How restaurants can navigate food inflation and protect profitability

It’s hard times — there is no way around them.

Inflation in food prices is pushing up ingredient prices. Wages are rising. The labor market is still a challenge. Consumer spending is decreasing due to rising gas prices.

If operators don’t take action quickly, these headwinds could easily wipe out restaurant profitability.

There is no way to stop food inflation. However, it can be managed and the margins protected. Operators have many options to ride out high inflation without losing profitability.

Continue reading to find out more about current food inflation and how it has affected restaurants. You can see past inflationary events and get some ideas on how to reduce the negative effects of inflation.

The key takeaways

  • July 2022 CPI for food far from home has increased 7.6 percent YoY — however, it is lower by 0.1% compared to June YoY measures
  • Restaurants could continue to attract consumer budgets as July 2022 home food is at an astonishing 13.1 percent
  • Rising gas prices have a negative impact on consumer restaurant spending more so than any other expenditure.
  • Inflationary and recessional past data show that customers tend to trade down, rather than out restaurant spending during economic turmoil — and that trade-down is already taking place
  • Operators can reduce trade costs and protect profitability through optimizing sales channels, controlling costs and improving customer service.

Restaurant profitability at risk from historic food inflation

What is food inflation?

You may be new to inflation or just need a refresher: Inflation refers to the economic increase in the price of certain goods and services over a period of time.

Food inflation can be defined as an increase in the price of food-related goods and services.

Consumers and restaurants are facing historic food inflation

Economists can track inflation in a number of ways. All of them are at or close to all-time highs.

Consumer Price Index: Food inflation

The Consumer Price Index (CPI), measures the change in prices urban consumers pay for certain consumer goods and services over time.

The general food index (groceries, restaurants and other food services) is at 10.9 per cent from July 2021 to 22 — an increase of 1 percent in July after a 1.1 percent June increase.

 

Source: U.S. Bureau of Labor Statistics

The CPI for food far away from home by the Bureau of Labor Statistic is up 7.6% over the previous year (July 20221-22) — that’s just 0.1 percent less than June’s 7.7 per cent increase. June’s measure represented the largest 12-month increase since November 1981.

The YoY increase in limited-service meals was 7.2 percent, and the YoY increase in full-service meals was 8.9 percent.

Both measures are increasing month-over-month, 0.8 percent for partial service and 0.6% for full service. However, the YoY measure of limited service fell 0.4 percent in June compared to June, while the full service meals measure remained steady at 8.9 % YoY from June through July. This could be a sign of some easing.

Producer Price Index: Food inflation

The Producer Price Index (PPI), tracks the average price change in the selling prices of domestic goods and services over time from the perspective of the seller.

 

Source: U.S. Bureau of Labor Statistics

 

There was some good news: the YoY consumer food inflation fell from its April peak of 34.6 at 29.3 to 29.3. This is still a remarkable number, considering it’s nearly twice the YoY increase recorded (15.6 percent in August 2011-2011).

 

 

Source: U.S. Bureau of Labor Statistics

From July 2021-2022, the final demand food index has increased 15 percent. This is higher than the June YoY 12%, but still lower than the April peak of 16.31% YoY.

For July, prices of fresh and dried vegetables rose more than 60 percent. They are closely followed by processed poultry, 26.5 percent, and 21.3 percent respectively.

One sign of optimism is the decrease in meat prices. July YoY meat prices fell 2.7 percent from July 2021 prices. This is still cheaper YoY but not as dramatic as June’s YoY numbers which were 9.3 percent.

What is causing the current food inflation?

Mike Dorning is the agricultural correspondent at Bloomberg News. He succinctly addresses all issues that are driving food inflation.

“Higher shipping costs, increased energy inflation, fertiler shortages and extreme weather make it more difficult to produce food…The war has turned the situation into a crisis.” Russia and Ukraine are major food, fertilizer, and wheat producers. Therefore, hostilities are severely disrupting production and delivery from Black Sea ports.” Mike Dorning’s ‘Breaking Point’: Rising Inflation Causes Cuts in Hunger-Relief Programs

The impact of general inflation on consumer sentiment

Historical context: More consumers mentioned lower living standards because of rising inflation than at any other time, except during the worst recessions of the past 50 years (March 1979-April 1981, May 2008 and October 2008, respectively, according to the University of Michigan Surveys of Customers).

In addition to plummeting sentiments, Donald Grimes (University of Michigan economist) highlighted that the real disposable income per person in the United States was roughly the same as it was in April 2022, just before the pandemic of February 2020.

“That’s good, right? But not so fast. Grimes estimates that the average real disposable income per person grows between 2% and 3% each year. This is a rare situation outside of recessions. We are currently in a recession-like phase from a perspective of income growth. Donald Grimes: Not a recession This might not be news for real disposable income.

We’ll be discussing this later. This weakened sentiment indicates a shift in restaurant customers’ spending habits. This is not a death sentence for restaurants. However, it can be used as a signal to optimize financial and operational performance.

Is there any good news about food inflation and the restaurant business?

It’s not all bad, but it’s not all grim. The industry has some bright spots.

 

Source Revenue Management Solutions Industry trends August 2022

Revenue Management Solutions data shows that restaurant traffic fell 4.3 percent YoY in June — a significant improvement on the 9.4 percent YoY decline in traffic in May. For July, sales measures have improved YoY.

Restaurants are at risk from food inflation.

Restaurant inflation and high gas prices make for a perfect storm.

Food inflation is a decrease in profitability due to higher labor and ingredient costs, paired with lower sales because of weakened consumer spending. Then there are the effects of rising fuel prices.

Technomic, a foodservice research firm, has created a report that shows how every $0.50 rise in gas prices leads to a “$68 Billion impact on consumer spending.”

 

Source Technomic Takes Skyrocketing Gas Prices

With 49 percent and 48 percent respectively, the top two most frequently mentioned cuts in restaurants are full-service and limited-service.

Similar surveys from Reuters and Ipsos showed that over half (54%) of Americans believe rising gas prices will have the greatest impact on how they spend money at restaurants.

Here is a breakdown of the most affected consumer spending buckets because of rising fuel prices:

  • Restaurants – 54%
  • Entertainment – 49 Percent
  • Home Improvement – 47 Percent
  • Vacations – 46 Percent

During turbulent times, customers trade down and not out

Data from both past inflationary periods and recessions show a common theme: consumers prefer to trade down to value-based options to avoid trading out of restaurants.

Technomic reports. The last time national gas prices rose above $4 per g was May 2008 to July 2008.

Comparing the 2008 spike in gas prices with 2007, we see a clear decline in restaurant sales. Full-service restaurants were hit almost twice as hard than limited-service restaurants (falling 4.3 percent in 2008 and 2.2 percent respectively).

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Research shows that the growth rate in limited-service sectors during recessions is still quite high (2.43%) compared to full service operations (0.08%). This study uses data from the National Restaurant Association that spans 1970 to 2009. It also includes six distinct recessions.

The research shows that consumers are willing to continue eating at restaurants even during recessions and inflationary periods. These times are also characterized by the resilience of limited-service restaurants, which highlights consumer attitudes toward trading down and not out.

According to commentary by Jana Zschieschang CMO at Revenue Management Solutions we are well into the trade down phase this time around.

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