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Why restaurants should consider NOT increasing menu prices during inflation

Restaurant during recession
Restaurant during recession. Photo credit : Jason Leung,

The United Kingdom is currently grappling with record-high inflation rates, and this economic pressure is being keenly felt by restaurants. As the cost of food supplies and labour wages continue to rise, restaurant owners are faced with the challenge of maintaining profitability for their businesses.

Whilst increasing menu prices may seem like the answer, it can have unintended consequences that can destroy the viability of a restaurant business. Implementing price hikes during a recessionary environment often leads to decreased footfall, resulting in reduced overall revenue, despite the higher prices. This, in turn, exacerbates the challenge of covering fixed costs such as rent and utilities, making them seem insurmountable.

Assessing the price sensitivity of core customers

Before a restaurant increases its prices across the board with the naïve intention of preserving its total contribution margin (total revenue net of total variable costs e.g. food ingredients), it should experiment with the price sensitivity of its core customers. As a restaurant manager, the initial step involves raising prices on some key menu items and meticulously collecting data on the volume sold and comparing it to the previous volume data before the price hike. The primary objective of the restaurant should be to maximize the total contribution margin (product of the contribution margin per unit and the overall volume sold). If this figure is lower in the new scenario (despite a higher contribution margin per unit), then the restaurant should be prepared to adjust (reduce) prices accordingly until the optimal balance is achieved. A restaurant manager could also implement temporary discounts to further investigate the effects of lower prices on sales volume. This pragmatic approach allows for sufficient data gathering to construct an economic 'demand-supply' curve to optimise the total contribution margin for the specific product in question. It is, however, crucial to recognize here that the ‘demand-supply’ curve may vary for different products and judgement and experience on the part of the restaurant manager can go a long way in prioritising products to experiment with.

Upholding customer sentiments to create a competitive advantage

When a restaurant decides not to raise prices directly in line with inflationary trends but opts to maintain them close to the current levels, it creates a natural competitive advantage for the restaurant. The restaurant can leverage this position by launching a targeted campaign for its core customers, emphasizing the fact that it is making all efforts to keep its prices relatively stable despite prevailing economic conditions. A restaurant not increasing its prices in line with inflation will go a long way in demonstrating its commitment to its customers' satisfaction and financial well-being.

Over time, this can result in a further incremental footfall especially because it can also attract new price-conscious consumers who may be seeking affordability during times of economic uncertainty.

Other considerations to enhance profitability

  1. Menu Engineering and Upselling: Menu engineering involves strategically promoting high-margin items to boost profitability. A restaurant should also take adequate measures to train its servers to effectively recommend and upsell sides, drinks, and desserts, which often have higher contribution margins than main courses. By emphasizing these options effectively, the restaurant can ensure a healthy average revenue per customer and enhance its overall profitability.

  2. Track and Reduce Food Waste: Tracking food waste is crucial for cost management. A restaurant should analyse wastage across its menu offerings and identify opportunities to reduce portion sizes without compromising customer satisfaction. This approach helps improve margins by reducing overall ingredient costs and minimizing waste.

  3. Lower ingredient costs: Restaurants should consider experimenting with food composition to substitute cheaper ingredients or use those with longer shelf life without compromising taste and experience. This can help lower costs directly as well as reduce shelf wastage which could also enhance profitability. If ingredients cannot be easily substituted, the restaurant should consider new, lower-cost suppliers for the same ingredients.

  4. Streamline Menu Offerings: A restaurant must review its menu and identify ‘tail’ items that contribute to inventory management costs and involve additional labour for processing but have low sales and contribution. Removing these items can simplify operations, enhance efficiency, and reduce costs. Streamlining the menu allows the restaurant to focus on popular and profitable dishes whilst reducing operational complexities.

As restaurants face the challenges posed by rising inflation, it is crucial to adopt a strategic approach to maintain profitability while meeting customer expectations. Rather than resorting to across-the-board price increases, assessing price sensitivity, leveraging competitive advantage, emphasising high-margin items, tracking, and reducing food waste, finding innovative ways to lower ingredient costs, and streamlining menu offerings can help restaurants navigate these uncertain times successfully. By implementing these strategies, restaurant owners can strike a balance between preserving their margins and providing value to their customers, ensuring the long-term viability of their businesses.

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