How Restaurants are Dealing with Continued Inflation

    "Combatting cost inflation with cost-cutting measures is like bringing a knife to a gun fight," report says.

    Woman wearing mask ordering food in a cafe restaurant covid 19.
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    Brands plan on 1.7 price increases on average in the next year, compared to 2.1 in the previous year

    While it’s no great revelation to today’s consumer, restaurants continue to raise prices and find ways to cut costs. In May, the food away from home index rose 7.4 percent year-over-year—the largest 12-month increase since the period ending November 1981. 

    For casual dining, menu prices climbed 9 percent compared to last year, while quick-service meal prices hiked 7.3 percent. May marked the third consecutive month the cost of full-service items increased at a higher rate, year-over-year, than limited service. Before, it hadn't happened since March 2020. 

    According to a recent Simon-Kucher 2022 Restaurant Study shared with QSR, inflation is the lead culprit, pushing brands’ expenses up 11.7 percent year-over-year. 

    Restaurants experienced the largest price increases in raw materials and labor.

    Simon-Kucher graph.

    The study, which surveyed more than 50 brands, found restaurants that experienced the highest growth implemented more frequent and higher price increases than those that appreciated lower growth. The higher-growth concepts increased prices 13.3 percent on average, while lower-growth brands lifted prices an average of 8.3 percent.

    Simon-Kucher graph.

    These restaurants focused their price increases in areas like service fees, list prices, and on developing new premium items. Differentiating pricing was another strategy deployed by brands to combat inflation-induced cost increases.

    “Differentiating price increases will be important for brands to stay profitable as they navigate upstream cost inflation while simultaneously supporting consumers who are increasingly concerned about their spending,” Philip Daus, a partner at Simon-Kucher, said.

    Simon-Kucher graph.

    Simon-Kucher graph.

    According to Revenue Management Solutions’ data, quick-service restaurants increased their prices by 11.8 percent, year-over-year, which is driving up check performance. In comparison, basket sizes have declined, down 3.6 percent compared to May of last year.

    Quick-service traffic has continued to lag, down 4.1 percent, year-over-year. But it has improved from the negative 9.4 percent reported in April, per RMS. 

    To help alleviate costs caused by inflation in the coming year, most restaurants are implementing plans to increase prices less often, but at a higher average magnitude, Simon-Kucher’s study showed.

    Brands plan on 1.7 price increases on average in the next year, compared to 2.1 in the previous year. However, the average total price increase is 12.6 percent, a jump from the 11.3 percent increase of last year. 

    Restaurants have also taken cost-cutting measures in the last year to compensate for rising cost. These include adjusting portion sizes, implementing menu rationalization, and modifying product composition. 

    Simon-Kucher graph.

    While these fixes are helping in the short-term, the Simon-Kucher said restaurants still need a long-term solution in order to counter the impacts of inflation. 

    According to the study, brands have focused on aforementioned cost-cutting measures in the past year, but will switch their focus to pricing in 2023. The study advised restaurants to base menu prices on what customers are willing to pay and the value being delivered, rather than simply increasing prices to cover growing costs.  

    Simon-Kucher graph.

    Simon-Kucher graph.

    David Clement, a partner at Simon-Kucher, said: “Combatting cost inflation with cost-cutting measures is like bringing a knife to a gun fight. Successful restaurants should be able to pass cost increases through to their customers, either through smart pricing strategies or menu engineering.”