How restaurant brands can tackle pricing in a high inflationary environment

Philipp Laqué, Managing Director UK, International Franchising
Richard Delvallée, Senior Vice President, Consulting Services

The pressures of the past two years are already causing big headaches for 2022, with conditions likely to squeeze operators even further. The US Consumer Price Index (CPI) continued to rise in December to 7%, the highest since June 1982. Food costs broke another record, according to the US Bureau of Labor Statistics, rising 6.3% year-over-year in December, the highest such rise since October 2008. Industry forecasts indicate wage growth is slowing down, and consumer price inflation soon will offset any increases.

If these stats concern you, you’re not alone. Consumer confidence has dipped to its second-lowest reading in a decade, down 2.5% from December 2021. 

With these conditions in mind, Revenue Management Solutions predicts a more challenging situation for price increases during 2022. We’re at an inflection point in the trading environment, with depressed consumer sentiment and higher cost pressures. For restaurant brands to succeed — and to protect the business from margin erosion and loss in value perception and market share — pricing activity in 2022 needs to be agile, strategic and consumer-centric. 

With this in mind, RMS developed three principles to guide restaurant brands and operators through pricing decisions:

1. Take a consumer-centric approach. When selecting items for price increases, institute a plan for phasing increases in throughout the year. Focusing on your consumers’ needs and wants will minimize the risk of trade-down or transaction loss.
2. Be flexible. In this uncertain economy, operators should have an inflation target, but also be ready to adjust as the scene unfolds. Spreading increases over multiple pricing rounds allows brands to adjust menu board inflation in a timely manner.
3. Find balance. Don’t let the short-term crisis cloud the brand’s long-term success. Careful balancing of short-term needs, brand health and value perception is a must.

1. Pricing starts with the consumer perspective

With lower consumer spending power, enacting a pricing strategy without regard for the consumer is risky. Menu board inflation may cause guests to decrease the frequency of their visits or pursue alternative options, ultimately leading to long-term negative profit impacts. Conversely, focusing on the consumer when making pricing decisions optimizes store profitability as it protects both value perception and transactions while preventing trade-down or brand-switching.

Consider these consumer-centric approaches:

• Rethink your pricing schedule. Smaller but more frequent price increases are less noticeable to guests and help prevent bill shock. In uncertain times, more frequent price changes allow for ongoing adjustments of the plan.
• Examine more than just price changes. Consider the overall balance of your menu. With a pricing strategy based on customers’ appetite — and transactional data specific to locations and customer segments — operators can assess where sensitivities are high or low. For example, the value menu may seem untouchable, but if the category represents 40% of your sales, should all the necessary increases come from the remaining 60%? Might you instead adjust your value menu by limiting the number of value-menu items, changing the offering or tweaking some prices?
• Don’t ignore the reset button. As noted above, a sound pricing strategy calls for phasing in AND phasing out price increases throughout the year. Examine product price sensitivity, consumer bundling behavior and external impacts to create a phase-out plan.  

2. Build certainty into an uncertain environment

It’s hard to predict what lies ahead in 2022. Nearly all hard costs face unprecedented increases, the Great Resignation has upended labor pools, and inflation will surely affect consumers’ ability and desire to spend. Flexibility is required, but you can create some certainty by setting an overarching goal: Protect traffic AND maintain healthy margins.

Consider these ways to add agility to your pricing strategy while still applying pricing best practices.

• Use your POS data to guide you. Determine ongoing price increases by applying traditional RMS methodologies, determined by careful POS data analysis. Examples include category sensitivities, item sensitivities and trading relationships.
• Consider carryover. Many in the industry took significant price in October and November of last year. How much of this will carry over to 2022? This need to be factored in.
• Create a new baseline. Leverage the need for a higher than usual price round to “fix” some of the menu inconsistencies that may exist on the menu. For example, am I providing more value as the order size increases? Examples include price per wings, fries sizes, upcharges, etc.
• Start a little higher. For example, if you have determined a 5% pricing impact is required, but your traditional pricing rounds remain between 1% and 2%, start with a 3% pricing round and then apply the remaining 2% in the subsequent rounds (or consider three pricing rounds of smaller increments – 2.5%, 1.5% and 1%). The higher impact earlier in the year should have positive financial impact throughout the remaining months. Subsequent rounds through the year could be dialed up or down.

Remember, the goal is to protect traffic and maintain healthy margins. A straight 5% increase may appear the “only way” to weather these tough times, but as customers get more price-sensitive, too big a leap could push them to your competitors.

3. Balance short-term panic with long-term success: The RMS approach

Labor and the cost of goods are causing today’s crises. But will they continue to cause pressure six months from now? Yes and no. Consider:

• Labor increases are likely going to stick. Pricing plans should be calculated to offset long-term hikes in labor costs, with consideration for increases already taken in 2021.  
• Tackle some COGS increases now. CPI data from November 2021 showed that the meats, poultry, fish and eggs index rose 11.9% compared to the same time in 2020. Beef went up by 20.1%, and pork prices are up 14.1%. According to the CPI, this is the largest 12-month increase since the period ending December 1990. Yet commodity pricing is volatile. When considering these staggering statistics, ask yourself: Will costs remain as high as they are now?

A pricing strategy based on short-term projection/current cost may put your brand at potential risk if COGS decreases. A brand could outprice itself vs. competitors, and lowering prices is always difficult. Your all-important value menu may be at risk. Furthermore, if discounts become necessary, is your brand positioned to absorb them?

RMS recommends offsetting labor and a portion of COGS increases now, keeping in mind that a higher-than-normal pricing round is necessary for the short term. As the situation becomes clearer, you can adjust in a few months with another round. A third round of price resets may be necessary, but our experience suggests that, with sound strategy, two pricing rounds will prove sufficient.

When formulating a pricing strategy that aims to fulfill the business needs, it can be tempting to move full steam ahead with a linear focus. But these are not normal, business-as-usual times. A prudent (and profitable) strategy requires not only data but also nuance and conscious consideration of the consumer.

At RMS, we believe it is possible to increase prices without damaging your brand. We’re here to help support the industry with solutions including profitability and pricing strategies, menu engineering, actionable financial health insights and more.

If you’re interested in accelerating your brand’s growth, we encourage you to reach out to schedule your personalized demo of our tech-enabled solutions. RMS is committed to equipping you with a path forward — informed by data. Contact us today.