondingly, these menu items carry a con-
tribution margin label of '%igh." The benefit of computing the profit
factor is that it allows for another dimension of analysis, rather than
relying on only "high" or 'low" profitability labels.
Profit Factors Are Important
Analysis of menu engineering data can be incorrect when the
profit factor is ignored, and management relies solely on the position
that the menu item occupies in the two by two matrix to develop a
plan to modify the menu. In the example of a school cafeteria, the
grilled cheese sandwich and the hamburger were both considered
Spring 1995 45
FIU Hospitality Review, Volume 13, Number 1, 1995
Contents © 1995 by FIU Hospitality Review. The reproduction of any artwork,
editorial or other material is expressly prohibited without written
permission from the publisher.
plowhorses; these items were popular, but were not making much
money on their individual sales. If the profit factor were ignored, then
the inclination might be to raise the price because they are high in
popularity in an attempt to get them to "star" status. Even though
this might be the correct action for the hamburger, since it is almost
at 100 percent profit factor and therefore requires only a small price
increase to become a "star," such an action on the grilled cheese sand-
wich could force the menu item to lose its high status of popularity
and become a puzzle, since the price would have to be raised consider-
ably to achieve status as a high profit item. A second problem with
the grilled cheese sandwich is that the price might not be able to be
increased enough to reach the level of a puzzle (high contribution
margin). This action to increase the profit factor could result in the
creation of a dog, or the maintenance of its position as a plowhorse
with different coordinants in the quadrant, because the popularity
may significantly suffer.
All costs can be identified as either fixed, variable or semi-variable.
A fixed cost is a one that remains stable over a relevant range of activi-
ty. A relevant range of activity is that range of activity within which
cost data are valid. A variable cost is a one that is constant per unit,
but changes in total in proportion to activity. A semi-variable cost is a
cost that has both a fixed component and a variable component.
In the menu engineering discussion so far, contribution margin
has been identified as selling price minus food cost. Analysis has
incorrectly assumed that the variable costs of the particular menu
item equal only the food cost of the item, and therefore all other costs
associated with selling the item are fixed. Although food cost certainly
is a variable cost, this computation does not account for all of the vari-
able costs that are incurred in the sale of each menu item. Any other
true variable costs of a particular menu item should be included in
the contribution margin computation, such as paper goods. An accu-
rate computation of contribution margin is the selling price minus all
variable costs.
The problem with including all variable costs in the contribution
margin computation is the effort required to separate semi-fixed (or
mixed or semi-variable) costs into their fixed and variable components.
There are several ways to separate semi-fixed (or mixed or semi-
variable) costs into their fixed and variable components, which are
the higMow or minimurn~maximummethod; construction of a scat-
tergram graphical presentation; or the use of regression analysis.
Regression analysis (method of least squares) is, however, the most
accurate procedure, and the recommended process.
Labor Costs Must Be Calculated
The largest expense in most restaurant operations is labor cost,
which is a semi-fixed cost. Part of the labor cost is fixed, representing
the necessary staff expenses that will be incurred to serve a mini-
mum number of guests, and depending on volume and standards
46 FIU Hospitality Review
FIU Hospitality Review, Volume 13, Number 1, 1995
Contents © 1995 by FIU Hospitality Review. The reproduction of any artwork,
editorial or other material is expressly prohibited without written
permission from the publisher.
established by management, the total labor effort will increase. If
regression analysis were to be done on labor costs for each menu
item, the variable labor component could be added to the food cost
and other variable costs for the item, affecting the contribution mar-
gin for each item, and the weighted contribution margin for the
menu grouping. If a two by two matrix were used, this new informa-
tion could affect whether a product has a high or low contribution
margin, which would affect its designation into a specific category
and the profit factor computation.
Looft recognized the need to consider labor in menu engineering
and suggested that an exercise in determining the actual labor effort
that pertains to a specific menu item would be a difficult pro~ess.~
The
authors interviewed and collected data from three family restaurants
of a national chain of unequal sales volumes. The same menu was
used in each of the three restaurants. No relationships between spe-
cific menu items and labor could be ascertained.
An alternative to separating each menu item's labor cost into its
fixed and variable components is to rank the labor effort required for
each menu item relative to the other menu items in the grouping. A
label of "high" labor cost would be assigned to the menu items in the
top one half of the rankings and a "low" labor cost label would be
assigned to each menu item in the lower one half of the group that is
being analyzed.
It is suggested that the rankings and labeling of a high and a low
labor classification be a judgment call by the professional food manag-
er or through employing the technique of a jury of executive opinion,
which is a method commonly utilized in qualitative forecasting mod-
[Link] there will be variability of demand for any particular menu
item on any particular day, and labor will be planned without knowl-
edge of this variability of demand, any quantitative method to deter-
mine the variable labor component of a menu item is suspect.
