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Perfect your menu with the new ABC report

Often, you need to look at a menu item from several different perspectives to determine its value for your restaurant. For example, a popular sushi roll might constitute up to 10% of a sushi bar’s sales but bring in negligible profits due to its high self cost and low markup. Should a menu include dishes that are very popular but have low margins? Should dishes that sell rarely but generate a strong profit be eliminated? You can find the answers to these and other questions by using the well-known ABC analysis method.
This popular technique is used for analysing the sales of B2B goods and services, optimising retail store stock, time management and even HR management. Restaurateurs rely heavily on ABC analysis when optimising their menus. A restaurant's profits depend on a successful combination of dishes with high margins, dishes with high sales volume and dishes that attract customers.
How does ABC analysis work?
ABC analysis is based on the Pareto principle, according to which 20% of goods (efforts) produce 80% of sales (results). For a selected time period, each dish on the menu is placed in one of three groups: A, В or С.
- Group A will include the menu’s most valuable items, which make up 80% of profits/revenue, as well as dishes with the lowest food cost
- Group B will include its moderately valuable items, which account for 15% of profits/revenue, as well as dishes with an average-to-high food cost
- Group C will include the menu’s least valuable items, which make up 5% of profits/revenue, as well as dishes with the highest food cost
Each dish is allocated based on its overall value, which is determined by an aggregate analysis of several factors. Tillypad XL can classify dishes using 3 parameters: revenue by sale, revenue by self cost and markup.
What's new in Tillypad XL 9.4?
Previously, several reports needed to be created in order to run an ABC analysis. Now, however, menu optimisation with Tillypad XL has become significantly faster and easier. A single document contains all the necessary revenue, sales volume, self cost and markup information for each menu item. On the basis of these data and more general sales information, each dish is automatically allocated to one of the groups: А, В or С.
Analyses using different parameters can result in a dish being allocated to different groups. For example, not every high-sales item will belong to group A if it is also considered from the perspective of net profit. And profitable-seeming dishes with low self cost and high margins might not provide the necessary turnover if their sales are sparse. But on the other hand, dishes that are sold regularly generate demand, bring customers into the venue, and prompt the sale of more expensive items, even if they do not create much profit on their own.
ABC analysis is most effective when carried out within a single group of menu items, e.g. as a comparison of sales within the salad, soup or dessert categories. The new Tillypad XL report allows you to quickly select either pre-set menu groups or your own sample of menu items.
Draw smart conclusions, take action
ABC analysis should be carried out quarterly in order for it to be a useful technique. Three months is the optimal analysis interval, as it allows you to assess sales of new and modified dishes and to catch and remove financially unattractive items before it is too late.
 This report, retrieved via Tillypad XL, shows the prospective viability of various menu items. Each dish is evaluated on three dimensions to determine its contribution to total sales:
- sales volume (revenue by dish)
- food cost (self cost as a percentage of sale price)
- markup (margin/profit generated by dishes in the selected period).
 For each menu item in the report, information is displayed in monetary (absolute) and percentage (relative) terms. The higher its percentage, the more important a dish is for profit and turnover.
Obviously, the most important business parameter will always be markup, as it reflects real earnings from sales.
The sales volume parameter shows the demand for or popularity of a dish, while dishes that are purchased frequently serve as anchor items that attract customers to the restaurant. Marketing campaigns usually use these dishes in promotions and special offers.
Food cost is a marker for the expenses that are incurred during the production of each dish. Items with the lowest food cost are allocated to group A, while dishes with the highest food cost will belong to group C.
When you evaluate the role of a dish in your restaurant, you may also choose to focus on the food cost and sales volume parameters in addition to its share in total revenue. Because the Pareto principle operates using two values, you may need to merge groups B and C; this is easy to do, since group C is very small (5%) and contains the menu’s weakest items. It best to deal with these items first and then move them to group B to make the analysis easier.
After the weakest menu items have been eliminated from the menu and groups B and С have been merged, the rest of the dishes can be allocated to one of four groups:
1.Group AB (sales volume above average, margins below average)

These are a restaurant’s most popular items; they attract customers to the venue but don't generate a lot of profit. To increase your restaurant's profitability, you need to think about how to increase the margins on these items-- for example, by finding better deals from suppliers or gently raising prices.
2. Group BB (sales volume below average, margin below average)

These dishes are not especially advantageous, as they neither create demand nor generate profits. Within this group, you should pay attention to items' food cost groups. If a dish within group BB is located in B or C on the food cost parameter, you should think about removing it from the menu entirely. If you don't think it's time to say goodbye completely (for example, if it's a new item that was introduced to the menu less than a quarter ago), you need to take steps to increase its margin or its demand; this might include using cheaper ingredients or strengthening sales with promotions.
3.Group BA (sales volume below average, margin above average)

This group contains dishes that decrease the restaurant's total revenue. We recommend paying extra attention to this group. You can improve these items by working on their recipes (more cost-effective ingredients can be substituted in or portion size can be reduced).
4.Group AA (sales volume above average, margin above average)
    These are your best dishes and drinks; they bring in strong profits, and you should strive to increase sales of these all-stars. If you can find a way to sell them twice as often, the profitability of your restaurant will soar. To make this goal a reality, try including these items into special offers or placing them in package deals. Or, if you would prefer not to discount these dishes, you can promote them using indoor ads (on table tents, menu inserts, or placemat menus) or through personal recommendations from waiters.
    After you have evaluated each dish and determined your menu’s key players and poor performers, the next step is to analyse customer preferences for different combinations of your best items. These preferences are tracked in another special Tillypad XL report.
    'Menu item combinations in orders' report
    This report is a great tool for increasing the sales of unpopular, yet promising dishes with large margins.
    It presents a list of the items that are often purchased together with a particular dish. When you have precise data about your customers' preferences, you can better plan marketing campaigns and create lunch specials or sets that will include dishes that are otherwise rarely sold. Alternatively, these dishes can be advertised together with top sales items or recommended by waiters when customers order one of their most ‘compatible’ items.
    Suppose the ABC analysis has shown that 'ratatouille' belongs to the AA group. When you look at the 'Menu item combinations' report for this dish, you will see that during past month, ratatouille has been sold 45 times with the chicken breast, 39 times with the chicken kebab and 27 times with the pork steak. Now that you have information about these popular combinations, you can run a more targeted ABC report to evaluate the profitability of their component dishes. The data from the report will help you develop effective special offers; guests will love these new programmes, since they have been created based on their actual preferences.
    Analyse your sales with the ABC report, optimise your menu, and enjoy watching your profits grow. Sit back as your menu impresses guests and you begin earning more without having to raise prices. Your stock will practically optimise itself as you avoid purchasing stock items that lie unused on the shelves.