— By George Lessmeister —
5 tips to protect profit by controlling cost.
In this period of high inflation, restaurant owners may feel pressure to raise prices to keep up with soaring costs. But this approach can backfire if not done carefully, and customers may go elsewhere with their already-stretched dollars if restaurant prices go too high. Being smart with expenses, especially labor costs, can help restaurants successfully compete in this challenging climate.
What Do the Numbers Say?
The Consumer Price Index released in early January showed prices actually decreased by 0.1% in December. While encouraging, that number is a bit misleading, as it primarily reflects a drop in the cost of gasoline. Food costs increased by 3.3%, and the overall inflation rate was 6.5%, well above the Federal Reserve’s target of 2%. The tide of inflation may be starting to turn, but consumers and business owners are still swimming neck-deep in higher costs for just about everything.
On an annual basis, prices for final demand foods increased 15.5% for the 12 months ending November 2022, according to the Producer Price Index. Foods with the highest price increases in 2022 were eggs (59.9%); butter and margarine (35.3%); lettuce (24.9%); roasted coffee (15.5%); and poultry (12.2%).
Inflation does seem to be easing somewhat, but prices are still expected to increase this year. The U.S. Department of Agriculture predicts all food prices will increase between 3.5% and 4.5% in 2023.
How Inflation is Affecting Restaurants
When adjusted for inflation, third-quarter 2022 industrywide sales decreased $1 billion from the previous quarter, according to the National Restaurant Association. Traffic dropped 18.2% at full-service restaurants in September and 6% at fast-food and quick-serve restaurants as consumers sought out value-focused dining options. So, what options do restaurant owners have to stay profitable?
Protecting Profits by Controlling Cost
The basic business equation is simple: revenue – expenses = profits. How can you maintain your profits when fewer guests are visiting your restaurant? You could raise prices, and there’s a good chance you’ll need to, but finding ways to cut expenses is a better option. As a rule of thumb, try to keep your prime costs (food, beverage and labor) within the industry norm of 55% to 65% of sales. Here is a list of how our clients nationwide are creatively controlling expenses.
1. Optimize the menu: Focus on menu items that can be made correctly and consistently with a minimum of labor. Pay attention to the cost of ingredients and feature menu items that use less expensive ingredients. Given the eye-watering cost of eggs, offer more pancakes and fewer omelets, for example.
2. Streamline supply chain: Reduce transportation costs by buying local where possible. Buy items that are in season and take advantage of seasonal price drops. When possible, buy in bulk and freeze or preserve for use later, or work the item into the menu in multiple ways.
3. Closely monitor inventory and reduce food waste: The restaurant industry generates 33 pounds of waste per $1,000 of a restaurant’s revenue, one study found. Follow a first-in, first-out model when a new order is received. Keep a consistent inventory schedule to know exactly how much of an item is in stock and how much is needed.
4. Pay only for the labor you need: Just as you don’t want to pay for food you can’t use, don’t pay for labor when you don’t need it. Analyze sales data and determine how profitable the business is down to the hour. Then use that information to decide if the business should open later, close sooner or if fewer people are needed on a certain shift.
5. Use temporary staff to fill peak times: Only hire the number of permanent staff you need for most situations and use temporary staff to meet demand at peak periods. You’ll save on payroll taxes and benefits, and you’ll avoid the headaches of recruitment and hiring. Choose a staffing partner who knows the industry to provide your team with high-quality temporary staff who know their jobs and can hit the ground running.
— George Lessmeister is CEO and founder of LGC Hospitality, a national staffing firm headquartered in Indianapolis. LGC has offices in over 40 U.S. cities. Team members work with hotel and restaurant leadership to place executives and temporary workers.