Restaurants risk losing customers who 'vote with their feet' amid inflation

Brooke DiPalma
·Senior Reporter
Updated ·3 min read
393

Increased menu prices and additional fees on receipts like kitchen appreciation, fuel surcharge, or wellness, are the latest efforts by restaurant owners to offset higher food and labor costs. However, these costly checks may also risk the loyalty of returning customers.

In April 2022, menu prices increased by 7.2%, according to the U.S. Bureau of Labor Statistics. That's the largest one-year increase since 1981.

Consumers are "sensitive" to these menu price changes, according to Hudson Riehle, National Restaurant Association SVP of Research. While consumers still view restaurants as "essential" to their daily lifestyle, Riehle warns that "the current economic environment will potentially influence their spending patterns in the months ahead."

With that said, Riehle told Yahoo Finance if customers' last experience "doesn’t meet their expectations, they are likely to vote with their feet" and not return.

"The typical restaurant business model is not set up to deal with this sustained and accelerated cost of food and labor which is putting extraordinary pressure on operators, and indications are these will continue," Riehle said.

Woman in coffee shop paying for a cup of coffee and cake with her mobile phone.
Woman in coffee shop paying for a cup of coffee and cake with her mobile phone.

However, these price hikes and additional fees seem to be the only way to stay afloat for many restaurant operators. The National Restaurant Association calculated that food costs jumped 17.1% from March 2021 to March 2022, while labor costs jumped 15.1%, based on its recent Restaurant Operations Report produced in conjunction with Deloitte.

Despite increasing menu prices, total pre-tax income for a restaurant with annual sales of $900,000 dropped by 75%. This means that as of March 2022, pre-tax income made up 1.2% of those restaurants' total sales compared to 5.0% prior to the COVID-19 outbreak in March of 2020.

Average small business restaurants already run on "very tight margins" of around 3-5 percent pre-tax, according to Riehle. Since the beginning of the COVID-19 outbreak in March 2020, 62% of operators say their restaurant accumulated additional debt. In addition, 57% say their restaurant fell behind on expenses

Riehle says the typical restaurant business model is "not set up to deal with this sustained and accelerated" food and labor costs, which then puts "extraordinary pressure on operators" and "indications are these will continue," Riehle warns.

Currently, the largest line items for restaurant include food, labor and occupancy costs. according to National Restaurant Association. All these combined account for roughly 33 cents of every dollar in sales during "normal times." Additionally, non-controllable costs such as occupancy, utilities, repairs/maintenance, general/administrative and direct operating represent about 29% of sales.

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A "now hiring" sign is posted in the window of a restaurant in Los Angeles, California on January 28, 2022. (Photo by Frederic J. BROWN / AFP) (Photo by FREDERIC J. BROWN/AFP via Getty Images)

Not all restaurant operators are opting to add in further fees. Natalie Freihon, owner of Strange Bird Hospitality, told Yahoo Finance she adjusts pricing based on costs on a "regular basis," but does not have plans to add any additional fees this year, which she said has presented challenges like she's never faced before.

"We have had to increase our costs though more frequently in the last year than ever before," Freihon shared.

Brooke DiPalma is a producer and reporter for Yahoo Finance. Follow her on Twitter at @BrookeDiPalma or email her at bdipalma@yahoofinance.com.

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