When Every Dollar Matters: How Restaurants Can Navigate Inflation and Higher Costs
In the recent inflationary environment, few industries have potentially been hit harder than hospitality and restaurants due to increasing inflationary pressures and restaurant and hospitality spending being discretionary for most customers.
Inflationary pressures, such as higher interest rates and increases in the cost of food and other inputs, are affecting not only restaurant costs, but also customers’ decisions to spend less per visit or not go to restaurants at all. Effectively weathering the storm in an environment that is hostile to restaurants is a necessity for businesses looking to be successful in the future.
Restaurant operators are navigating rising food and financing costs while customers become more selective about discretionary spending.
Interest Rates
In September, the Federal Reserve is expected to increase its benchmark interest rate. This has downstream effects for businesses as well as consumers. Higher rates will increase borrowing costs for businesses that need financing to help with funding gaps or to install a new freezer or other equipment. They can also cut into your customers’ disposable income, leaving less money available for dining out.
With these increases in rates, banks are starting to be pickier about which businesses they lend to, making it harder for smaller businesses to secure reasonably priced debt.
To properly protect against this, ensure that your financials are always ready in case you find a lender who can move quickly compared with competitors that are also looking for loans. Being on top of your finances can help differentiate your business and is viewed favorably by lenders. It may even help you secure a better interest rate.
Also, if you can hold off on installing new equipment or purchasing a new freezer immediately, waiting until you have the available cash to pay out of pocket may be the better move. With rising rates, loans can average around 8% interest per year. That is a significant increase compared with a few years ago and can eat up cash that could otherwise help your business combat challenging economic trends.
Input Costs
Rising input costs are affecting not only your business when deliveries arrive, but your customers as well. Recent conflicts are driving up freight and delivery costs, which are also affecting customers’ wallets and reducing their discretionary spending.
Weather events and other unexpected disruptions in other parts of the world may further affect your costs. Droughts in Asia are affecting coffee bean prices, while screwworm outbreaks are affecting beef prices. We are no longer insulated from these events and should plan accordingly.
Featuring dishes that use lower-cost ingredients, such as lower-cost proteins, can increase your margins while also attracting customers through the perceived value of paying less to eat out. This can potentially lead to more traffic from value-conscious consumers.
Also, ensure that you have multiple vendors you can contact and use to compare costs for core staple ingredients. Every little bit of margin helps, especially for goods that are purchased in bulk.
Ratios and Data
Do you know whether you had fewer tables than last week? What was your average check per table? These are questions restaurants should be able to answer to help them understand not only the customer experience, but also whether a decrease in sales is due to fewer people coming in or customers ordering less-expensive dishes.
How you combat either of these issues will be different depending on your answer.
Serving a larger number of tables at a lower average ticket may put pressure on your margins because you may need to bring in more staff to serve those tables. In that situation, implementing an upselling strategy, such as offering desserts or appetizers, may help increase the average ticket.
If your number of tables is going down but your average ticket remains steady, there could either be an issue with the customer experience or customers may not perceive enough value to walk through the door.
Ensure your point-of-sale system is modular and that you understand how to use its reporting functions so you can answer these questions. Regularly review average ticket amounts and the number and types of dishes sold to help you identify and address problems before they become significant.
Conclusion
The current economic environment is challenging for restaurants and hospitality businesses, but difficult conditions do not automatically mean poor results. Operators who understand their numbers, control costs, and make decisions based on actual business data will be in a much stronger position to weather continued inflation and changing consumer spending.
That means keeping your financials current, being thoughtful about taking on new debt, monitoring the cost and profitability of your menu items, and regularly reviewing information such as customer traffic and average ticket amounts. Small adjustments made early can be much easier to manage than major changes after margins have already deteriorated.
Restaurant owners cannot control interest rates, commodity prices, weather events, or how much disposable income their customers have. They can, however, control how quickly they recognize changes and how effectively they respond to them. In a difficult operating environment, having accurate financial information and using it to make informed decisions can be a significant competitive advantage for a small restaurant or hospitality business.
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