We will look at how sales mix delivers incremental revenues and more importantly sustainable profits through the phenomenon of Contribution Margin. We will, along the way, address the pricing concept of average check and other profit related elements.

In Part 1, we learned about the components of a sales mix being menu item mix, meal periods and market segments. We also saw how restaurant seat capacity plays such an important role in not only revenue generation but also profitability.

In Part 2, we looked at the powerful concept of a Buffet spread which is central to optimizing sales mix in a restaurant and which is a popular approach adopted by hotel restaurants. In the process we learned how this approach boosts restaurant profitability.

In thus concluding part, we will look at how sales mix delivers incremental revenues and more importantly sustainable profits through the phenomenon of Contribution Margin. We will, along the way, address the pricing concept of average check and other profit related elements.

CONTRIBUTION MARGIN

Contribution Margin is a powerful principle that will allow you to focus on and optimize both hotel and restaurant profits.

What is Contribution Margin?

Contribution Margin is simply Revenues minus (-) Variable Costs.

Contribution Margin is based on the principle of the extent of contribution a revenue item makes to total profit. It recognizes that to earn revenues, both fixed and variable costs will be incurred. However, a change in revenue or sales quantity will only affect the variable costs. Fixed costs remain unchanged irrespective of sales or revenue quantities.

Let us illustrate this with an example:

Type of Restaurant: 24 Hour All Day Dining / Coffee Shop

Restaurant Seat Capacity: 200

Table Turnover: (February 2018) – 3 times turnover

Turnover: (March 2018) 5 times turnover

Average Check: $25 (February & March 2018)

Service Charge: NIL

Variable Costs Per Cover: $2.50

FNB Revenue: (200 x 3 x 28) x 25 = $420,000

In the above example, the Contribution Margin will be calculated as:

February 2018

(200 x 3 x 28) x $25 = $420,000 FNB Revenue

Variable Costs: (200 x 3 x 28) x $2.5 = $42,000 Variable Costs

Contribution Margin = FNB Revenue – Variable Costs so,

$420,000 – $42,000 = $378,000

FOOD & BEVERAGE COVER

Food and Beverage Cover is one of the two basic ingredients of revenues (the other is Average Check). The Food and Beverage Cover can also be called the quantity element of revenues (the Average Check is called the price element).

Food and Beverage Cover calculation is closely linked to guest patronage, number of guests consuming meal, number of meals being consumed and so forth. In simple terms, it normally represents number of guests who have had a meal during a meal period. So, you could say that number of guests is equal to number of covers. There are some exceptions and some situations to be considered in the calculation.

Normally, it is the practice of every hotel or hotel group/chain to have their own definition of a Food and Beverage Cover although all of them follow the above principle in some way or other with some variation.

Remember the following formula:

Restaurant Revenues = Food & Beverage Covers X Food & Beverage Average Check

AVERAGE CHECK

The Average Check is one of the two basic ingredients of revenues (the other is Covers). The Average Check can also be called the price element of revenues (the Covers are called the quantity element).

This is made clear by the following formula:

Restaurant Revenues = Food & Beverage Covers X Food & Beverage Average Check

What does the Average Check represent?

The Average Check represents the average of all the menu items of food and beverage that were sold during the period for which it is calculated. In other words, all the a la carte and buffet menu items over all meal periods and market segments are totaled in quantity (Covers) and then multipled by the price (Average Check) to arrive at Food and Beverage Revenues.

The Average Check is influenced by the Sales Mix which has gone into the Food and Beverage Revenues.

MEAL PERIOD ANALYSIS

Why is it critical to know and analyze these meal periods?

There are two paths to restaurant revenue growth. The first one was Table Turnover which we saw in Part 1 (insert link) of this 3 part series on Restaurant Sales Mix. The second path is meal period analysis. This is actually very closely related to table turnover ratio seen earlier. In fact, we can go as far to say that the optimum path to restaurant revenue growth is a combination of both these factors.

But what then is meal period analysis?

It is a study of data and information on what contribution each meal period in a hotel or resort’s restaurant outlets is making. This of course depends first on the type of outlet.

Meal period analysis requires accurate identification of specific meal periods that are applicable to each of a hotel or resort’s restaurant outlets. Generically, the standard meal periods for a city hotel are breakfast, lunch, snack, dinner, supper although this is more applicable to a Coffee Shop.

Having understood factors which affect table turnover and meal period analysis, how then are these considered powerful operationally as well as from a point of view of financial analysis tools. How do these actually contribute to restaurant revenue growth.

As we saw earlier in the module, revenue contribution in restaurants is made by two key elements – food and beverage covers (number of guests) and the average food & beverage check. These are also known as the quantity (or volume) and price contributions. The formula, if you remember is:

Restaurant Revenue = Food & Beverage Covers X Average Food & Beverage Check

When the above formula is applied for each meal period, these become the building blocks of a revenue estimate. However, this revenue estimate is on the assumption that each guest or cover is based on a turnover of one. If we are to assume different table turnover ratios for different restaurant types and meal periods, then we need to multiply the earlier revenue estimate with this ratio to arrive at the final revenue estimate.

For example, taking the earlier formula further:

Restaurant Revenue = Food & Beverage Covers X Table Turnover Ratio X Average Food & Beverage Check

An alternate way of calculating restaurant revenue is:

Restaurant Revenue = Restaurant Seating Capacity X Table Turnover Ratio X Average Food & Beverage Check.

One very important aspect to remember in using Table Turnover ratio is that the ratio must be accurately applied. When applied to full seating capacity, the factor will be less than when computed based on covers.

So, the approach is to estimate revenues assuming table turnover ratio is 1 and then multiplying actual cover count (or seating capacity) with the table turnover factor (number of times a table is turned over) to arrive at the final estimate.

This is why table turnover and meal periods in tandem are such powerful elements of budgeting or forecasting restaurant revenues.

New Hotel Revenue Projection

Another area of financial analysis where table turnover and meal period are used together is for new hotel revenue projections. This is done by actually applying table turnover ratio to the full capacity of the restaurant.

Moreover, table turnover can be generically used to determine various other factors like manning requirements, supplies etc.,

This is the concluding Part 3 Restaurant Sales Mix – Contribution Margin of the 3 part series.

Click if you did not read Part 1 or here for Part 2.

About S Lakshmi Narasimhan
I am the Founder of Ignite Insight LLC (www.ignite-insight.biz) a New York City based consultancy, which specializes in Group Executive Training, Coaching and Consulting. I coach, train hotel and restaurant non-financial managers how to optimize profits in the operation. I run an online financial academy called Profits MasterClass. Visit http://www.profitsmasterclass.com for details on the courses that are offered. These courses are focused on boosting hotel and restaurant profitability. TRY FREE before you decide to purchase any of the full paid courses. I teach Hospitality Finance, Hotel Operations Analysis Graduate classes, Business Development, Financial Management, Rooms Division Management Under Graduate classes during the Spring and Fall semesters as an Adjunct Faculty member at the New York University, Jonathan M Tisch Center for Hospitality, and Tourism in the School for Professional Studies.