While some reports talk about inflation coming down compared to last year, not enough people are looking at how it compares to the base from 2020-2021. By comparison, inflation is still running rampant — and with real wages down and borrowing interest rates and mortgage rates high, restaurant operators, owners, and managers should keep an eye on the overall economic outlook to stay ahead.
For restaurants, continued inflation may mean a few things: less dining out for Americans who are feeling the pinch of their dollar not going as far; higher food costs for restaurateurs; and more expensive interest rates for those looking to finance projects. Food, labor, freight, and equipment costs are all still going up — and many restaurants are now saddled with paying back the COVID-19 Economic Injury Disaster Loans (EIDL), restricting cash available to spend.
Fortunately, there are steps that restaurateurs and operators can take to minimize the impact of those challenges.
Watch Your Food Costs
First, restaurant owners, operators, and managers should always keep a close eye on food costs. Your POS system may provide reporting on those expenses, or you may analyze those with a pencil and calculator. Your most popular items should yield your highest profits; remove dishes that aren’t popular or that yield low profits.
Reviewing menu prices is also a good time to review the items themselves — what are your top sellers? Are there portions that could be reduced? What are your higher profit items, and how can you promote those more? Are there ingredient swaps that would reduce inventory and waste? Consider eliminating loss leaders and adding dishes that utilize ingredients less affected by price surges.
Ultimately, the lower your gross profit margin, the more you must increase your prices to maintain your margin. A quick calculation to help gauge how much to increase prices: divide your cost increase by the inverse of your desired gross profit margin (in other words divide by your desired prime costs).
Either way, be sure to review your menu items for ones that may need an additional price increase due to ingredient expenses. Ongoing review of menu prices is a necessity, even though it is something many restaurants try to avoid. Raising prices can deter customers and incur additional costs by reprinting menus and updating menus online, but it can be an inevitable change.
Inventory Management is Key
Of course, when we talk about menu items and pricing, we have to talk about inventory, too. Count higher cost items weekly — if not daily — and avoid over-purchasing that can lead to waste. That’s money that you are literally throwing away.
Check with other suppliers to make sure you’re getting the best pricing or see if your financial advisor has access to programs that provide a range of prices being paid for the same product by various vendors. Some higher-volume items may be available for contract purchasing at a discount, or a long-term price lock.
We’ve seen a rise in restaurant client inquiries that involve adding services charges to customer checks to avoid raising menu prices. While that is an option, restaurants must be cautious about how they implement the strategy. In many states, service charges are subject to sales tax and need to be added prior to sales tax calculation. These regulations vary by state, and you should be aware of your state’s policy before adding service fees to customer tickets. Service fees can also feel misleading to customers who find themselves facing a higher bill than anticipated, so be clear about fees up front.
Other Things to Consider
Another important thing to measure is revenue by hour, so review your hours of operation. The combination of labor shortages and product availability has led to some restaurants being open fewer hours during the week — trimming low-volume periods won’t raise revenue, but it can reduce costs and make your restaurant operate more efficiently. A Datassential report showed restaurants have cut operating hours by 6.4 hours per week compared to pre-pandemic schedules — and 7.5 hours a week for independent restaurants.
While it is likely higher prices will continue for some time, savvy restaurant owners and operators can protect profits by taking steps now. Ask your CPA for advice, especially if your CPA specializes in restaurants and can provide specific insight based on data and experience. One positive is that consumers seem willing to pay higher restaurant prices due to their desire to dine out — and hopefully that trend lasts longer than high food costs.
Bob Patterson is the founder and president of Patterson & Company Certified Public Accountants. Founded in 2011, Patterson & Company CPA provides clients with specialized, industry-tested tools and expert knowledge. With expertise in the hospitality industry as well as other service-based businesses, the firm offers year-round accounting and advisory services, supporting all back-office tasks through their BOSS advanced online platform that manages payroll, bookkeeping and vendor payments alongside the tax planning and compliance services of a full-service CPA firm. Prior to founding Patterson & Company, Patters was president, CEO and a partner in Consumers Choice Coffee. He is a Certified Public Accountant, a Certified Fraud Examiner and a Chartered Global Management Accountant.
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