After getting through to the other side of a global health crisis, the restaurant business is booming once again, but it’s becoming more expensive than ever to be in the game.
Breakdowns in the supply chain, lockdowns in China, the war in Ukraine, rising labor costs, skyrocketing gas prices, and soaring food prices all add up to serious inflation in the dining universe. U.S. restaurant prices were up 9.2% in March over the year before, presenting the biggest increase on record.
As the cost of gas and food spikes, resourceful restaurateurs need to employ inventive solutions to outmaneuver inflation to remain profitable throughout the rest of the year and into 2023.
How Inflation Is Affecting Restaurants
According to Bloomberg, the consumer price index climbed 7% in 2021, the largest 12-month gain since June 1982, and it is expected to increase even further as the second half of 2022 approaches.
While many restaurant owners only raise their menu prices as a last resort, these price increases are starting to become necessary to compensate for cost pressures coming from the rising cost of fuel, higher commodity prices, and increased wages. These price increases, which represent an inflationary environment not seen in a generation, impact restaurants enormously.
Here’s a breakdown of the way inflation is impacting the restaurant industry.
Food Costs
According to the US Department of Agriculture, food prices are increasing at the fastest rate in 40 years. And according to a report released by the USDA on March 25, 2022, these challenges are not expected to end soon.
Consumer Price Index (CPI)
The CPI measures the average change over time in the prices paid by urban consumers for a representative market basket of consumer goods and services.
According to the report, food price increases are expected to be above the increases observed in 2020 and 2021. In 2022, food-at-home prices are predicted to increase between 7.0 and 8.0 percent, and food-away-from-home (at restaurants, entertainment venues, and food trucks) prices are predicted to increase between 6.0 and 7.0 percent. Price increases for food-away-from-home are expected to exceed historical averages this year.
Below is a summary of the USDA findings related to the food service industry.
From February 2021 to February 2022, food prices increased by 7.9%, which was the largest price jump in one year since July 1981.
Food prices were 9.4% higher in April 2022 than in April 2021
CPI increased by 0.6 percent from March 2022 to April 2022
According to the USDA’s report, prices in all food categories are expected to go up throughout the rest of 2022. At least half of all categories will experience double-digit inflation. With the beef and veal category continuing to see the most runaway price inflation, below is what price inflation could look like across food categories.
Beef and veal: +16.2%
Pork: +14%
Poultry: +12.5%
Fats and oils: +11.7%
Eggs: +11.4%
Fresh fruits: +10.6%
Fish and seafood: +10.4%
Cereals and bakery products: +7.8%
Processed fruits and vegetables: +7.6%
Sugars and sweets: +7%
Dairy: +5.2%
Fresh vegetables: +4.3%
The Producer Price Index
The Producer Price Index (PPI) measures the average change in prices U.S. producers receive for the sale of their products. A PPI resembles a CPI in that it reflects price changes over time. However, instead of retail prices, a PPI is a measure of wholefood prices. Here are some of the staggering statistics.
Wholesale poultry prices are predicted to increase between 15 and 18%.
Wholesale dairy prices are predicted to increase between 13 and 16%.
Farm-level egg prices are predicted to increase between 73.5-76.5%.
Gas Prices
Energy prices have inflated dramatically in 2022 as natural gas prices soar around the world. In the US, we're just pennies away from $5 for a gallon of regular gas, according to the latest data from AAA, which reported the national average at the pump as of June 7, 2022, is about $4.92.
Heading into summer, analysts predict even higher prices that could surpass $6.20 a gallon by August.
Thirteen states, including Alaska, Arizona, California, Hawaii, Illinois, Indiana, Maine, Massachusetts, Michigan, Nevada, New Jersey, Oregon, and Washington, have already blown past the $5 threshold, with California leading the pack at $6.37 a gallon.
One Chevron station 150 miles north of San Francisco recently had a listed price of $9.60 a gallon.
And as the summer season begins, gas prices are continuing to skyrocket out of control. Transportation costs affect restaurant owners in many ways as every meal comes with hidden costs that add up over time.
As a restauranteur, it’s important to know how rising gas prices can affect your business and what you can do to keep your business profitable.
Cost of Goods
The agricultural industry is getting hit hard by increasing gas prices, with transportation costs up at least 40-50% this year. That price hike is quickly trickling down to the food industry which causes the price of goods to climb. This has a direct impact on restaurants.
And it doesn’t stop there, fueling the heavy-duty equipment used to harvest is more expensive and the long distances farm workers normally travel to get to work are also becoming more expensive. And everyone pays.
Thus, an increase in the cost of fuel is drastically affecting the cost of delivered goods.
Food Delivery
Pain at the pump is dramatically affecting food delivery drivers who rely upon gas-powered vehicles to do their jobs and are now being forced to grapple with an unforeseen business expense that they can do little about.
