According to a survey by the National Restaurant Association, only 16% of restaurants in the U.S. expect profits to increase in 2023, and 50% are expecting to make less money because of rising expenses. The three inflationary culprits include labor, energy, and food costs.
This uncertainty makes it difficult to determine when to raise prices and at what point to hold your ground, particularly considering consumers’ uncertainty about the economy. Let’s explore what restaurants expect in the coming year and how operators are gearing up for what lies ahead.
The Expectations
While restaurant operators are somewhat optimistic about sales, 90% expect significant margin pressures due to high labor and food costs. In addition, over 60% were strongly concerned about energy and utility costs.
The Actions
About one-third of restaurants delayed expansion plans, and 13% stopped using third-party delivery services due to the associated high costs. The industry adjusted to escalating inflation, with 87% raising menu prices, 32% closing on days they were once open, and 48% reducing hours of operations in 2022. Due to higher interest rates, about 38% have postponed planned development.
Another interesting finding was that about 62% of restaurants were operating with fewer employees needed for the number of guests. Despite this statistic, almost 20% of those surveyed reported holding off on recruitment, and 57% said they planned to lay off staff in the second half of 2023 should a recession materialize. Approximately 32% said they had eliminated positions and over 20% plan on investing in technology.
Food Costs
The Producer Price Index increased in 18 of the last 23 months, with some food prices rising by double digits. For example, the cost of eggs and coffee contributed to a 30% increase in breakfast menu prices. As many in the industry know, egg prices jumped by almost 50% year-over-year and increased by 11% in December due to the avian flu outbreak. In December, the consumer price index slowed to 6.5%, despite food costs and menu prices still showing some increase.
To accommodate these rising costs, menu prices rose on average 8.5% year-over-year. This price increase is lower than grocery store prices which escalated by 12%. Currently, chicken and dairy have shown some signs of deflation.
Many believe that menu pricing is reaching its threshold.
Guest Reactions
Despite the growing menu prices, some good news is that guests are still willing to spend their money at restaurants. In November 2022, restaurant spending increased by 0.9% compared to retail which declined by .8%, and department stores, which were down by 3%.
The Black Box Workforce and Guest Intelligence report found that FOH hourly staffing was down only 2% from October 2019. This is a considerable improvement from the 10% decline in March 2022 and correlates with the guest sentiment and customer reviews, which reported more staff attentiveness and fewer mentions of understaffed establishments. In addition, October and September had the lowest number of complaints about staffing levels for the year.
Some bad news is that as traffic softens and the high menu prices begin abating, it will be harder to post strong positive same-store sales, as was the case for 2022.
Labor and Staffing Pressures
Like commodities, labor inflation is easing. Restaurants are reporting an increase in the applicant pool and more selective hiring. They also report paying higher wages, whether due to rising minimum wages or competing effectively with other brands to attract and retain staffing levels.
Should a recessionary impact occur, most experts are expecting it in the third or fourth quarter of 2023. However, this year holds opportunities for restaurants offering unique experiences as diners still crave premium experiences, despite trading down. Additionally, some industry experts suggest restaurants continue to take the necessary pricing to right-set their margins and regain lost profits.
Restaurants Raising Menu Prices
In 2022, restaurants raised prices by about 8-12%. Looking ahead restaurant menu pricing is expected to increase in the single-digit range. While off-premise sales still account for a large share, the Strategic Communications & Advisory (SCA) expects some decline as guests choose to dine in for the experience.
According to the SCA, another pendulum swing in a positive direction is the supply chain. While recent issues constrained the ability to offer specific menu items due to inadequate supplies, this issue seems to be diminishing. Signature items are returning, though at higher prices. On the other side, according to the National Restaurant Association’s survey, 96% of operators still experience supply chain shortages or delays, and 76% made changes to their menu due to these issues.
Support Pricing Your Menu
As is evident, these are somewhat volatile, if not confusing times, with industry insiders possessing different outlooks. There is one strategy that offers keen insights into restaurant menu pricing without requiring charts or crystal balls. F&B Insights offers the world’s largest menu database, providing restaurants with competitor and market pricing information. Make informed decisions to ensure you’re not leaving money on the table or overpricing and affecting demand. To learn more, contact F&B Insights today.
