As the restaurant industry looks ahead to 2023, it feels like some of the persistent issues are lessening while others are looming. Inflation may continue to drive up food costs, a possible recession could lead to consumers dining out less, and staffing remains an issue for many. There are steps that restaurateurs and operators can take now to minimize the impact of those challenges — but some of them do come with pitfalls.
Adjusting menu prices is something many restaurants try to avoid — both to keep consumers happy, but also because of the work generated by reprinting menus and updating websites and retraining staff come at a cost. But it can be inevitable. Operators who were staying on top of supply chain cost increases started adjusting their costs in 2020, but even those who have held off or haven’t made changes since then should plan on reviewing prices (again) soon.
Your POS system may also provide reporting on food costs — or you may analyze those with a pencil and calculator. Either way, it is time to review your menu items for ones that may need an additional price increase due to ingredients. Consider eliminating loss leaders and adding dishes that utilize ingredients less affected by price surges. Your most popular items should yield your highest profits; remove dishes that aren’t popular or that yield low profits.
Ultimately, the lower your gross profit margin, the more you must increase your prices to maintain your margin. Here’s 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).
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 reduce waste?
While reviewing, look for dishes that can be tweaked — chicken wings were a prime example in 2021. The chain Wingstop embarked on a major marketing campaign and launched “Thighstop,” whereas other restaurants pivoted to serving chicken tenders instead. To prevent future problems, identify inflation-susceptible ideas and replace them with more steady and secure ones.
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 CPA has access to a service that gives 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.
It may also be worthwhile to consider smaller, local vendors as well. Many full-service restaurants have shifted to local purveyors in recent years to keep up with consumer desires; while supplies are inherently limited due to operational size, they are less likely to be impacted by worker shortages in a processing plant or be held up by transportation delays.
Our firm has also received a significant increase in restaurant clients inquiring about adding various services charges to customer checks to avoid raising menu prices. While it 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 sure they are aware of their 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.
Another area to review is operating hours. The combination of labor shortages and product availability has led to some restaurants being open less — trimming low-volume periods won’t raise revenue, but it can reduce cost 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.
Melina Patterson is the vice 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. As vice president of the firm, Melina oversees client recruitment, relationship supervision, brand marketing and manages payroll.