Some food delivery apps are addressing the issues facing the drivers by offering rebates to drivers or attaching surcharges to customer orders.
Uber Eats orders began charging consumers fuel surcharges of $0.35 to $0.45 in March in response to rising gas prices. DoorDash is giving drivers 10% cash back when they buy gas using DasherDirect, the company’s debit card designed for drivers. These surcharges, which go directly to drivers and couriers, affect both restaurant owners and the consumer.
For information on how to hire your own delivery drivers, see our blog post, Hire Education, Part 2: Hiring Delivery Drivers During a Labor Shortage.
Customer Attendance
This brings us to customer attendance in restaurants. When consumer budgets start to thin, one of the first places they tend to cut back on is dining out. This will undoubtedly have a substantial impact on all types of restaurants, especially fast food. Higher gas prices mean less driving; less driving means less business for the restaurant industry.
Increase in Menu Prices
As the cost of delivered goods increases, restaurant owners will have to compensate–and this usually means increasing menu prices. And as menu prices increase, customer rate decreases. The vicious cycle continues.
Restaurants that are conscious that they not only need to remain competitive but need to keep their menu affordable enough to make customers want to make the trip will generally prefer to avoid raising menu prices. But responding to these alarming price increases is leaving many restaurants with little choice –– and customers are noticing.
According to the fourth quarter Yelp Economic Index reviews mentioning menu prices increasing grew 29% from the fourth quarter of 2020 to the fourth quarter of 2021. See our post, Managing Negative Yelp Reviews for Positive Results for more information about dealing with unflattering online reviews.
But there is a bright side. Higher gas prices will also increase the number of delivery sales as folks are more likely to stay home and have the food brought to them. This slight “glass-half-full” way of looking at things could be a way to help balance out the dent in sales caused by rising gas prices.
So, while it might cost a little more to deliver food, the demand for it will also increase, making a rise in delivery fees a bit more justified. So, if you haven’t done so already, now is the perfect time to optimize your delivery operations. For more information on Restaurant Delivery, check out our post about our Free Guide to Restaurant Delivery ebook.
To avoid raising menu prices, we’ve put together a few alternate strategies you can incorporate to manage rising inflation and still maintain healthy profit margins.
4 Ways Restaurants Can Manage Inflation
Gain visibility and control of your inventory
To manage costs effectively, and to gain insights into your business that result in better profit margins, it’s crucial that restaurant owners have an effective beverage and food inventory management process in place.
The combination of consistent inventory counts and an inventory management system that automates important calculations allows you to gain valuable insights that help you reduce food waste, improve your ordering processes, increase profit margins, and better serve your customers based on what sells.
Reduce food waste
Because food costs account for about 30% of restaurants’ total costs, your inventory is a direct investment into the profitability of your business. So, it goes to reason that the better you utilize that inventory, the more profitable your business will be.
That’s why keeping food waste at bay is more essential now than ever. By optimizing your restaurant’s inventory management, restaurant managers can gain the data to see exactly what products are going to waste and that data can further be utilized to determine what process changes must be made to create less food loss.
Dive deeper into ways to reduce food waste by reading our blog post, Wasted, Managing Food Waste for Sustainability and Profitability.
Get creative with ingredient substitutions
With inflation seriously impacting food costs, and supply shortages affecting availability, it goes without saying that there are some ingredients that cut into your bottom line. No matter how great a dish sells, if the cost to make that dish is too high, your profit margin will suffer. To counteract the high price of certain ingredients, look into creative ways to swap costly ingredients for something less expensive.
By finding ways to reduce costs on ingredients and still sell the dish at the same price, you’ll see the benefits in your profit margins.
Use Menu Engineering
Menu engineering allows you to gain unique insights into the cost of dishes, the price you can get for those dishes, and, ultimately, the profitability of the dishes. This will give you the information you need to analyze the performance of your menu.
Your dishes should be divided into four categories.
Stars: High profit, high popularity dishes.
Puzzles: High profit, low popularity dishes.
Plow horses: Low profit, high popularity dishes.
Dogs: Low profit, low popularity fishes.
For an in-depth look at creating a Minimum Viable Menu for your restaurant, check out our blog post, Cooking a Tempting Online Menu that Delivers to learn how these four categories can help you build a more profitable menu.
Take away
As prices soar throughout the country, spiking gas prices and rising food costs are fueling tremendous frustration for restaurant owners across the nation. After getting through the challenges of the last two-plus years, think of inflation as just one more hurdle to jump. Incorporating a few well-placed strategies, following best practices for restaurants, and staying on top of the numbers, those of us in the food game will get through to the other side once more and remain profitable in 2022 and the years to come.
For more information about how to save money, understand metrics, and grow your business, see these related posts.
By Eileen Strauss
Comentários