Inflation has taken a bite out of the restaurant industry. While big chains and independent restaurants have access to better deals, due to their sizes, small businesses have been forced to reevaluate their strengths and weaknesses to deal with this economic climate.
It does not help matters that customers have been cutting out on fast food and casual dining as high inflation cuts a deep hole in their pockets, leaving less money for discretionary spending. According to industry tracker Black Box Intelligence, the restaurant industry has witnessed a continuous drop in footfalls for the past eight months.
Biting Inflation Forces Restaurant Industry to Innovate
Rising inflation has reduced purchasing power for restaurateurs and customers. The US Department of Agriculture has recorded the overall consumer price index of food prices being 10.1% higher than in May 2021.
Inflation has affected consumer’s spending power as prices for poultry, seafood, and even vegetables shoot up. Experts recommend sticking to seasonal menus so that you don’t end up paying through your nose for an off-season item.
The restaurant industry is caught between two dragons as rising prices will drive away customers while keeping prices as is cuts into already thin profit margins. Big chains have the bandwidth to negotiate and cash in hand to insulate themselves from volatile market changes. On the other hand, mom and pop restaurants lack these securities but are much more agile and can adapt according to seasonal changes.
Limited-service menu prices rose 7.1% year-over-year in October, while full-service prices rose 5.9% according to new federal data released on November 9.
Big chains can lock in prices and have massive bargaining power with their suppliers. Independent restaurants must work with what they have, as they cannot afford to switch their partners.
In the US, restaurant chain Noodles&Company, with over 450 locations, signed a deal for chicken supply in 2023. The restaurant chain estimates it will save around 2% relative to its third-quarter margin for cost of goods sold. “As you look through all of the disruption in the supply chain environment, vendors want some level of certainty in terms of purchase quantities, not just price,” Noodles CEO Dave Boennighausen told CNBC.
Small restaurants cannot do this. Instead, they are adapting by reducing portions, offering other varieties, or even removing certain items from the menu. In the food industry, it is important to be agile. Some restaurants have started offering new dishes that work under any budget. For example, instead of a pricey steak, customers can pick a good chicken salad or entrees that will nourish them while giving them a good dining out experience.
According to the Bureau of Labor Statistics, prices for food consumed away from home has risen over 8.5% in the last one year as of October 2022. Changes brought on by climate change and worsening geopolitical instability has even caused a shortage of your favorite foods at the local grocer.
For mom and pop restaurants, communities also rally together to keep a local business running. While big chains have branding power, small restaurants make their customers feel like family and earn goodwill that helps them survive lean periods.
For big chain restaurants, price can also vary from location to location, depending on numerous factors like whether it is a franchisee or a company-owned restaurant. Small businesses do not face this problem and customers do not compare prices and quality. In a survey conducted by PYMNTS, customers admitted to paying attention to price differences while visiting chain restaurants.
This year, fast food chains have increased prices more aggressively than others, as they had low prices to begin with. But as inflation continues to scorch the pocket, both big chains and mom and pop restaurants are worried about holding on to their customers, who are also struggling with an overall increase in standard of living costs.
