Lecture Managerial Accounting for the hospitality industry: Chapter 7 - Dopson, Hayes

Chapter 7 - Food and beverage pricing. In this chapter, you will learn about the important relationship between the costs of the products you will sell and the prices you must charge your guests. If your prices are too low, your profits may be too low also.

Chapter Food and Beverage Pricing © 2009 John Wiley & Sons     Hoboken, NJ  07030 Managerial Accounting for the Hospitality Industry Dopson & Hayes Chapter Outline  Factors Affecting Menu Pricing  Assigning Menu Prices  Menu Price Analysis © 2009 John Wiley & Sons     Hoboken, NJ  07030 Managerial Accounting for the Hospitality Industry Dopson & Hayes Learning Outcomes  Identify the factors that affect a foodservice operation’s menu pricing strategy  Utilize the product cost percentage and contribution margin methods of menu pricing  Utilize matrix analysis and goal value analysis to evaluate menu pricing strategies © 2009 John Wiley & Sons     Hoboken, NJ  07030 Managerial Accounting for the Hospitality Industry Dopson & Hayes Factors Affecting Menu Pricing  Perhaps no area of hospitality management is less well understood than the area of pricing food and beverage products  Some of the most common factors affecting menu prices include one or more of the following  Local Competition The price a competitor charges for his or her product can be useful information in helping you arrive at your own selling price  Service Levels As the personal level of service increases, costs increase and thus prices must also be increased © 2009 John Wiley & Sons     Hoboken, NJ  07030 Managerial Accounting for the Hospitality Industry Dopson & Hayes Factors Affecting Menu Pricing  Guest Type A thorough analysis of who your guests are and what they value most is critical to the success of any restaurant's pricing strategy  Product Quality You should select the quality level that best represents your guests’ anticipated desires as well as your own operational goals, and then price your products accordingly  Portion Size The effect of portion size on menu price is significant It will be your job to establish and maintain strict control over portion size © 2009 John Wiley & Sons     Hoboken, NJ  07030 Managerial Accounting for the Hospitality Industry Dopson & Hayes Factors Affecting Menu Pricing  Ambiance Prices may be somewhat higher if the quality of products and ambiance also support the price structure  Meal Period In some cases, diners expect to pay more for an item served in the evening than for that same item served at a lunch period  Location A location can be a good for business or bad for business If it is good, menu prices may reflect that fact If a location is indeed bad, menu prices may need to be lower  Sales Mix Sales mix has the most influence on a manager’s menu pricing decisions Sales mix refers to the frequency with which specific menu items are selected by guests © 2009 John Wiley & Sons     Hoboken, NJ  07030 Managerial Accounting for the Hospitality Industry Dopson & Hayes Assigning Menu Prices  There should be a clear and direct relationship between a restaurant’s profits and its menu prices  It is important to understand that revenue and price are not synonymous terms  Revenue refers to the amount spent by all guests, while price refers to the amount charged to one guest  Thus, total revenue is generated by the following formula: Price x Number Sold = Total Revenue © 2009 John Wiley & Sons     Hoboken, NJ  07030 Managerial Accounting for the Hospitality Industry Dopson & Hayes Assigning Menu Prices  The economic laws of supply and demand state that, for most products purchased by consumers, as the price of an item increases, the number of those items sold will generally decrease  Conversely, as the price of an item decreases, the number of those items sold will generally increase  For this reason, price increases must be evaluated based on their impact on total revenue and not on price alone © 2009 John Wiley & Sons     Hoboken, NJ  07030 Managerial Accounting for the Hospitality Industry Dopson & Hayes Assigning Menu Prices  Increasing prices without giving added value can result in higher prices but, frequently, lower revenues because of reduced guest counts  Guests demand a good price/value relationship when making a purchase  The price/value relationship reflects guests’ view of how much value they are receiving for the price they are paying © 2009 John Wiley & Sons     Hoboken, NJ  07030 Managerial Accounting for the Hospitality Industry Dopson & Hayes Marketing Approaches to Pricing  The prices of the items sold on a menu can represent a variety of concepts  For example, when Ruth Chris, the famous New Orleans steakhouse restaurant group, sets the price for a steak on its menu, it seeks to tell its customers, “Come here for quality!”  