Ask anyone in the restaurant industry right now, and they will probably tell you that supply chain issues, along with increased food costs, are their most pressing challenges. Everything, from fryer oil to meat and vegetables to dish soap and freezer parts, is in short supply. And, when a restaurant can get its hands on the items it needs, they find themselves paying much higher prices.
In a post-COVID economy, after two years of closures and staff shortages, people are ready to dine out again in greater numbers. Restaurant owners have a lot at stake, but the supply chain crisis continues to hamper this industry, creating a difficult situation for those who sell food and people who want to buy and eat it.
What is Inflation and Why is it Bad for Restaurants?
Inflation is an economic concept that refers to an increase in the price of goods and services and the devaluation of currency within an economy over a specified period. Economies experience natural cycles of ups and down, and inflation is generally part of this process.
When an economy is thriving, the demand for goods and services goes up. But, when that demand outpaces supply, prices increase, and you get inflation. According to the Federal Reserve, a healthy inflation rate is about 2% year-over-year. When it’s higher than this, it becomes a negative economic signal because goods and services become unaffordable. And that’s a situation the United States (and restaurants) has been struggling with over the past year.
The annual inflation rate in the U.S. hit 9.1% in June, which was a 40-year high. But that only tells a fraction of the story if you’re in the restaurant business. Food prices have continued to climb. According to the USDA, the Consumer Price Index for all food increased 10.9% year over year from July 2021 to July 2022. In 2022, the USDA has the following predictions for food prices:
- Up to 39% increase in prices on farm-level milk
- Up to 32% increase in prices on farm-level wheat
- Up to 22% increase in prices on wholesale fats and oils
- Up to 18.5% increase in prices on farm-level vegetables
Restaurants may be able to weather short-term increases in costs. But these inflationary pressures have been ongoing for over a year. Consider the cost of a single cheeseburger. If all the ingredients go up in up price by 15%, what cost you $2.50 to make last year will cost you $2.87 today. If you sell 100 cheeseburgers per week, that’s $37 more in expenses, adding up to $1,924 per year for just a single menu item.
At some point, restaurants will need to raise their prices. And most have. Beyond the direct costs, inflation impacts consumer spending habits, and places pressure on businesses to increase wages because everything costs more. The relationship of inflation to the supply chain is one of the more important considerations for restaurants.
How Supply Chain Issues Are Contributing to Inflation
According to the National Restaurant Association’s 2022 State of the Restaurant Industry report, 96% of restauranteurs report supply delays. In fact, many operators and consumers have become accustomed to the frequent unavailability of preferred menu items. The supply chain is contributing to inflation in this industry in several ways.
Agricultural costs are some of the biggest drivers of food price inflation. The cost of things like wheat, vegetables, and meat depends on a lot of factors, such as weather conditions, diseases and pests, and global demand.
The war in Ukraine has had a big impact on global agriculture because that country is a major grain exporter, and the conflict has been the cause of soaring energy costs. Without a strong agriculture industry as a foundation, the entire food supply chain is going to suffer.
2. Labor Costs
Labor shortages have also been a serious challenge in every area of the food supply chain. From agricultural to restaurant workers, there has been a shortage of labor over the past two years. This leads to increased costs as well as lower efficiency and more errors.
3. Warehousing and Logistics
With the COVID-19 pandemic, there was an explosion in demand for a wide variety of goods and services. But there hasn’t been sufficient transportation and logistics infrastructure to support it. This has resulted in shipping backlogs and swamped warehouses that are under intense pressure to deliver more with fewer resources.
4. Government Policies
A lot has changed in just a few short years. Not all countries are continuing to export the same food to other countries or allow imports of food products. These types of restrictions are creating bottlenecks in the food supply chain, driving up prices.
What Restaurants Can Do to Respond to Inflationary Pressures
If you’re in the restaurant business, you can’t control inflation. But you are able to make other decisions and control various operations within your business. Here are some of the ways restaurants can mitigate the impact of inflation.
- Modify your menu — Investigate some alternative menu options, at least temporarily, that may have less costly ingredients. If you put the right combos together, you might even be more justified in a price increase.
- Find alternative suppliers — See if you can find other vendors and business partners that might have lower prices. But don’t shop on price alone. Reliability and visibility in the supply chain are vital factors. Absent these, your costs might continue to increase.
- Reduce costs — Look for areas in your operations where you can cut some costs. These might include a lease renegotiation or the use of fewer perishable items.
- Invest in technology — It might seem like the worst time to invest in technology. But many restaurants are making this leap. And it’s paying off. For example, some are using robots to deliver food or tabletop touchscreens for ordering and checkout. This can help restaurants that are having staffing issues remain in operation.
- Raise prices — According to a recent CNBC poll, 47% of business owners have raised prices in response to inflation. When everything has become more expensive, your most loyal patrons will understand the need to adjust prices.
The restaurant industry continues to face supply chain issues and inflation troubles that are complex and seem overwhelming. But these problems present opportunities for the industry to innovate and implement strategies that will prevent or control similar issues in the future. Growers, manufacturers, logistics firms, and restauranteurs can work together to resolve the ongoing supply chain issues and accomplish their goals through transparency and open communication.