Updated: Apr 15, 2022
As the world journeys towards what seems like the end of the COVID-19 pandemic, the decreasing dollar value and price surge of food and labor costs have meant that the cost of preparing food has increased considerably. Market pressures are forcing local, national, and international restaurants and food shops to consider raising their prices to remain profitable.
Beyond climate change and oil price hikes, 2021 has been a year unlike any in decades – and Covid has also been a major contributor to the supply chain disarray restaurants are facing now.
Three primary factors lead to this price hike:
For many restaurants, sales are at an all-time high, and surprisingly, this has not been good for the supply chain. Many analysts are attributing this increase in demand to an increase in expendable income because of:
Covid relief funds
Less expenditure on leisure travel by consumers
Reduced cost of commute to and from work
COVID restrictions on local businesses are being lifted.
2. The employee shortage in the restaurant industry because of Covid-19, causing orders to build up and choke weak points in the supply chain.
3. The California cargo backlog due to extra shipping and the inability to manage it
The supply chain is choked (reduced supply) while the demand is rising. Because of this disequilibrium, market forces are putting pressure on prices to go higher.
Restaurant prices may also need to be reviewed to ensure you maintain operational viability. However, everyone has to bear this heavier economic burden, and rushing to increase prices during the supply chain disarray could only make matters worse.
This article will go over the process you should adopt to maintain your profit margins in these trying times and how you can remain financially viable as you keep prices-raises a last resort.
Taking a Closer Look at The Problem
The Q4 of 2021 has been turbulent for everyone, especially restaurateurs, despite the celebratory reopenings.
The Bureau of Labor Statistics published a report at the end of Q3, suggesting that the Consumer Price Index (CPI) for food rose by 0.4% in September, after rising 0.3% in August. During the year, it has increased by 4.5% so far.
Restaurants aren’t facing problems related to demand, which is rising. Instead, supply chain is driving costs up, leaving restaurants in a pickle.
Tackling the Supply Chain Disarray – Raising Menu Prices
In 2020, the average spending on food at home decreased to 5%. The share of income spent on food has trended downward since 1960. In 2020, this percentage dropped from 10% to 8.6%, a decrease that would have normally taken about 5 years to take place. In 2019, about a third of a person’s income in the US was spent on food at home and restaurants.
Yet, according to the National Restaurant Association, the projected demand for eating out in restaurants has increased by 19.7% till year-end 2021 against 2020. Unfortunately, the increased demand comes with a change in consumer behavior and supply chain disruptions, potentially leading to losses for restaurants.
So, how can you offset these losses in this supply chain disaster without raising prices? How to go about raising menu prices if that’s the only option left?
Recosting The Menu
Start by recosting your menu. Despite increased costs, many vendors are still trying to offer lower prices. Inspect the food marketplace for materials and make a list.
We recommend recosting your entire menu with more scrutiny at this stage. For recosting the menu, weigh or count ingredients instead of using volume. For example, instead of measuring flour by cups, place it on a scale and note its weight. This will make working out your expenses significantly easier and more accurate.
Do this for all the dishes you serve. Then, write the old costs in one column and the latest costs in another. Once done, compare the two prices and review the impact of the higher prices to get a good idea of how much your profit margins will get hurt if you don’t do anything.
Time for Some Fun via New Recipes
You may have to come in during the day or work a graveyard shift for this, but consider making some recipe changes without changing the texture or taste too much. However, this isn’t advisable if you stand out of the crowd solely because of your current texture or taste.
Your priority should be to get rid of or replace any ingredients that might be used excessively or are costly, such as garnishes.
Looking Into Your Own Sleeves – Retraining Kitchen Staff
The biggest problem we see when we first start working with restaurants is consistency. Most restaurants will lose up to 4% because each cook prepares and serves each recipe slightly differently. This difference comes across as a lack of training and results in inconsistent food. You have different options for cutting costs and achieving a balance between raising menu prices and managing supply chain costs. These options include changing serving sizes and putting SOPs in place that cut down waste aggressively.
Negotiate – Maybe It’s Time to Reconsider Your Source?
Some farms may be closer to your restaurant than others, while some may simply be doing better than others and, therefore, may offer better costs. Schedule a meeting with your buyer and other vendors to negotiate the cost of cooking materials.
If your supplier’s farm is far away, naturally, they will charge you more than someone nearby.
Don’t Forget About Your Competitors
While you’re raising prices, your competitors might not, adding the risk of you losing more customers to them. Remember, everyone is facing roughly the same problems as you.
Understand What You Really Need
Does your profit margin reflect the marketplace standards, or are you charging a lot more for your food and service than the others? Maybe it is time to recalculate your breakeven and forecasted gross margin based on the higher prices and consider coping with the reduced profit margin for a while. We believe it’s only a matter of time before the shipping issues are resolved.
Raise Prices, But Be Smart About It
Raising prices should be kept as a last resort. After taking all other steps, if you still feel that raising prices is the only option you have left, be smart about the raise.
Consider introducing a new menu item that has a higher price point. A new menu item can draw some excitement among customers and staff, and if the item is priced to reflect the higher food cost, you should start to see some improvements in your cost margins.
We suggest that you keep the price of your top five bestsellers consistent and only raise prices on others. With time, you can consider increasing those prices as well.
Suggestive Selling. Analyze which items have the greatest impact on your business and adopt a suggestive selling approach to move those items first.