Question

From page. 285 "Apply What You Have Learned”

Jessica Castillo had always been interested in food and cooking. After culinary school and several extensive apprentice stints with some of the best chefs in New York and a spectacular year in London, Jessica felt that she was ready to open her own restaurant.

Creativity and customer focus were Jessica's strength, as was a firm conviction that she didn't want her dining room filled only with “rich people.” She wanted to make the types of foods she served available to as wide an audience as possible. Jessica wanted to serve a diverse group of customers, but she also knew that she had to make a fair profit if she wanted to stay in business.

Menu pricing had always puzzled Jessica. In her few years in the hospitality industry, Jessica had already seen several cases of restaurateurs who planned for a 25% or 30% food cost, priced their menu accordingly, and yet failed to generate the profits they needed to stay open. She was keenly aware that many fine dining establishments such as the one she wished to open frequently encountered that very fate.

1 Assume that Jessica asked you for your input on her menu‐pricing quandary. Draft a short paragraph describing your philosophy of the relationship between “menu price” and “profits.”

2 Consider the type of operation Jessica plans to open. Identify five factors that you believe will have a significant impact on the prices Jessica should charge for her menu items.

3 Consider the industry segment in which Jessica's restaurant will operate. What role do you believe her competitor's pricing should play in influencing her own menu prices? Do you think the same situation would exist in other segments of the restaurant industry? Explain your answer.

Jessica Castillo had always been interested in food and cooking. After culinary school and several extensive apprentice stints with some of the best chefs in New York and a spectacular year in London, Jessica felt that she ready to open her new restaurant.

Creativity and customer focus were Jessica's strength, as was a firm conviction that she didn't want her dining room filled only with "rich people." She wanted to make the types of foods she served available to as wide an audience as possible. Jessica wanted to serve a diverse group of customers, but she also knew that she had to make a fair profit if she wanted to stay in business.

Menu pricing had always puzzled Jessica. In her few years in the hospitality industry, Jessica had already seen several cases of restaurateurs who planned for a 25% or 30% food cost, priced their menus accordingly, yet failed to generate the profits needed to stay open. She was keenly aware that many fine dining establishments such as the one she wished to open frequently encountered the same fate.

Considering the type of operation Jessica plans to open, identify two main factors that will have a significant impact on Jessica's menu pricing.

Answer 1

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Menu technology could give clients a low-cost menu that increases their average expenses which increase sales and profits. The revenue level should therefore be measured in a way that makes it competitive for the restaurant and at the same time is marginal for the customer. Different methods are available to set menu price and profit such as the desired cost percentage of service, which adds benefit percent to menu value. After that, see how much it sells on the selling prices as if it was 33% on value rather than 25% on the menu price, if it is roughly the amount that we can assume that the food is paid in other restaurants. In order to improve the customer standard, we should see that foodstuffs which have a high demand should be placed at a competitive price. Therefore the selling price must rise if there is a revenue increase in the menu and the profits are directly proportional. The menu prices should therefore be set taking account of value, demand, expenditure, profitability, performance and expected benefit.

In view of the type of operation, the following factors will have an impact on the price to be charged by Jessica:

1) The cost of basic food materials: the price of all raw product items required for this menu item must be decided by Jessica. For example, the amounts of raw material and the price of all the toppings should be taken into account to determine the last menu price if the item on Jessica consists of Cheese pizza.

2) Sales Mix: the price of a menu item is based on the type of product Jessica has on the menu as a result of numerous items needing to buy the same raw material or the same procedure.

For example, almost the same sauces are needed for preparing Marconi and white pasta, so the cost should be equivalent.

3) Overhead expense: when Jessica opens a very large restaurant, it will increase the fixed overall cost. Rent, fuel, maintenance costs and cleaning costs are fixed overhead costs. At the end of years, it should attempt to avoid higher fixed costs.

4) The expense of the employees: serving, catering and handling the staff are all included. If the number of people employed is greater, this aspect should also be taken into account for the saleable price of the item.

5) Competitive pricing: it should pay a price similar to other rivals because if it paid less, it would gain more customers but that would not be profitable. If she charges more, the customer count decreases There are many other factors that depend on pricing such as demand and raw material supply for food, market conditions, choice of people, etc.

Taking into account the type of business, Jessica is expected to pay substantially for the following factors:

1) Price of raw food: the price of all raw product that are required for a menu item must be calculated by Jessica. Example: Where the Jessica menu item is made of Cheese pizza, the amount of raw material and price of all overlapping should be taken into account in order to calculate the final menu price.

2)Sales Mix: Cost of the product in the menu depends on the type that Jessica holds on to the menu as many items have to be made with the same raw material or method.

For example, almost identical sauces are needed to prepare marconi and white pasta, so the costs are similar.

3)Overhead: when Jessica opens a very large restaurant, it will increase the fixed overhead costs. Rent, power, maintenance costs and cleaning costs are fixed overhead costs. At the start of the years, she must attempt to avoid increased fixed costs.

4) Employee costs: serving, cooking, staff management included employees. If the numbers are larger, this factor should also be taken into account in the sellable price of the item.

5) Competitive pricing: she ought to pay the price equal to that paid by other rivals because she earns more customers if she charge less than them but this is not profitable for her. If you charge more than others, the number of customers would decrease

Many other variables, such as demand and supply of raw materials for food, market conditions, preference of people etc., also depend on pricing.

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