In an industry hard hit by the pandemic, restaurants are facing yet another challenge: rising inflation. Inflation is at its highest in decades, with food and energy costs rising faster than the average, not to mention labor cost increases across all industries. Likely, if labor costs aren’t impacting your restaurant right now, it’s because you’re not fully staffed.
Restaurateurs and operators need to act now to cover costs by increasing menu prices —even if you have adjusted prices recently — and looking for opportunities to save on food costs.
Let’s start with what’s happening and why. Inflation occurs when too many dollars are chasing too few goods and services. In addition to a surge in demand, supply chain bottlenecks continue to impact supply for a variety of products. A perfect storm developed over the past 19 months and looks likely to continue well into the future given previous and current monetary policies and decisions.
Through the payment platform used by my firm, our clients are experiencing significant price increases for common ingredients — up more than 25 percent for ground beef, nearly 50 percent for steak, more than 30% percent for chicken, seafood up 20 percent, French fries more than 30 percent — even lettuce is up 50 percent. These numbers track with other nationally reported figures.
Skyrocketing prices have caught the attention of the Biden administration, which unveiled a $1 million boost in early January to support smaller meatpackers in effort to reduce the influence of big corporations, arguing the increased competition would help bring down prices. While there may be some relief coming in that sector, it isn’t likely to offset the overall rise in costs.
Inflation at these rates will require frequent and consistent price changes unlike any time in recent history. The Wall Street Journal reported recently that fast food restaurants have raised menu prices by 7.9 percent this year, while other restaurant formats have increased prices by just 5.8 percent on average.
This is not enough of an increase to maintain margins in today’s environment.
A quick calculation to help gauge how much to increase prices: divide your cost increase by the inverse of your desired gross profit margin.
As an example, suppose your prime costs (sum of food cost and labor cost) are 55 percent today and you expect them to increase by two percent in the next few months. To maintain your 55 percent prime cost, you need to increase your menu by 4.4 percent — 2/.45 (.45 = 100% minus 55% prime cost, expressed as a decimal). If your prime costs are 50 percent, you would increase menu prices by four percent (2/.5); if they are 60 percent, menu prices would need to increase by five percent (2/.4).
Ultimately: the lower your gross profit margin, the more you must increase your prices to maintain your margin.
A quick calculation to help gauge how much to increase prices: divide your cost increase by the inverse of your desired gross profit margin (in other words divide by your desired prime costs).
As an example, suppose your desired prime costs (sum of food cost and labor cost) are 55 percent (gross profit margin = 45 percent) and you expect costs to increase by two percent in the next few months. Generally speaking, to maintain your 55 percent prime cost, you need to increase your total menu by 1.85 percent — ($1.00 cost + $.02= $1.02 new cost)/.55). If your desired prime costs are 45 percent (GP=55 percent), you would increase menu prices by 2.26 percent (1.02/.45); Ultimately, the higher your gross profit margin, the more you must increase your prices to maintain your margin.
Most vendors are not in the mood for discounting in today’s environment — but it is worth a shot. Some higher-volume items may be available for contract purchasing at a discount, or a long-term price lock. And, your CPA may have access to a service that gives a range of prices being paid for the same product by various vendors. Consider asking for this information to see if another vendor might offer better pricing.
Your POS system may also provide reporting on food costs — or you may analyze those with a pencil and calculator, but either way it is time to review your menu items for ones that may need an additional price increase due to ingredients, consider eliminating loss leaders, and adding dishes that utilize ingredients less affected by price surges. Your most popular items should yield your highest profits; remove dishes that aren’t popular or that yield low profits.
While reviewing, look for dishes that can be tweaked — chicken wings were a prime example in 2021. The chain Wingstop embarked on a major marketing campaign and launched “Thighstop,” whereas other restaurants pivoted to serving chicken tenders instead. To prevent future problems, identify inflation-susceptible ideas and replace them with more steady and secure ones.
Due to supply chain issues and labor shortages at large-scale production facilities, it may be worthwhile to consider smaller, local vendors as well. Many full-service restaurants have shifted to local purveyors in recent years to keep up with consumer desires; while supplies are inherently limited due to operational size, they are less likely to be impacted by worker shortages in a processing plant or be held up by transportation delays.
While it is likely higher prices will continue for some time, savvy restaurant owners and operators can protect profits by taking steps now. Ask your CPA for advice, especially if your CPA specializes in restaurants and can provide specific insight based on data and experience. One positive is that consumers seem willing to pay higher restaurant prices due to their desire to dine out — and hopefully that trend lasts longer than high food costs.