When Wendy’s selects items for its 99 cent menu, it seeks to tell customers “Come here for value!” © 2009 John Wiley & Sons     Hoboken, NJ  07030 10 Managerial Accounting for the Hospitality Industry Dopson & Hayes Goal Value Analysis  Returning to the data in Figure 7.4, we see an overall food cost % of 35%  In addition, 700 guests were served at an entrée check average of $16.55  A variable cost (labor cost) of 30% of selling price is assigned to each menu item  For analysis purposes, most operators find it convenient to assign nonfood variable costs to individual menu items based on the overall restaurant’s nonfood variable costs © 2009 John Wiley & Sons     Hoboken, NJ  07030 43 Managerial Accounting for the Hospitality Industry Dopson & Hayes g o fig u re!                      Using 30% for variable cost % and the average/ weighted average numbers from Figure 7.4 for # sold (100), selling price ($16.55), and food cost % (35%), Isabella calculates the formula to compute the goal value of her total menu as follows: A ×B ×C ×D = Goal Value (1.00 – 0.35) × 100 × $16.55 × [1.00 – (0.30 + 0.35)] = Goal Value or 0.65 × 100 × $16.55 × 0.35 = 376.5 According to this formula, any menu item whose goal value equals or exceeds 376.5 will achieve profitability that equals or exceeds that of Isabella’s overall menu © 2009 John Wiley & Sons     Hoboken, NJ  07030 44 Managerial Accounting for the Hospitality Industry Dopson & Hayes Goal Value Analysis  The algebraic goal value formula can be used to create a specific goal value for the entire menu, and the same formula can also be used to compute the goal value of each individual menu item  Menu items that achieve goal values higher than that of the overall menu goal value will contribute greater than average profit percentages  As the goal value for an item increases, so, too, does its profitability © 2009 John Wiley & Sons     Hoboken, NJ  07030 45 Managerial Accounting for the Hospitality Industry Dopson & Hayes Goal Value Analysis  The overall menu goal value can be used as a “target” in this way, assuming that the average food cost %, average number of items sold per menu item, average selling price (check average), and average variable cost % all meet the overall profitability goals of the restaurant  The computed goal value is neither a percentage nor a dollar figure because it is really a numerical target or score  Refer to Figure 7.8 for the results of the goal value analysis © 2009 John Wiley & Sons     Hoboken, NJ  07030 46 Managerial Accounting for the Hospitality Industry Dopson & Hayes Figure 7.8 Goal Value Analysis Results Rank Item Chicken Breast Coconut Shrimp Scallops & Pasta Beef Medallions Overall menu (Goal Value) Grilled Tuna Strip Steak Lobster Stir-Fry Food Cost % 0.22 0.30 0.24 0.37 0.35 Number Sold 140 121 85 125 100 Selling Price $13.95 16.95 14.95 15.95 $16.55 Variable Cost % 0.30 0.30 0.30 0.30 0.30 Goal Value 731.2 574.3 444.3 414.5 376.5 0.40 0.45 0.51 105 73 51 17.95 17.95 21.95 0.30 0.30 0.30 339.3 180.2 104.2   © 2009 John Wiley & Sons     Hoboken, NJ  07030 47 Managerial Accounting for the Hospitality Industry Dopson & Hayes Goal Value Analysis  Should items that fall substantially below the overall goal value score be replaced?  The answer, most likely, is no if the manager is satisfied with the current target food cost percentage, profit margin, check average, and guest count  Every menu will have items that are more (and less) profitable than others  Many operators develop and promote items called loss leaders © 2009 John Wiley & Sons     Hoboken, NJ  07030 48 Managerial Accounting for the Hospitality Industry Dopson & Hayes Goal Value Analysis  A loss leader is a menu item that is priced very low, sometimes even below total costs, for the purpose of drawing large numbers of guests to the operation, while their fellow diners may order items that are more profitable  The accuracy of goal value analysis is well documented  Used properly, it is a convenient way for management to make decisions regarding required profitability, sales volume, and pricing © 2009 John Wiley & Sons     Hoboken, NJ  07030 49 Managerial Accounting for the Hospitality Industry Dopson & Hayes Goal Value Analysis  Items that not achieve the targeted goal value tend to be deficient in one or more of the key areas of food cost percentage, popularity, selling price, or variable cost percentage  In theory, all menu items have the potential of reaching the goal value  One problem could be that the item’s food