Every week we comb through the news to find employment trends affecting the hospitality industry so you don’t have to. This week’s Hospitality in the News topic: how does inflation affect restaurants? 

Higher expenses, less traffic, and lingering impacts from the COVID-19 pandemic have brought a perfect storm to the restaurant industry, with many using increased menu prices as an umbrella. But that can quickly backfire if not done carefully, especially as customers find their dollars being stretched more and more across the board. It’s always important to ask yourself, how does inflation affect restaurants? 

Inflation Rates

U.S. inflation rates have soared this year, staying above 7% through October and reaching as high as 9.1% in June. Food prices have risen 12.85% year-over-year, according to the Producer Price Index. That includes a 22% increase for grains, 36.4% increase for cooking oils and a 43.9% increase for beef and veal.  

Restaurants, for the most part, have passed those costs onto consumers through menu price increases. In fact, 91% of restaurants have raised prices since the pandemic, according to those surveyed by Rewards Network. Food items experienced an average increase of 6% in cost to customers, according to analysis by SpotOn, with the average entrée costing $19.50.  

“This is arguably the most difficult inflationary environment for restaurants in history,” said Jason Himber, president of MINA restaurant group. 

How Does Inflation Affect Restaurants?

When adjusted for inflation, industrywide sales in the third quarter were down $1 billion from the previous quarter, according to the National Restaurant Association. Restaurant traffic is also down, particularly at full-service restaurants (a drop of 18.2% in September). Dips were less for fast-food and quick-serve restaurants (a drop of 6%) as consumers seek out value-focused restaurants.  

In the best of times, it is tricky to manage menu price changes and improve profit margins. Add in soaring worldwide inflation, and the task of walking the fine line between higher operating costs and alienating cash-strapped customers with price hikes, seems monumental. 

Here are some strategies to consider for handling inflationary pressures:
  1. Optimize the menu – A simplified menu costs less and it allows the restaurant to focus on getting everything correct and consistent, which will have guests coming back for more. Industrywide, menus are about 10% to 20% smaller per restaurant, with 31% trimming their menus, according to Toast, a point-of-sale provider. Focus on core items that sell the best and are easy to source from suppliers on a consistent basis.
  2. Focus on cheaper ingredients – Don’t give up quality but look for ingredients that are particularly expensive and try to swap with something less costly.
  3. Reduce food costs/streamline supply chain — Buy items that are in season and take advantage of seasonal price drops. Where feasible, buy local to lower transportation costs. When possible, buy in bulk and freeze or preserve for use later, or work the item into the menu in multiple ways.
  4. Closely monitor inventory and reduce food waste – The restaurant industry generates 33 pounds of waste per $1,000 of a restaurant’s revenue, one study found. Follow a first-in, first-out model when a new order is received. Keep a consistent inventory schedule in to know exactly how much of an item is in stock and how much is needed.
  5. Embrace technology – Use technology in all aspects of the restaurant that make it easier and cheaper to operate. A point-of-sale system can help monitor menu pricing and manage inventory. Some also have the ability to order products and schedule labor based on historical sales data. Robotics in the kitchen can free up employees to optimize their skillsets and productivity, especially in terms of improving the customer experience, according to the National Restaurant Association (NRA).
  6. Add temporary surcharges/fees – As the cost of materials and supplies continue to skyrocket, adding surcharges or fees can help offset those increases, NRA said. Some restaurants have added temporary inflation fees while others are charging extra for condiments or using a credit card to pay.
  7. Adjust labor and operating hours — Analyze sales data and determine how profitable the business is down to the hour. Then use that information to decide if the business should open later, close sooner or if less people are needed on a certain shift.
  8. Raise menu prices – After optimizing food costs and expenses, raising prices may be the only remaining option, but it must be done strategically so as not to discourage customers from dining at the establishment.
    • Stay in line with the competition, as customers are more likely to accept higher menu prices when they mirror changes seen in other establishments, SpotOn said. Base the increase on the value delivered, rather than just to cover growing costs, NRA said.  
    • Don’t change several things at one time and raise prices across the board. Identify items that can withstand a price increase. Drastic changes, like reducing portion sizes and increasing prices, can cause customers to look elsewhere. Staff also need time to adjust to changes.  
    • Monitor the impact of price increases. Is traffic declining? Are customers opting for less expensive items or splitting entrees? Are they leaving bad reviews that mention price? 
    • If customers question the increases, be honest and upfront with them. Explain how operating costs have increased and how that is impacting business.  

Now that we can answer the question, “how does inflation affect restaurants?” you can start to build a plan to account for how it’s impacting your bottom line. But remember, nothing lasts forever. With the right approach, it is possible to weather inflation while maintaining profit and keeping customers happy.