Four Focus Areas for QSRs to Mitigate Wage and Commodity Inflation

While the restaurant industry has experienced major supply chain and labor issues throughout the pandemic, it is now reaching a tipping point. While initially it was more difficult or impractical to assure adequate levels of staffing, and supply chain disruptions were causing product shortages or outages, these complications are now coming at a real cost to restaurants. Inflation on both wages and commodities are putting major margin pressure on brands. While supply chain issues will likely decrease over the course of 2022, wage inflation represents a new status quo on the bottom line. 

To position themselves for sustainable growth, restaurants must respond quickly. While some brands have already begun passing costs on to consumers without too much pushback (Chipotle, McDonald’s), brands will need to closely monitor customer response, as value-oriented customers are likely to begin to be more price sensitive as they also feel pressure from inflation. Here are four key areas that brands should be focusing on to help protect their bottom line and maintain a positive guest experience:

Zero In on Personalization and Customer Data

When it comes to guest engagement strategies and marketing efforts, most brands are just starting to incrementally move from mass marketing to more personalized and tailored lifecycle marketing. Brands have been pushing aggressively for higher levels of digital adoption, which provides access to first-party customer data and a lower cost to serve. But that doesn’t come without cost, as brands need to heavily incentivize customers to initially register and then remain active. Brands who do not continue to invest in acquiring first-party customer data and leveraging it to drive targeted customer behavior will struggle to maintain share of stomach without reliance on unsustainable discounting. There is money to be saved by more closely managing campaign budgets and the cost of offers by zeroing in on efforts around segmentation and personalization. These strategies will best position brands for future growth in guest count and bag size.

Optimize the Supply Chain

Brands need to invest in supply chain improvements more aggressively. Focusing on predictive analytics and automation addresses several common issues that brands face today, which present ample opportunity for bottom line improvement. Waste reduction will drive significant cost savings for most brands, while having the additional benefit of addressing sustainability targets. More effective management of the rollout and depletion of Limited Time Offer or non-core products would reduce the frequency of outages, allowing more streamlined operations, improved marketing processes, and better guest experience. More recently, outages, shortages and major price increases of both perishable and non-perishable goods have plagued restaurants, and while supply chain optimization cannot solve these problems, it will certainly reduce the impact brands feel by better predicting demand and improving allocation of products throughout a brand’s system. Brands who neglect to invest in their supply chain will face outsized impacts of the rising cost of goods and instability of the global supply chain.

Improve Back-Office Processes

Labor costs have risen far faster than previous projections for the industry, with many brands raising minimum wages ahead of both legal mandates and their own schedules (Starbucks, McDonald’s). It has become increasingly difficult to attract and retain crew, and the reality is that crew retention is an important success factor for restaurants. This is particularly true for QSRs, where speed and accuracy dictate a customer’s level of satisfaction. However, higher wages only partially address the problem. It is also critical for brands to address the crew experience. First, brands should work to improve their back-office processes, moving to digital-first solutions where automation can reduce manual overhead. Investment in digitization of these processes will improve restaurant operations and reduce complexity for crew members.

Streamline Kitchen Operations

Brands must recognize that the shift to a higher proportion of off-premise sales has greatly impacted restaurant operations. Where crew previously served the vast majority of customers eating in or going through the drive thru – which is naturally throttled by crew capacity – crews now need to balance growing proportions of mobile pick-up orders and orders for delivery, which in many cases are not throttled. As brands continue to push hard on digital adoption, this problem will be exacerbated. Brands should act now to streamline kitchen operations, improving the integration of digital and off-premise order fulfillment through both digital platform enhancements like throttling or dispatch improvements, and through practical operational changes implemented in the kitchen. Failure to address these issues will contribute to poor crew retention rates and wage inflation over time, driving up costs, as well as negatively affecting customer experience, which threatens topline growth as well.

While customers have been relatively accepting of price increases so far, and sales have been growing, there is a limit to the ability of top-line sales to offset the rising cost of doing business. Taking a wide aperture when assessing opportunities to reduce costs will be critical, from marketing efficacy, to kitchen and crew, to back of house systems. It is not the time to hunker down and brace for impact – brands who invest in themselves proactively through efforts to reduce costs now will best position themselves for sustainable future growth.