Restaurants seem to be facing one extraordinary challenge after another. First came the closures and social distancing brought on by the pandemic. Then, they reopened only to find that the shortage in staff left unhappy customers and reduced hours of operation. Now, rising food costs are chipping away at the bottom line, leaving operators with no choice but to increase menu prices.
Many ask how much they can raise prices without impacting their business’s demand.
The Rising Costs
CNBC reported on the Long Beach Fish Grill, a restaurant in California. The owner, Jessica Dinglasan, noted several items whose rising prices forced her to, for the first time, charge “market price” on her menu. These included 13-gallons of canola oil that went from $19 to $42 and halibut that almost doubled in price from a year ago.
Price increases have hit 40-year highs, increasing each month since November 2020, showing no signs of slowing down. The most recent high was an increase of 8.5% in March, making it the biggest year-to-year increase in more than 40 years.
If you’re wondering why the continued escalation in food and energy costs, the answer can be summed up in the name of one of my favorite movies, The Perfect Storm. Inflation measures the rising prices of goods and services over a specified time frame. These rising prices are typically a result of an increase in demand, a shortage of products, or an increase in production costs.
Governments distributed massive fiscal support programs to mitigate the economic fallout from the COVID-19 crisis. This increased the demand for goods, but production and distribution could not keep up with this rapid rise in demand. The shortage in labor only added to the supply chain bottlenecks, and then Russia invaded Ukraine, further disrupting food and energy production.
Financial professionals now suggest that this inflationary period will continue for some time. Over 50% of experts polled by Bankrate for their First-Quarter Economic Indicator expect inflation to be more significant than expected for the next 12-18 months.
Increasing Menu Prices
Some restaurants have tried to keep costs the same for their guests, fearing rising menu prices will disrupt increasing revenue. The problem with that approach is that rising income does not always translate to increased profits, particularly in the restaurant business, where razor-thin margins require extreme vigilance.
Some restaurants have turned to implementing fees to offset rising costs, whether a processing fee for credit cards, a service fee for takeout, or even a “supply chain” fee. Operators also made menu adjustments, replacing some items with cost-effective options or taking them off the menu altogether. Others are taking the more direct approach and raising the prices on their menu items.
According to Forbes, when compared to 2020, Chipotle’s menu prices are up about 10%, and Bloomin’ Brand, the parent company to brands like Outback Steakhouse, Carrabba’s Italian Grill, Bonefish Grill, and Fleming’s, has risen 5%.
So, how do restaurants keep their balance in this tight-rope-like environment?
Increase Menu Prices and Save on Food Costs
Unfortunately, today’s inflationary rates require frequent price adjustments in a manner that few have seen in recent history. It is the only way to maintain an adequate profit margin. Modern Restaurant Management spelled it out in detailed figures.
“Suppose your prime costs (sum of food cost and labor cost) are 55% today and you expect them to increase by 2% in the next few months. To maintain your 55% prime cost, you need to increase your menu by 4.4% — 2/.45 (.45=100% minus 55% prime cost, expressed as a decimal). If your prime costs are 50%, you would increase menu prices by 4% (2/.5); if they are 60%, menu prices would need to increase by 5% (2/.4).”
In essence, to determine how much to raise your prices, you need to divide your cost increase by your desired prime costs.
For those of you who are like me and just got a headache reading those equations, you’ll be happy to know that your POS system can provide robust reports that analyze this type of data for you. Additionally, you can turn to companies like Consolidated Concepts that bring increased buying power and contract negotiation to the table, reducing costs while improving quality. They also work with local vendors to maximize profits and minimize supply chain upheavals, an important consideration in our current environment.
AI-driven menu pricing, which leverages nationwide market intelligence, also enables operators to raise prices with confidence that they won’t be affecting demand.
While the restaurant industry is experiencing a challenging environment in countless ways, you can protect your profits and make it through the current upheavals. Emerging is here to help.