Restaurants: Pricing for profit

09 August 2007 by
Restaurants: Pricing for profit

Setting menu prices at the right level is a crucial element in the success of a restaurant. Janet Harmer speaks to one restaurateur who got it wrong and others who have pitched it perfectly

Restaurateur Patricia Douglas is learning the hard way. Having achieved considerable success in the insurance industry, she and her husband, James, decided to seek a new challenge and plough their money and time into realising their dream of running a restaurant.

For someone who had no experience of working in the hospitality industry, Douglas's plans were ambitious. She wanted to create the kind of luxury dining experience that can be found just half-an-hour away in central London.

Douglas believed that the affluent residents of the picturesque village of Limpsfield in Surrey would want to indulge in the same kind of eating-out experience that they enjoyed in the capital. Having purchased the full-repairing lease for £115,000, she and her husband spent a further £200,000 revitalising the 16th-century building that was once a school.

Alexanders subsequently opened as a 45-seat restaurant with an adjoining 25-seat brasserie in November 2006. However, while the new interior - a mix of original dark wooden panelling and leaded windows with a sleek, contemporary decor - looked stylish, and chef Simon Attridge had culinary ambitions that matched those of the owners, the menu prices swiftly scared off the punters.

With no set-price menu, customers were faced with a choice of à la carte dishes that came with price tags which, for a new restaurant with no established reputation, can only be described as stratospheric. Think £9-£16 for starters, £17-£26 for main courses and £7-£10 for puds. With wine, water and coffee added on, average spend in the early weeks was £80-£85 per head.

Alexanders' pricing structure was strongly criticised by food critic Jay Rayner after a lunch visit in February on a day when there were only five other customers. In his review for the Observer, he described the prices as "big fat ones of the sort that make the wallet recoil like a small lad's testes on hitting icy water".

Rayner said his advice to Alexanders would be to drop its prices by 30% until it had built a loyal clientele and a reputation, then slowly increase its prices. While he recognised that Attridge could cook, he described the prices as "unreasonably expensive" for an unknown establishment. "At the moment, Alexanders is pricing itself as if it were a destination restaurant. And that, I'm afraid, is not the way to make people go there."

Several months on, Douglas says that Rayner was "wholly correct in what he said about the pricing".

The new menus now in place include a three-course lunch menu at £23.50 and a three-course dinner menu at £40.

As a result, business is beginning to build at Alexanders. Whereas only 395 covers were served during April - a month in which food costs amounted to £8,500 - today the restaurant is serving about 500 covers a month. And monthly turnover is now about £30,000, compared with £23,000 in the first few months.

Costs have also had to be dramatically reassessed, with a total saving of £15,000 per month - down from £45,000 to £30,000 per month. This has been done in several ways.

Most significantly, Attridge has agreed to leave the restaurant by mutual consent, and sous chef Rick Drummond has taken over as head chef. Former restaurant manager Bruno Cicco has also gone, and Douglas is now running front of house, although she plans to recruit a head waiter. "In a small community like this, customers like to see the owner in the restaurant," she says.

All connections with the original food suppliers have been severed and the linen contract renegotiated. Ingredients are now being purchased locally as opposed to being couriered in from all over the country, saving about £1,500 per month.

"We've discovered that the locals don't want to pay for a Michelin-starred restaurant, which is what we were aiming for," says Douglas. "My advice to anyone opening their own restaurant for the first time would be to do your homework fully about what the market wants. We came into the business naïvely and it has been a steep learning curve - with a shortfall of £100,000 between income and outgoings during the first six months. We originally budgeted for an annual turnover of £650,000-£750,000, but a figure of £450,000 is more realistic.

"We're now getting a lot of positive feedback from our customers and passionately believe that we can turn the business around."

The Alexanders experience highlights the importance of getting menu prices spot-on - to cover costs, attract business and make a healthy profit.

Pricing formula

The general formula for setting menu prices involves deciding what income needs to be achieved to cover all non-food costs and generate any profit. The food cost is then added on to establish the final price of each dish. Generally, a mid-spend style of restaurant will have a lower food cost - maybe 25-30% - while a more expensive restaurant with Michelin aspirations will have a food cost of 35%-plus. Rarely is the equation set in stone, though, as other factors will be considered, such as the location, the opposition and where the restaurateur wants to place him or herself in the marketplace.

