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How Michael’s on East Maintains Cost Controls

Read the case and answer the questions that follow. Studying this case will help you better understand how concepts relating to cost controls can be applied in a company such as Michael’s on East.

            Just as the recent recession impacted many consumers’ wallets, it also directly affected the businesses that rely on the discretionary income of those very consumers. The restaurant industry has certainly been no exception. Americans curbed their penchant for dining out or traded down to lower-priced restaurant options. For higher-end restaurants, the loss of business has been devastating. Enter Al Massa.

               Massa is executive chef of the Florida-based restaurant Michael’s on East. Menu items include veal chops, racks of lamb, Cornish game hens, filet mignon, lobster, salmon, sea bass, and swordfish. The elegant dining room, complete with piano bar, has become known as Sarasota, Florida’s “gastronomic sanctuary.”52 It is a place to enjoy a fine dinner with an equally fine glass of wine.

           But Massa had a difficult challenge on his hands: maintaining a high-quality menu of offerings while controlling rising costs. It was not easy. Loyal customers of the restaurant had come to expect a certain degree of excellence in the menu but were reluctant to continue paying the prices they had in previous years. Slashing prices, however, was not the answer. And sacrificing the quality of ingredients was also not an option. “The idea isn’t to just cut costs, it’s to build sales,” Massa said.53

         The true difficulty lay in crafting a menu that exhibited quality but was still sensitive to the cost concerns of restaurant patrons. In the fast-food industry, 99-cent and dollar menus have become a mainstay for value-conscious consumers. Although it would not have been prudent for Michael’s on East to offer one-dollar steaks and lobsters, it could still borrow from the fast-food industry’s pricing strategies. “We took a value approach to combat food costs,” said Massa. A few years ago, the restaurant offered a three-course dinner for $25 and a two-course lunch for $15. “It was so successful,” Massa said, “that we made it a regular part of our operation.” The first summer Michael’s on East attempted this strategy, it sold 2,000 more meals than it had the previous summer.54

            Another way Massa is controlling his costs is through portion size. “Instead of serving our normal eight- to nineounce slab of swordfish, we’ll do six ounces, cut into medallions,” he said.55 When served, customers don’t notice the very slight difference in the size of the entrée.

               Even the curried chicken—a best seller at the restaurant—has received Massa’s cost-trimming attention. For Michael’s on East, the chicken costs the restaurant only $2 to serve, but by pairing it with delicious but lower-cost side dishes, the profit margin increases. “If we can sell 120 of those at a food cost of 25 percent,” Massa calculated, “that’s how we’re going about reducing our food cost— by having some of our lead sellers be our value menu selections.”56

            Traditional menu items such as steak have also been carefully reevaluated. When Massa realized that the restaurant could not cut portion size or price, he devised the unique compromise of offering just the steak with no sides. Called simply “steak on a plate,” if a customer wants a baked potato or other side, he or she can purchase it à la carte. “We worried customers would balk at not getting their potato and vegetable, but they didn’t skip a beat.”57

            It would probably have been easier to gradually slash menu prices by 10 or even 20 percent and try to make up the lost profit margin through increased volume. But restaurants such as Michaels on East have a particular image to uphold, and a drastic drop in price sometimes conveys a loss of quality in the mind of the customer. Massa also could have opted for cheaper ingredients and lesser-quality steaks and fish, but patrons very likely would have detected the difference. Instead, Massa’s approach of maintaining very high-quality raw ingredients and combining them with a value approach to the menu has enabled the restaurant to continue its success in a tough economic climate.

Questions

1How would you evaluate Massa’s cost control strategies?

2.What potential challenges do you see in Massa’s cost control strategies? How would you recommend overcoming those challenges?

3.If you were Massa, what other cost controls would you try to implement?