Inflation Putting the SQUEEZE on Businesses

Agood news/bad news scenario has set up for restaurant owners in 2022. While the National Restaurant Association (NRA) projects that the restaurant industry will have all-time high sales of $898 billion in 2022 – rising for the first time above prepandemic 2019 sales – inflation in the U.S. economy will prevent restaurant profitability from seeing the same recovery.

In fact, higher menu prices caused by increases in the costs of labor, material and commodities account for some of the record sales projection. Adjusted for inflation, the sales number is 11.5% below 2019, according to the NRA in its 2022 State of the Restaurant Industry report.

The report also noted that 90% of restaurant operators say costs are up, and 80% say profits are lower.

The foothold taken by inflation in the U.S. economy was felt by restaurateurs halfway through last year. “We began noticing increases in mid-2021 as the labor market became more stressed and supply chain challenges were more frequent,” said franchisee Matt Herridge of Charton Management, with eight BURGER KING® locations in Ohio and West Virginia.

by SEAN IRELAND

“Early last summer, as we were bidding out the new BURGER KINGs we opened late in quarter three, it was apparent that construction and material costs had increased significantly and continued to do so through the back half of 2021,” said CEO Luke Pisors of Ambrosia QSR, with 136 BURGER KING restaurants in Oregon and Washington. “By August, there were also significant supply chain disruptions, affecting product availability as well.”

The ongoing labor difficulties faced by restaurants, combined with the supply chain disruptions noted by Pisors, have hit restaurants, and much of the economy, with a one-two punch that ignited inflation to levels not seen since the late 1970s and early 1980s.

Wages and salaries for private industry workers increased 5% in 2021, according to the U.S. Bureau of Labor Statistics, and the cost of benefits increased 2.9% for the year. The trend is continuing in 2022.

Herridge said salaries are continuing to go up as his restaurants compete with others to hire from a limited pool of candidates and keep current team members from taking other jobs. In addition to boosting salaries, Charton Management also offers a $2 per hour bonus each pay period for team members who don’t miss a shift in that period.

Ambrosia QSR has also experienced a rapid increase in labor costs. “We’re in one of the highest-cost labor markets in the nation, with a minimum wage in Seattle, Washington, of $17.27 per hour,” Pisors said. “However, like much of the country, we found market forces pushing beyond the state minimums, even when they’re in the $13.50-$14.50 range currently. Our average hourly rate increased over $2.50 in the past few months alone.”

The additional costs of wages and benefits are one side of the inflation crunch. The other comes from increasing expenses for food and materials caused by shortages and increased shipping costs. The NRA noted in September that wholesale food prices had posted the highest 12-month increase since 1980. Among restaurant commodity prices, beef was up 60%, fats and oils up 50% and eggs up nearly 40%. The U.S. Department of Agriculture’s Consumer Price Index for Food indicated that all food prices were 6.3% higher at the end of the 2021 than they were in December 2020.

Operators have had little choice but to pass on increases to consumers. The Bureau of Labor Statistics reported that restaurant menu price inflation hit a nearly 40-year high in November. Limited-service restaurant prices rose 7.9% year over year.

On a call to discuss 2021 earnings in February, CEO José Cil of BK® parent company Restaurant Brands International Inc. discussed the challenge. “On pricing, we took price in 2021 at each of our brands, and given the level of commodity cost and labor inflation we’re seeing, we expect additional price increases in 2022 and are working closely with franchisees to make the best decision for guests and our franchisees’ P&Ls,” he said.

Herridge noted that Charton Management restaurants have increased menu prices, but how long they will continue to do that is an open question. “We have significantly raised prices over 2021,” he said. “It seems as if there may be some more room to do so since many guests still are receiving higher levels of expendable income via government largesse. When this ends however, there will likely be a need to hold.”

“We’ve taken some price increases, but we’re trying to stay below the industry pricing trend for two reasons,” Pisors said of Ambrosia QSR. “First, increased menu board prices can lead to more guests choosing discounted or value items, negating the value of the increase. Second, we’re challenged with traffic growth across the brand, and we have to be careful not to exacerbate that trend as we deal with profitability issues.” Herridge also noted the delicate balance BK® restaurants are seeking. “We must find a way to bring guests to our restaurants outside of discounted food,” he said.

While sales are predicted to be up across the restaurant industry, inflation may keep profits depressed. January sales were up slightly in Charton Management’s restaurants, but profitability still dropped due to inflation. Pisors said sales at Ambrosia QSR have trended negatively against the prior year and against competitors in the industry.

That challenges restaurant teams to provide a guest experience that overcomes any of the pandemic’s challenges – be they longer waits because of labor shortages, supply chain kinks affecting the availability of menu items or inflation. In the experience of these two franchisee companies, there are complaints, but they are often made with an understanding that some problems are out of the restaurant’s hands.

“Guests currently understand the need for price increases in general,” Herridge said. “We have commiserated with the complaining guest as to the overall challenges brought about by the pandemic.”

“Guests have certainly been frustrated, whether by staff shortages or product outages,” Pisors said. “There are also many who are visibly appreciative to the team members who are working so hard in challenging circumstances.”

How long those circumstances will continue is difficult to predict, but according to the NRA’s State of the Restaurant Industry Report, restaurant owners are bracing for the challenges to last for months to come. “2022 for the restaurant industry will remain another year of transition, and the year is off to a pretty sober start,” said Hudson Riehle, senior vice president of the NRA’s research and knowledge group, in a story for CNBC. “When you survey restaurant operators, 76% across the country now say that business currently is worse than it was three months ago. It remains a fairly volatile and uncertain environment.” n

SEAN IRELAND is the NFA director of communications. You may reach Ireland at 678-797-5165 or seani@nfabk.org.