Just a few miles down the road from Alexanders, the Westerly in Reigate, Surrey, set out to ensure its menu prices would make the restaurant accessible to everyone.

"We wanted to be a neighbourhood operation where customers will come back time and again and not just on special occasions," says chef-proprietor Jonathan Coomb, who, with his wife, Cynthia, opened the restaurant in January. "We intend to be busy for years to come."

The philosophy appears to have paid off. The 42-seat restaurant is full every night and has a turnover of £9,000-£10,000 per week, compared with an original budget of £7,000-£8,000. Average spend on food is £27 per head and £42 with wine. Starters are priced from £5.50 to £7.25, mains at £13.95-£16.50, and puddings at £5.

Coomb uses his experience of running nearby gastropub the Stephan Langton for seven years to ensure he keeps his costs at a level where he can maintain a sensible pricing policy. His food cost is about 35%. "It means we use rumps or leg, rather than the best end of new-season lamb, and lots of pork belly and rabbit," he says. "We don't use hand-dived scallops, langoustines or the finest fillet of beef.

"Our customers tell us that our pricing is reasonable for the quality of the food we produce. And the more we gain their confidence, the more they drink up the wine list."

It is no surprise to discover that Jay Rayner loved the Westerly, describing it in the Observer as "the complete antithesis of everything that drove me nuts at Alexanders", concluding that he had enjoyed "a faultless meal at a delicious price".

Consistently busy

Another consistently busy restaurant with prices that are deemed to be sensible is Arbutus, which opened in London's Soho a year ago [Read Caterer‘s Menuwatch]. Owners Anthony Demetre and Will Smith now hope to repeat the success with their second restaurant, Wild Honey, which has just opened its doors a stone's-throw away in Mayfair.

"The aim of Arbutus from the outset was to offer value for money," says Demetre. "We've always wanted to provide top-quality cooking but to do that and offer value we've had to move away from serving luxury ingredients such as turbot, langoustines, scallops and foie gras. Instead, we've turned our attention to the likes of pollock, which is a forgotten, but great, piece of fish if used properly. Some people find it to be watery, but I salt it first to remove some of the moisture.

"Using cheaper fish and cuts of meat takes skill, and we've worked hard in getting our cooking techniques right to produce some tasty dishes."

The philosophy at Wild Honey is the same as at Arbutus, where average spend for a three-course dinner with wine is £45 - no meant feat for an ambitious restaurant in the heart of what is one of the most expensive areas in the UK.

To achieve this, Demetre and Smith look closely at every element of expenditure at the two restaurants, making cuts where necessary, but never compromising on standards and quality. "For instance, we've introduced carafes of wine as well as bottles we've got rid of linen, which makes a huge saving of £30,000-£50,000 a year and we don't have a sommelier," says Demetre. "Our intention is always to provide a saving for the customer."

Demetre works on a food cost of 27-30%, which is achieved by constantly being on the telephone to the markets, planning for the next day's menu. "Plentiful fish and meat, together with seasonal fruit and vegetables, is what determines our menus and keeps our prices competitive. We buy in bulk when we can, and make sure we sell the produce quickly to keep everything fresh."

While the generally held belief is that Michelin stars encourage restaurants to put up their prices, Arbutus took the opposite viewpoint when it won a star in January. "I think it would have been disrespectful to the guide and our customers if we'd increased our prices," says Demetre. "In fact, we reduced our prices by about 10% across the board on our food, which meant that we've had to work even harder on obtaining good prices on purchasing.

"We serve good food, but the key to our success is that we offer value for money. There are many restaurants serving good food, but too many of them price themselves out of the market. There is so much competition out there that I have no doubt people would go elsewhere if we raised our prices."

Even restaurants that intend to provide the full gamut of the fine-dining experience - acres of linen, waiters on hand to retrieve falling napkins and brush away non-existent crumbs, and the luxury triumvirate of caviar, truffles and foie gras - need to consider carefully how they prices their menus.

