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What’s ahead for food costs?

As we look ahead to what inflation and food costs hold for the balance of 2021, restaurant operators find themselves in that strange spot between not great news but not bad news, either. Or, as Jennifer Bartashus, Senior Equity Research Analyst, Consumer Staples & Retail at Bloomberg Intelligence, puts it: “Inflation won’t get worse, but recovery will be slow.”

State of inflation on all fronts

As we discussed in a post about price increases, inflation continues in the segments affecting restaurants, most notably labor, manufactured products and agriculture.

Bartashus, who has more than 20 years of experience as a research analyst specializing in consumer staples and restaurants, recently spoke with RMS about some of the factors impacting climbing food costs.

The new Hunger Games? Competition for labor

For restaurant brands, times have changed. Customers can — and want to — come back, but restaurants can’t find the staff to serve them. In the latest ‘Quits level’ report from the U.S. Bureau of Labor and Statistics, in May 2021, 706,000 people left their food-service-related jobs, the highest number reported in the past 12 months. (In May 2020, the quit level was 330,000.)

As restaurants clamor over a shrinking labor pool, tactics like sign-on bonuses have become standard fare, along with offering higher wages even when not required by law.

Along with food workers’ newfound status as a precious commodity, another wrinkle is arising from the pandemic: disruption of the transportation sector. According to Bartashus, a lack of truck drivers is crimping the food supply chain. She adds that in the long term, over-the-road drivers will continue to dwindle as generations now entering the workforce find the career path less desirable. “As a result,” she said, “companies are looking at ways to buy and sell locally to avoid long-haul delivery.”

Agri-commodities continue to climb

While the growth curve for agriculture commodities was flat for many years, that is certainly not the case at the moment, says Bartashus. Commodities including corn, wheat, hogs and milk continue to see huge spikes, and in some cases, prices have nearly doubled from pandemic levels. Add to that a lack of agricultural workers, fewer acres under production, unpredictable weather and rising costs for exports, and it becomes clear that what might be a momentary boon for the agricultural sector is not necessarily so for the restaurant industry.

Yet, in looking at overall price increases, the peaks and the plateaus are still lower than 2020, Bartashus says. From Q1 2017 to Q1 2021, the total price increase for the grocery sector was 8.6%, and most of that change happened in the past eight months.

Commodities may be at their highest rates, says Bartashus, but these companies are “due” the price increases they’re taking. “We haven’t seen inflation in food costs in a long time,” she says. “If, for instance, food companies take 3% per year in price increases, that’s good for everyone.”

What about that plan?

In May 2021, RMS surveyed more than 800 people and found that the percentage of respondents planning on eating out less in the future was at its lowest level (15%) since May 2020. Great news — for now. However, Bartashus notes that if price gets ahead of demand, the recovery might not sustain long-term.

Bartashus makes her point with a personal example. “In the spring, my husband and I went to a popular steakhouse,” she says. “Fully prepared to order our usual pre-pandemic indulgence of cheese fries, we saw that the menu price had jumped considerably. We skipped the indulgence, needless to say.” When the couple returned a few months later, the fries were back in line with “normal” prices, and they did order them, happily. “While there’s no denying that restaurants have to make up for inflation,” she concluded, “there’s only so much price you can take before you start to lose customers.”

RMS VP Chris Norton agrees, saying, “With food prices likely to stay at their current levels for the next six to seven months, it’s prudent to develop a pricing strategy that takes a longer view, at a minimum for the next 12 to 18 months,” he advises. As for passing rising costs on to customers, Norton advises his clients to develop strategies that account for and meet the complexities of fluctuating commodity prices head-on.

Creative thinking is in order (still)

Throughout the pandemic, food distributors have brainstormed ways to help operators with food and labor issues. When dine-in restrictions began, both US Foods and Sysco helped their restaurant customers establish takeout and delivery services. As restrictions lifted, the companies focused on helping operators reopen locations. Now, with food and labor supply chains maxed, the food distributors are responding to the needs of understaffed restaurants and creating new, labor-saving products such as pre-cut vegetables and pre-breaded chicken.

The restaurant ecosystem will need to continue to think creatively and strategically, says Bartashus, particularly when it comes to finding ways to manage check. One way, she suggests, is for operators to decrease third-party delivery. “As consumers suffer from food-at-home fatigue and keep going out, consider if you can increase cost on takeout or drive-thru,” she says. “Keep in mind that it’s still less than third-party delivery.”

Consumers still perceive grocery prices to be higher, says Norton. The US Bureau of Labor and Statistics reports that inflation at grocery stores (FAH) is slowing down in Q2 2021 at 0.45%, while restaurant prices (FAFH) are increasing at 4.04%. However, this doesn’t align 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.

“Grocery promotions haven’t gone back to normal, which is one reason for the perception of higher prices,” he says. Bartashus adds that as consumers have more options for food, the sector will need to refocus on its value proposition. Just like restaurants, they’ll need to think creatively.

“It’s not getting better for anyone fast,” she says. “It won’t get worse, but recovery will be slow. Plan accordingly.”

As we enter the second half of 2021, inflation remains 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 delivering industry reports while gathering the top minds within the industry for episodes of our Revenue Stream video series. Visit our website to see more insights.

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