Menu Engineering Revised as a Three by Two Matrix
Labor, designated as either high or low in the menu engineering
worksheet, can be incorporated into the model. This is an alternative
to adjusting the variable cost of the menu item for labor. The result is
a three by two matrix. This new matrix will result in eight possibili-
ties, along with appropriate classifications adapted from Kasavana
and Smith's original two by two matrix:
High contribution margin, low labor, and high popularity (ShiningStar)
High contribution margin, high labor, and high popularity (Star)
High contribution margin, low labor, and low popularity (Puzzle)
High contribution margin, high labor, and low popularity (Brain Teaser)
Low contribution margin, low labor, and high popularity (Trador)
Low contribution margin, high labor, and high popularity (Plowhorse)
Low contribution margin, low labor, and low popularity (Dog)
Low contribution margin, high labor, and low popularity (Ultimate Dog)
Spring 1995 47
FIU Hospitality Review, Volume 13, Number 1, 1995
Contents © 1995 by FIU Hospitality Review. The reproduction of any artwork,
editorial or other material is expressly prohibited without written
permission from the publisher.
Exhibit 5
School Cafeteria Menu
Analysis of Items Sold
Menu Engineering Worksheet
Menu Item Contrib.
Name Popular Margin Labor Category
Turkey Sandwich High High Low Shining Star
Pizza High High High Star
Fish and Chips Low High Low Puzzle
Spaghetti Low High High Brain Teaser
Hamburger High Low Low Tracctor
Grilled Cheese High Low High Plowhorse
Bologna Sandwich Low Low Low Dog
Chicken a la King Low Low Low Ultimate Dog
Working with the original menu engineering example, and classi-
fylng each menu item as either high or low in labor cost, this expand-
ed worksheet can be summarized as in Exhibit 5.
Menu engineering has been available as a management tool for
some period of time. It has not been used to its full capabilities. Critics
have correctly pointed out that contribution margin did not include all
variable costs. Additionally, managers are not usually paid on the basis
of contribution margin. It is a more common industry practice to pay
based on the attainment of goals such as a food cost percentage or sales
volume. Even users of menu engineering could come to incorrect conclu-
sions by ignoring positions within coordinants and profit factor.
A significant flaw with menu engineering is the failure of early
models to factor in all variable costs in the computation of contribu-
tion margin. For those variable costs other than food, a correction to
the item's contribution margin should be done immediately to include
other "true" variable costs. However, it is not so easy to identify the
variable component of semi-fixed costs, the most significant being
labor. The variable cost component of labor cannot be easily comput-
ed, and if it were to be quantified, it is questionable as to the validity
of the result.
The solution is to assign a label to labor, either high or low, and
expand the menu engineering worksheet to eight possibilities.
Management action then can be developed for each of these descrip-
tors. By "ranking" labor, the management process is improved, much
the same as through the use of profit factor.
Menu engineering used as a tool can force management action in
marketing and merchandising aspects of the business to create a new
48 FIU Hospitality Review
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FIU Hospitality Review, Volume 13, Number 1, 1995
Contents © 1995 by FIU Hospitality Review. The reproduction of any artwork,
editorial or other material is expressly prohibited without written
permission from the publisher.
sales mix resulting in a higher level of contribution margin. This new
sales mix will provide an opportunity to reach the enterprise's finan-
cial objectives by serving fewer customers, since it will be driven by
contribution margin.
References
'M. Kasavana and D. Smith, Menu Engineering - A Practical Guide to Menu
Analysis, rev. ed. (Okemos, Mich.: Hospitality Publications, Inc., 1990).
%id.
31bid.
[Link], Hospitality Industry Managerial Accounting (East Lansing:
Educational Institute of the American Hotel & Motel Association, 1990),297-302.
5Kasavanaand Smith.
'jJ. Dougan, "Menu engineering with electronic spreadsheets," The Bottomline
(December 1993lJanuary 1994):15-17.
?[Link], "Prime numbers: Finding your menu's strengths," The Cornell Hotel
and Restaurant Administration Quarterly (1985): 71-77.
[Link], "Enhancing current menu sales mix analyses for the 1990's and
beyond," Proceedings from the Second Annual AHFME Research Symposium, New
York, New York, 1989.
'R. Schmidgall, Hospitality Industry Managerial Accounting (East Lansing:
Educational Institute of the American Hotel & Motel Association, 19901,322-332.
Stephen M. LeBruto is an assistant professor, William J. Quain an associ-
ate professor and Robert A. Ashley a program director a n d instructor in t h e
Department of Hospitality Management, College of Business Administration
at the University of Central Florida.
Spring 1995 49
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FIU Hospitality Review, Volume 13, Number 1, 1995
Contents © 1995 by FIU Hospitality Review. The reproduction of any artwork,
editorial or other material is expressly prohibited without written
permission from the publisher.