Certainly, Gary Rhodes and Chris Cooper, operations director of RA Hotels, which runs two Rhodes restaurants at the Cumberland hotel in London's West End, gave careful consideration to the price of the menu at their latest collaboration, Rhodes W1 Restaurant. The 45-seat restaurant - with lavish trimmings, including a Kelly Hoppen-designed interior, Swarovski crystal chandeliers and a master sommelier - is offering a three-course menu for £45. One of the starters is a dish of warm scallops and langoustines with caviar hollandaise.

"We were determined to enter this new upmarket site with appropriate prices vis-à-vis our competitors, while also conscious of not appearing either overpriced or presumptuous," says Cooper.

"The £45 menu is, therefore, relatively affordable and it allows customers to comfortably explore the wine list. At £45, we both hit our targets and offer terrific value."

Given Rhodes's high profile - through TV work and the publication of 17 books - and culinary track record - he has headed up five restaurants that have achieved a Michelin star - it would have been no surprise if he had opened his latest venture with high prices.

Rhodes clearly covets achieving two or three Michelin stars. "I want to take this restaurant to a level I haven't done before," he told Caterer earlier this year. "I would like to reach the level of Le Manoir aux Quat'Saisons, what Michel Roux Jnr is doing at Le Gavroche and what Gordon (Ramsay) is doing."

A la carte

A three-course dinner selected from the à la carte menu without wine at Le Manoir (two Michelin stars) is between £80 and £100 per head at Le Gavroche (two stars) it is £100 and Gordon Ramsay (three stars), £85.

Looking at these prices, there is no question that the cost of eating at Hibiscus, when it relocates from Ludlow to London in September, will be fantastic value. Chef-proprietor Claude Bosi, who held two Michelin stars in Ludlow, will charge £49.50 for his three-course dinner menu and £25 for the three-course lunch menu. He will use nearly all the same suppliers as he used in Ludlow and continue to cook the same style of food.

While Bosi was a big name in Ludlow, he recognises that it is probably only true foodies who will know him in London. "He is hugely optimistic, but he realises he needs to start in London at a modest price," says his public relations adviser Maureen Mills. "He's sensitive to the fact that he is the new man in town and doesn't want to be presumptuous. Claude has done his sums and doesn't envisage increasing this price during the first year."

It's clear that the market cannot sustain too many restaurants at the top end. Those that are successful at this level need to have a chef with impeccable credentials who has proved over time that he or she can consistently produce the best food. But even those with such lofty ambitions need to enter the market cautiously, pricing their menus at a sensible level and only increasing them once they've gained the trust of a supportive clientele.

A critic's view

Restaurant reviewer Jay Rayner, who writes for the Observer, takes menu pricing seriously. He says: "No business - whether it is a restaurant or any other - can afford to misprice its products. If it does, it won't stay in business.

"I don't have a problem with paying seriously big money for an exceptional restaurant experience - as much as £300 or £400 per head - just as some people are prepared to pay out for tickets to an FA Cup final or to see Barbra Streisand in concert.

"My criticism with Alexanders was that it priced itself as if it were a Michelin-starred restaurant with a reputation to match, which it didn't have. The pricing was pompous and bizarre.

"Average spend at Gary Rhodes's restaurant - at £150 for two, with wine - is the same as what was being charged at Alexanders when I visited. Putting aside his TV persona, Gary Rhodes is a Michelin-starred chef who has proved time and time again that he is capable of turning out a consistent, precise product -and he's working in London, not Limpsfield.

"It therefore makes no sense that Alexanders, which involved an unheard-of chef working in an out-of-town site, was charging the same price as Rhodes W1 Restaurant.

"The Westerly is about cooking without ego. The chef has clearly worked out what the market is and priced the menu accordingly.

"It is interesting to note how Gordon Ramsay prices his menus, pitching them at a reasonable level initially to build a clientele and then gradually increasing them. It is very smart. I think his restaurant at Royal Hospital Road opened with a menu priced at £65 per head for three courses, with his restaurant at Claridge's opening at £32.50. The New York restaurant opened at $80 (£39), it is now $90 (£44) and I expect it will hit $100 (£49) by Christmas.

"Pricing is something that, I think, matters more to me than it does to other reviewers. I write for a liberal-left readership who have a slightly puritanical edge, and they can't hack restaurant prices that go beyond a certain point."

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