Even though we have emerged though the thick of the pandemic, life has not quite gotten back to “normal.” Given supply chain logjams, labor shortages, and the rising cost of fuel, which is affecting shipping costs for all goods, restaurant chains and independents alike are coping with price surges at the counter and worrying about passing along those costs to customers.
It is, as Garrett Reed, CEO of Layne’s Chicken Fingers, calls it: “A perfect storm of everything at once.”
Reed and Layne’s COO, Samir Wattar, recall this climate started brewing mid-2021 as many supplies lagged and demand was high, and it has not stopped since. “I wake up every week to letters from manufacturers—‘We're taking an increase in 30 days or in 15 days, or your next deal is going to be increased by X,’” Wattar says. For example, the company used to pay $2 per pound for chicken tenders. That cost at the start of the summer was up to $3.70. Fries and soft drinks cost more, too.
“It's been a struggle to manage,” Wattar adds. “We take price increases, but how much can we pass on to the consumer? When is the point that you're going to price yourself out of the market? We started looking at managing prime costs versus just managing food costs and labor costs. That's at the heart of the P&L. [And] other lines in the P&L that you can manage and get one-tenth here, one-tenth there, and you try to survive.”
For Layne’s franchisees, the No. 1 priority is to have available product. The company sells one protein (chicken tenders), one side (French fries), and the packaging. With over 70 percent of the chain’s business being drive through, it is important essentials be available.
“We took a price increase earlier this year,” Wattar says, noting cross-country shipping costs have gone up as much as three or four times. “But we started managing more of prime costs, food and labor together, and implemented a labor management system based on productivity versus percentages. We’re able to control it that way, instead of saying, ‘I want X percent for food costs, and I want X percent for labor costs.’ Let's combine them and manage them together. Then look at below the prime costs, see what's on the P&L and manage that—linen supplies, janitorial supplies, chemicals. Try to get some savings there so you don't cheat your customer and you don't overprice yourself out of the market.”
Layne’s took an approach where it will not reduce portion sizes (“shrinkflation”) or make the customer feel cheated. It wants to stay fair to loyal users. Layne’s also notes it’s received little negative feedback from consumers, far less than normal even, which the brand sees as a sign people are adjusting to the overall price increases surfacing in post-lockdown life.
“It's been refreshing because we're fighting so many battles, and you really don't want to fight the battle with your customer,” Reed says.
Another company working to sustain customer satisfaction amid the surge is Atomic Wings. During lockdown, some of the brand’s locations saw business double, CEO Zak Omar says. Then a shift came.
“I'm a Dunkin’ Donuts franchisee as well, and it seems like across [quick-service restaurant] transaction counts have [recently] gone down,” he says. “It’s a culmination of a couple things. Inflation, and a lot more people have less disposable income. Quick-serves also had to announce about a 20 to 30 percent increase in our menus just because the cost of everything has gone through the roof.”
Like others, Omar grappled with price increases at Atomic Wings. In late spring, a French fry manufacturer raised prices on them 65 percent. The explanation given was that during the height of the pandemic, the company did not plant enough crops of potatoes, so as demand stayed high and supply was low, prices went up.
“Now they're playing catch up, and it's hard to play catch up,” Omar says. “They've had to raise their prices because the price of wheat has gone up, the price of transportation has gone up, all these external factors. We used to pay about $17 for a jug of oil for filling our fryers. Today, we're paying $43 for that same jug. There's only so much a store owner can bend, right? These are franchisees, and I'm not only talking about my brand. I'm talking about any mom-and-pop shop out there, any diner that you go to, any restaurant that you go to. Consumers really need to be mindful that this isn't Target, Walmart, or Amazon.”
Packaging costs have gone up, and with a lot of packaging originating overseas (like plastic goods and Kraft boxes) there was a big bottleneck that built up. “They were six months delayed [in getting items into warehouses], so the price of packaged goods, the price of just putting the food in the containers, has shot up astronomically,” Omar says. “Restaurant owners are getting hit from all angles.”
Omar says Atomic Wings tried to be as innovative as possible. Since Q1 2022, its thigh wing now comes in two variations, a breaded thigh and a traditional naked thigh wing. He says the chain is profitable for franchisees and cost effective for customers. “We can sell that as a combo for less than $10, and it's a filling meal,” Omar says. “You won’t sit there and say, ‘I wish I had more.’ This is just enough for one or two people actually, combined to eat in on.”
Atomic Wings wants to make sure it remains a value-added product. “We pride ourselves on the quality of our food—we're fresh, never frozen—so we're not going to skimp out on the quality of our meats or the quality of our foods overall,” he says. “Our sauces remained the same. We're hoping that they can enjoy some of these other products.”
Atomic Wings also tried to work out innovative pricing. “Let's say we were selling 10 pieces for $12.99. We can make an 8-piece combo or a 7-piece combo for $12.99,” Omar says. “We just have to go with the times, and if that means simplifying the menu, lowering the counts of your pieces, then that's what we have to do. We don't want to be at $20 for 10 wings.”
Tough economic times call for creative measures. But ultimately, something is going to have to give.
“What we're going through right now is very unsustainable,” Wattar says. “It cannot be like this for a long time.”
Omar thinks financial relief from the current economic strain will not arrive until Q2 2023, and a lot of it depends on gas prices, which started coming down in July.
“All these restaurants are working with distributors to deliver the food to their restaurant,” Omar says. “They're not going to eat that cost. They're going to pass it on. We try to minimize that as much as possible and not push that cost to our customers. We try to eat that as much as possible and, like I said, come up with innovative ways to stay price friendly.”