Have you raised your restaurant's menu prices?
Raising menu prices can be a nerve wracking decision for restaurant owners and managers. If prices are too high, customers stop coming, but if operating costs are climbing (and costs have been climbing) the decision around raising prices starts to switch from “if” to “how much?” and “how often?”.
What’s happening with costs?
The two biggest costs for any restaurant are prime costs (labor and food/paper supplies). Unfortunately, both of these costs have been rising for restaurants for over a year and the pandemic has even created new costs that restaurants haven't had to deal with in the past.
It’s no secret that labor costs are rising within hospitality. Restaurants and other hospitality businesses have struggled to find workers over the last 12 months. In fact, 7 out of 10 restaurant operators have reported difficulty finding enough workers to support customer demand. Whether due to unemployment check supplements, fear of contracting COVID-19, or inability to work due to other COVID-19 related life disruptions, restaurant labor has been in short-supply.
To attract workers back to restaurants, operators have had to raise wages. While, before the pandemic, there was a national debate that rose to the level of protests on whether $15/hr was too much for minimum wage, restaurants are now routinely offering starting wages above $20/hr plus tips to attract workers.
Restaurants are not the only businesses that have had to raise wages in order to hire staff. In fact, a variety of factors had caused costs to increase further up the foodservice supply chain and these costs have been rolling down to restaurants.
Reduced production at meat processing plants has resulted in a 40% year-over-year increase in the price of beef and similar supply crunches have affected dairy items like butter. Transportation costs are also contributing to rising prices, as well as causing other supply headaches. The NRA recently reported that 96% of restaurant operators experienced supply delays of key food and beverage items.
Of course large distributors are passing on their increased costs, and are even margining up according to recent financial reports.
New costs and commissions
Early in the pandemic the shut down of in-person dining caused sales on 3rd party delivery apps to explode for many restaurants and food businesses. Unfortunately, that means these restaurants had to face yet another incremental cost in the face of commissions paid to the delivery apps. For restaurants who haven't seen sales shift back to in-person dining, or orders through their own website this will mean a permanent cost increase and hit to margins unless they raise prices.
Menu prices have already started rising.
According to the Consumer Price Index, over the course of the last year menu prices at full-service restaurants increased 6%, and prices at limited service restaurants were up almost 8%. But if those increases are accurate, restaurants are likely still facing thinner margins. In November Sysco reported passing along cost increases of 13.4% to customers.
Savvy restaurant operators have also “split” their pricing in attempt to overcome the commission fees charged by 3rd party apps. They charge lower prices in store, and higher prices on the products they list on apps like DoorDash or UberEats.
Will your customers weather additional price increases
The only silver lining for restaurants is that wages are increasing across industries. While aggressive inflation can be very disruptive, as long as guest wages continue to rise, there should be less push back to rising restaurant prices. In fact, the psychological effect of bigger paychecks may actually aid in people eating out more often.
If you haven’t increased your menu prices recently, take a look at your costs over the last 18 months, especially your prime cost percentage and determine if a price increase is justified. Also try benchmarking your prices against similar items being sold in your area as a gut check. Test prices increases and measure their effect. You can start small, but be bold. You may lose some guests, but if you can't make enough margin to stay in business, you'll lose all your guests.
If you do determine that your guests won't put up with menu price increases, try to find other ways to build back your margin, like incentivizing bigger orders, or reducing costs by changing recipes or ingredients.
About Dashy Dash
We save restaurants time and money by automating time consuming cost management and analysis, avoiding unnecessary costs, and leveraging the combined view of our community to give you insights on products, prices, services, and additional savings opportunities.
We help restaurants...
1. Save hundreds of dollars and dozens of hours per month by eliminating invoice data entry. We store invoices and automatically categorize restaurant spend down to the line item.
2. Compare prices across vendors by revealing the average prices restaurant supply vendors are charging in you area.
3. Catch prices increases early with alerts when the prices for the items in your order guides start to rise.
Reduce your prime costs, increase your food margins, and improve your restaurant management with our cost management software. Join today, it's free for our pilot customers. Join Today