To take price or not? How restaurants can deal with inflation

As minimum wage hikes and soaring food costs take a toll on restaurants, brands are raising prices to offset costs, and some are letting their customers know.

But while some operators are taking a big price hike across its whole menu and in every location, according to RMS, this is a bold move to make. “Typically, our advice for brands is to take price at no more than 1.5-2% in a single pricing round and to do so over time, in waves,” says Mark Kuperman, Chief Operating Officer at RMS.

But these are not typical times. Post-pandemic consumer behavior is unpredictable. Pent-up demand is real — and some pandemic behaviors (think drive-thru and takeout) seem here to stay.

On the flip side, shortages in the supply chain have food costs soaring to record-high levels, and according to the AP, May saw the biggest 12-month inflation spike since 2008. Federal data showed nearly 1.4 million job openings in the restaurant and hotel sector in April. And, adding insult to injury, the Labor Department reported more than 740,000 workers quit jobs in leisure and hospitality in April.

With variables affecting pricing coming from every direction, how can brands manage inflation and maintain a positive bottom line? Should operators go big or go home or take a more measured approach? Given there’s no indication that a dip in food costs or a flush workforce is around the corner, we asked some of our pricing experts at RMS for their take on the best path forward.

Raising prices without losing customers

Whether you chalk it up to rapid demand increases or still-tangled supply chains, food costs are soaring. Throughout the pandemic, we saw common commodities, such as meat and chicken, increase in cost significantly and it is still expected to continue increasing going into 2022.

With no real idea when the supply chain will realign, offsetting additional costs with price might seem like the only choice. But RMS VP Chris Norton cautions clients against this approach, acknowledging that the overall price impact would be just too high for customers to pay.

“With food prices likely to stay at current levels for the rest of the calendar year, taking a longer view and developing a 12-18 months pricing strategy is prudent,” he advises. “Instead of passing all price on to their customers, we work with our clients to develop strategies that account for and meet the complexities of fluctuating commodities head-on.” These might also include menu engineering and redesign strategies.

Customers realize that restaurants are caught in the Catch-22 of a diminished workforce and higher food costs. Because of that awareness, RMS found, consumers expect to see prices climb a bit, and the majority believe safety precautions, increased minimum wage and cost of food justify those price increases.

Finally, consumers don’t just feel the financial pain of restaurants — they share it. Inflation is touching businesses and individuals alike. The US Bureau of Labor and Statistics reports that inflation at grocery stores (Food At Home) is slowing down in Q2 2021 at 0.45%, while restaurant prices (Food Away From Home) are steadily increasing at 4.04%. However, this is not aligned with what customers perceive. In RMS’ consumer sentiment findings from Q2 2021, among more than 800 respondents, 61% said they felt they were paying higher or much higher prices for groceries, and 46% felt the sting at restaurants.

With that in mind, this might leave some operators asking themselves “how much price should I take and what data should I use?” To help, RMS asked COO Mark Kuperman to answer frequent client questions we receive about restaurant pricing and share his best practices with our readers.

As we near the second half of 2021, inflation will remain a hot topic. RMS is committed to bringing you insights and guidance as challenges — and opportunities — develop. For tips on restaurant pricing and more information on industry topics, subscribe to our monthly newsletter. We will continue conducting consumer surveys and industry reports, as well as gathering the top minds within the industry on episodes of our Revenue Stream video series. Visit our website to see more insights.

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