cost % is too high  This can be addressed by reducing portion size or changing the item’s recipe since both of these actions have the effect of reducing the food cost % and, thus, increasing the A value © 2009 John Wiley & Sons     Hoboken, NJ  07030 50 Managerial Accounting for the Hospitality Industry Dopson & Hayes Goal Value Analysis  A second approach to improving the goal value score is to work on improving the B value, that is, the number of times the item is sold  This may be done through merchandising or incentives to service staff for upselling this item  Variable C, menu price, can also be adjusted upward; however, adjustments upward in C may well result in declines in the number of items sold (B value)!  Increases in the menu price will also have the effect of decreasing the food cost % and the variable cost % of the menu item (and increasing the contribution margin) © 2009 John Wiley & Sons     Hoboken, NJ  07030 51 Managerial Accounting for the Hospitality Industry Dopson & Hayes Goal Value Analysis  An easy way to determine the effects of changes made to goal values is to use an Excel spreadsheet  Sophisticated users of the Goal Value Analysis system can modify the formula to increase its accuracy and usefulness even more  Anytime you determine a desired goal value and when any three of the four variables contained in the formula are known, you can solve for the fourth unknown variable (see Figure 7.9) © 2009 John Wiley & Sons     Hoboken, NJ  07030 52 Managerial Accounting for the Hospitality Industry Dopson & Hayes Figure 7.9 Solving for Goal Value Unknowns Known Variables A, B, C, D B, C, D, GV A, C, D, GV A, B, D, GV A, B, C, GV Unknown Variable Method to Find Unknown Goal Value (GV) AxBxCxD A GV BxCxD B GV AxCxD C GV AxBxD D GV AxBxC   © 2009 John Wiley & Sons     Hoboken, NJ  07030 53 Managerial Accounting for the Hospitality Industry Dopson & Hayes Goal Value Analysis  Goal value analysis is becoming increasingly linked to break-even analysis because of their mathematical similarities (see Chapter 9)  In addition to the ability to analyze multiple cost variables simultaneously, goal value analysis is valuable because it is not, as is matrix analysis, dependent on past operational performance to establish profitability  It can be used by management to establish future menu targets © 2009 John Wiley & Sons     Hoboken, NJ  07030 54 Managerial Accounting for the Hospitality Industry Dopson & Hayes g o fig u re!                      To illustrate, assume that Isabella wishes to achieve a greater profit margin and a $17.00 entrée average selling price for next year She plans to achieve this through a reduction in her overall food cost to 33% and her other variable costs to 29% Her overall menu goal value formula for next year, assuming no reduction or increase in guest counts, would be as follows: A (1.00 - 0.33) xB x 100 x xC $ 17.00 xD = Goal Value x [1.00 - (0.29 + 0.33)] = Goal Value or 0.67 © 2009 John Wiley & Sons     Hoboken, NJ  07030 x 100 x $17.00 55 x 0.38 = 432.8 Managerial Accounting for the Hospitality Industry Dopson & Hayes Goal Value Analysis  Each item on next year’s menu should be evaluated with the new goal value in mind  Remember, however, that a purely quantitative approach to menu analysis is neither practical nor desirable  Menu analysis and pricing decisions are always a matter of experience, skill, and educated predicting because it is difficult to know in advance how changing any one menu item may affect the sales mix of the remaining items © 2009 John Wiley & Sons     Hoboken, NJ  07030 56 Managerial Accounting for the Hospitality Industry Dopson & Hayes Review of Learning Outcomes  Identify the factors that affect a foodservice operation’s menu pricing strategy  Utilize the product cost percentage and contribution margin methods of menu pricing  Utilize matrix analysis and goal value analysis to evaluate menu pricing strategies © 2009 John Wiley & Sons     Hoboken, NJ  07030 57 Managerial Accounting for the Hospitality Industry Dopson & Hayes ... 615.89 11.86 75 3.90 10 .77 429.80 10.88 570 .69 10 .76 305.15 11.36 73 7.50 10.05 4,002 .77 571 .82 10.83 Total Contribution Food Margin Cost % $72 0.51 45 1,435.06 30 1,130.85 40 1,523.20 22 548 .76 51 965.60...     Hoboken, NJ   070 30 24 Managerial Accounting for the Hospitality Industry Dopson & Hayes Figure 7. 4 Isabella’s Menu Analysis Worksheet Date: 1/1 - 1 /7 Menu Item # Sold Strip Steak 73 Coconut Shrimp...  The price/value relationship reflects guests’ view of how much value they are receiving for the price they are paying © 2009 John Wiley & Sons     Hoboken, NJ   070 30 Managerial Accounting for the Hospitality Industry