In an industry hard hit by the pandemic, restaurants face another challenge: rising inflation. Inflation is at its highest level in decades, with food and energy costs rising faster than average, not to mention rising labor costs across all industries. Probably, if labor costs aren’t affecting your restaurant right now, it’s because you’re not staffed.
Restaurant owners and operators must act now to cover costs by raising menu prices – even if you recently adjusted prices – and looking for opportunities to save on food costs.
Let’s start with what is happening and why. Inflation occurs when too many dollars chase too few goods and services. In addition to an increase in demand, supply chain bottlenecks continue to impact supply for a variety of products. A perfect storm has developed over the past 19 months and is likely to continue well into the future given past and current monetary policies and decisions.
Thanks to the payment platform used by my company, our customers experience significant price increases for common ingredients: more than 25% for ground beef, almost 50% for steak, more than 30% for chicken , seafood up 20%, fries over 30% – even lettuce is up 50%. These figures correspond to other figures reported at the national level.
Skyrocketing prices caught the attention of the Biden administration, which unveiled a $1 million increase in early January to support small meat packers in a bid to reduce the influence of big business, arguing that increased competition would contribute to lower prices. Although there may be some relief in this sector, it is unlikely to offset the overall cost increase.
Inflation at these rates will require frequent and constant price changes like never before in recent history. The Wall Street Journal recently reported that fast food restaurants have raised menu prices by 7.9% this year, while other restaurant formats have raised prices by just 5.8% on average.
This increase is not sufficient to maintain margins in the current environment.
A quick calculation to help you gauge how much to raise prices by: divide your cost increase by the reciprocal of your desired gross profit margin.
For example, suppose your core costs (sum of food cost and labor cost) are 55% today and you expect them to increase by 2% in the next few days. month. To maintain your cost price of 55%, you must increase your menu by 4.4% — 2/0.45 (0.45 = 100% minus 55% cost price, expressed as a decimal). If your main costs are 50%, you will increase menu prices by four% (2/0.5); if they are 60%, menu prices should increase by 5% (2/0.4).
Ultimately: the lower your gross margin, the more you need to raise your prices to maintain your margin.
A quick math to help you gauge how much to raise prices by: divide your cost increase by the reciprocal of your desired gross profit margin (in other words, divide by your desired base costs).
For example, suppose your desired core costs (sum of food cost and labor cost) are 55% (gross profit margin = 45%) and you expect costs to increase by 2% over the next few months. Generally speaking, to maintain your main cost of 55%, you need to increase your total menu by 1.85% – ($1.00 cost + $0.02 = $1.02 new cost) / 0.55 ). If your desired main costs are 45% (GP = 55%), you will increase menu prices by 2.26% (1.02/0.45); Ultimately, the higher your gross margin, the more you need to raise your prices to maintain your margin.
Most sellers aren’t in the mood to discount in today’s environment, but it’s worth it. Some higher volume items may be available for purchase under discounted contracts or with a long-term price lock. And, your CPA may have access to a service that gives a range of prices paid for the same product by different vendors. Consider requesting this information to see if another vendor might offer a better price.
Your POS system can also provide reports on food costs – or you can scan them with a pencil and calculator, but either way, it’s time to review your menu items for those that may need some attention. additional price increase due to ingredients, consider eliminating loss leaders. , and adding dishes that use ingredients less affected by price spikes. Your most popular items should bring in your highest profits; remove dishes that are unpopular or low-yielding.
When reviewing, look for dishes that can be tweaked – chicken wings were a prime example in 2021. The Wingstop chain embarked on a major marketing campaign and launched ‘Thighstop’, while other restaurants have turned to serving chicken fillets instead. To prevent future problems, identify inflation-sensitive ideas and replace them with more stable and secure ones.
Due to supply chain issues and labor shortages in large-scale production facilities, it may be worth considering smaller, local suppliers as well. Many full-service restaurants have turned to local suppliers in recent years to meet consumer desires; while supplies are inherently limited due to operational size, they are less likely to be impacted by labor shortages at a processing plant or delayed by transportation delays.
While higher prices are likely to continue for some time, savvy restaurant owners and operators can protect their profits by taking action now. Ask your CPA for advice, especially if they specialize in restaurants and can provide specific insights based on data and experience. One silver lining is that consumers seem willing to pay higher prices in restaurants because of their desire to dine out – and hopefully this trend outlasts high food prices.