As the Federal Reserve continues to raise interest rates, restaurant owners have a right to be worried. There are still sectors of the food service economy that have yet to fully recover from the COVID-19 crisis, and now the threat of a recession is on our collective doorsteps.
Nevertheless, while an economic downturn may be inevitable, restaurant owners are not helpless. Let’s explore some actionable ideas you can use to minimize potential disruptions on your business.
How Inflation is Impacting Restaurants
In simple terms, inflation means everything costs more.
For restaurants, that means expenses increase. Examples include:
- Rent and utilities
- Cooking materials and supplies (i.e. gas, tools, utensils)
- Restaurant materials and supplies (i.e. napkins, sanitization tools)
- Labor (i.e. chefs, waiters and waitresses)
All of these factors can present a challenge to restaurant business models and test small business resilience.
One challenge many restaurants face in particular: There’s a limit to how much they can raise prices to cover rising expenses. This is especially true for fast food restaurants, as customers may decide to cook their meals at home rather than pay an extra two dollars on a burger or pizza.
Higher end restaurants aren’t exempt either. Premium foods like steak and seafood may see less interest from customers in times of inflation, which can hurt revenue.
What is Driving Food Inflation?
Several factors are at play.
First, the coronavirus hurt global supply chains. Lockdowns caused by the pandemic prevented farmers from distributing their food and worsened an already increasing labor shortage. In early 2022, the Russian invasion of Ukraine further damaged the supply chain due to sanctions. Note that Ukraine is also currently the world’s fourth largest exporter of corn.
Combine these issues with droughts in countries like Brazil, shortages in China’s wheat production, and natural disasters in other underserved countries. Finally, add rising domestic inflation to the mix and you have a perfect storm for food prices worldwide.
How Are Restaurants Dealing With Inflation?
To battle the turbulent economy, restaurants are coming up with some innovative business continuity plans. A few examples include:
- Lower prices. At first glance, this may sound counterintuitive. But lowering prices attracts customers, and restaurants that use this tactic are betting on converting casual visitors into regular customers. When the economy eventually recovers, these newfound customers may continue to provide business at profitable prices.
- Cut premium items from the menu. Some restaurants are removing items like steak and seafood from their operations. If customers aren’t ordering them, it may make sense to temporarily take them off the menu to save on ingredient costs.
- Raise prices. The most obvious strategy is to simply increase how much you charge your customers. This method may come with more risks, as it may turn some customers off. But there’s also a chance your most loyal customers will continue to support your business.
- Switch to delivery or pick-up only. One way to reduce expenses is to cut down on rent. Restaurants that traditionally allow dine-in may decide to stop leasing physical locations and shift to a delivery or pick-up only model. This can also help save on utility costs.
What Tactics Should Restaurant Owners Use to Increase Profitability?
In general, increasing profitability means either reducing your expenses or increasing your revenue. Since the restaurant industry spans a diverse array of businesses, there may not be any one-size-fits-all solutions.
Nevertheless, there are some broad concepts any restaurant can employ. When it comes to reducing expenses, for example, you could explore ways to reduce your cost of ingredients. One way might be to place larger orders of non-perishable ingredients to take advantage of bulk discounts. To increase your revenues, one strategy might be to explore scalable digital ads, especially if your primary marketing strategy currently relies on physical fliers or word-of-mouth.
In the following section, we’ll explore some more ways to improve both profitability and adaptability in greater detail.
6 Ways Restaurants Can Mitigate the Impact of Inflation
Optimize Your Digital Presence
As mentioned above, one way to cut down on expenses is to lean into digital marketing. Internet and social media advertising can allow you to reach new customers efficiently at scale. The difference between advertising to 100 people versus 100,000 people can be as little as one click. And with consumers increasingly making decisions based on what they see online, this can be a much more effective marketing route than traditional advertising methods.
Also consider enabling customers to order online if you’re not already doing so. This can be in the form of online orders either via your website or a delivery service like DoorDash or GrubHub. One potential benefit of this function is that it may allow you to better reach younger demographics that don’t hesitate to order food via their mobile devices. Perhaps more importantly, however, it could also allow you to minimize the use of your physical locations until the economy recovers, a move that can help save on rent and utilities.
Double Check Your Menu
Run a top-down analysis on what you offer, including how much each item costs and how much revenue it generates. Consider whether there are any unnecessary ingredients, or if there are specific dishes that rarely get ordered but take up a lot of inventory space.
While it may not be fun to trim your menu, doing so could allow you to run operations more efficiently and double down on your top revenue drivers. Remember, this is only temporary if you want it to be. You can always tell customers these items will be back in the future.
Analyze Your Daily Operations
First, write your daily process down, including everything from opening your restaurant to preparing food to washing the dishes. See if you can identify any inefficiencies. Are there times throughout the day where you’ve hired more waiters or cooks than you need? Could you save on utilities by running cleaning processes through equipment or machinery rather than doing them manually?
The lower your expenses, the better your restaurant will be positioned to survive inflation.
Treat Your Staff Well
In the previous point, we talked about the potential need to trim staff. On the flip side of this point, also make sure to treat your staff well. Turnover rates among restaurant staff are high, and the last thing you need is to spend hours searching for new employees rather than growing your restaurant.
One way to increase the sustainability of your staff is to pay them well and listen to their concerns. Give them time off if they need to, and do whatever it takes to make them love their job. It goes without saying that happy employees are much less likely to quit.
Deliver Quality No Matter What
As a restaurant owner, you already know how important the customer experience is. Elements like cleanliness, taste, and atmosphere can all increase the likelihood customers will return. High quality restaurants also get good online reviews, which help drive new visitors to your establishment.
As inflation increases, remember not to cut any corners on providing the best experience possible. Repeat customers can make up an important part of your revenue stream, so do what it takes to keep them coming back.
Consider Boosting Cash Flow With Financing
If cash is tight, one way to keep operations afloat or jump on new business opportunities is to get small business financing. From small business loans to start up business loans to business credit cards, there are many financing options for small business owners, startups, local businesses, solopreneurs, entrepreneurs, and other small business communities to explore. These include loans from both the U.S. Small Business Administration (SBA) and private financing providers.
The easiest way to find the right financing option is to use Nav. Create a free account to instantly compare your best options based on your business data. We’ll also show you exactly how to establish business credit so you make your restaurant lender-ready.
This article was originally written on August 31, 2022 and updated on December 8, 2022.