Inflation adds to pressures in the restaurant sector

An Alignable Research Center survey found that 72% of restaurateurs say they will be out of business if inflation does not moderate. Roughly half said inflationary pressures could force them to close their businesses within the next six months, and one-quarter are highly concerned they will have to close.

Across all small business owners, 1% said they’ve already closed operations because of soaring costs, and another 1% indicated they won’t make it to July. Half of the restaurant owners said their essential costs have risen 25% and just 16% said they were able to cover the price increases by raising prices. The restaurant owners also said it’s not just the margin squeeze that’s a problem with 44% saying their top-line revenue is down 50%, or less than their pre-COVID 19 sales.

Wells Fargo Securities economists said restaurants are trying to operate amid a perfect storm with inflationary food prices, labor constraints and rising rents while consumers spend more of their budget on gasoline which can lead to less eating out and more dinners at home.

Alignable reports the restaurant industry saw a 7.2% year-over-year increase in menu prices in April, a result of the soaring cost increases they’re seeing because of a combination of supply-chain disruptions, a sudden surge in demand, and global disruptions like Russia’s invasion of Ukraine.

“It’s just a matter of time before we have no working capital left to operate with,” one of the small business respondents told Alignable. “I’m about to lose everything.”

HIGHER PRICES, LESS TRAFFIC
The NPD Group reports food inflation and rising costs have increased the price by 9% of a foodservice meal in April compared to the same pre-pandemic month in 2019. Restaurant traffic in April was 11% lower than the pre-pandemic level in April 2019.

The 1% increase in consumer spending at restaurants in April versus a year ago was more a reflection of higher prices than increased use of restaurants, according to NPD’s daily tracking of the U.S. foodservice industry. NPD reports online and physical visits to quick service restaurants dropped 4% in April compared to a year ago and is 6% below the April 2019 pre-pandemic baseline. Traffic to full-service restaurants, which had the steepest declines during the pandemic, was down 3% this April compared to a year ago, which is 31% below April 2019 visits, NPD reports.

“Rising prices put pressures on consumers that contribute to the restaurant industry slowdown. For many consumers, it’s more affordable to eat at home,” noted David Portalatin, NPD food industry advisor and author of Eating Patterns in America. “This is when operators need to demonstrate their value to consumers struggling with inflation and be solutions-oriented to help consumers meet needs across life stages.”

Portalatin said rising restaurant prices and other inflationary pressures have had the most impact on lower-income households with children. For consumers in households with annual incomes under $50,000, restaurant visits declined 11% in April 2022 compared to the same month a year ago.

Traffic from households with children under age 6 was down 8% and decreased 9% for households with kids ages 6-12 in April compared to a year ago. Restaurant visits from groups with children, from the same home or not, were down 14% from a year ago, while traffic from adult-only groups was up 1% in April compared to April 2021, NPD reported.

SHRINKING MENU
Menus nationwide have 13% fewer items than before the pandemic, and customers are okay with that, according to Brian Warrener, a professor at Johnson & Wales University, and specialist in the food and beverage industry. He said by focusing on fewer items and doing them well, restaurateurs can save on labor and the cost of goods. Cross-utilizing ingredients and removing an extra garnish or sauce also make work easier.

Warrener, speaking this week at the 2022 National Restaurant Associations Show in Chicago, said on top of inflationary pressures, supply chain issues are also a problem for restaurant operators.

Shifting to foods less affected by supply issues, such as staples and local ingredients, can also be an effective approach. He said the price difference between niche local products and national commodities could also be shrinking as shipping costs rise.

Warrener said the just-in-time inventory no longer works and urges restaurant operators to stock up on things like take-out containers and other non-food items when they can find low prices.