How Does Inflation Affect Restaurants: A Total Overview

Marketing 19 minute read 21st July 2023

How does inflation affect restaurants? It is a question on the lips of many business owners in the restaurant industry. As of mid-2023, annual inflation on food prices was 6.7% - creating massive repercussions for the restaurant industry and consumers.

2022 saw the US’ gas and food prices reach a 40-year high. While inflation is currently reducing in severity, it’s not a done deal. The economy (and inflation) is out of control for most people. Which creates anxiety. Inflation has a massive impact on restaurants - lowering profit margins and sometimes ruining businesses.

It’s also helpful to learn as much about it so you can tackle it when it rears its ugly head. With this overview of inflation’s impact on restaurants, you can maintain a consistent cash flow.

Whether you are riding out this wave of inflation or preparing for future inflation, this guide will help. Don’t let inflation dishearten you. The best way to protect your business is to educate yourself and get ahead of the curve. Congratulations on this first step.

This guide has some evergreen advice for managing inflation in the restaurant industry, including customer transparency tips. Expect everything from menu prices to future preparation tips - this is a total overview of the restaurant’s inflation experience.

how does inflation affect restaurants

What Is Inflation?

Before we get into the question of ‘how does inflation affect restaurants,’ we’ll take a more general look at inflation. Inflation is a simple concept: the rise of general prices in an economy. When prices rise, each currency unit—be it dollars or euros, etc—buys less than it previously could.

For example, while you could usually buy a milk bottle for $3, you may now have to pay $5. Or, while you could previously catch a taxi home for $15, it is now $25. All the prices rise during inflation, and the country has a higher cost of living.

There is global inflation in full fury in 2023. The UK has a notably high inflation rate at the moment. The leading causes of the UK’s inflation are freak weather disrupting crops and energy prices rocketing after Russia invaded Ukraine. These seemingly isolated events have a ripple effect on the price level.

The US is also experiencing severe inflation in 2023. Like the UK, freak weather is widely to blame for the rise in food prices. However, experts also cite backlog orders and shortages from COVID-19. Supply shock is a leading cause of inflation, so this makes sense.

To summarize, inflation is the rapid increase in prices across a nation and often the globe. While each country has differing inflation levels, global events tend to have a knock-on effect on each other.

This means that a bad round of crops in Spain and Northern Africa could impact food prices in the UK. Or if Mexico has a bad round of crops, the US food prices could rocket. It is essential to keep this broader perspective in mind. This way, you can limit risks as much as possible by having different sourcing options.

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How Does Inflation Affect Restaurants and Their Pricing: Why Are Restaurant Prices Rising?

So, how does inflation affect restaurants and their pricing? In short, restaurants have to keep a profit margin to stay afloat. The whole business relies on there being a surplus profit. If the price level for operating rises, restaurants have to up their menu prices to bridge the gap.

It is one of the most unfortunate but necessary business strategies in the restaurant industry. And while it can negatively impact customer relationships, it is unavoidable.

The main reason there’s a mass movement of restaurant prices rising is that food prices are rising. When food prices rise, the cost of ingredients rises. This means that to make profit from each dish, the menu prices need to rise per dish.

Increased ingredient prices mean a decreased profit per dish, so restaurants eventually reach a point that demands action. This can also apply to drinks menus, especially when restaurants use fresh ingredients.

Energy costs increasing also causes a need to take a second look at menu prices. This occured in the aftermath of situations like the UK’s rising gas and electric costs after Putin invaded Ukraine. Broader events can spark spikes in energy costs that ripple through the economy, including the restaurant industry.

Since food and drink are restaurants’ primary sources of profit, this is the main thing to increase. So despite food not being the cause of inflation in this scenario, you can still see a rise in menu prices.

Lastly, importation costs and issues with supply chains can impact restaurants. Supply chain partners have a significant impact on the restaurant industry. If restaurants have to outsource to different suppliers last minute or pay premium shipping costs, it impacts price level.

Inflation can impact restaurants for many reasons - primarily rising food costs, importation, energy costs, and supply chain issues.

How Does Inflation Affect Restaurants and Their Customers: Customer Reactions to Inflation

How does inflation affect restaurants and their customers? What reactions can you expect from customers when you raise menu prices due to inflation? In short, it depends on how you prepare customers for the shift. It also depends on how reasonable you are with the price level raise.

If you’re reasonable and provide notice, you may have a few disgruntled customers, but overall, you may find customers supportive. In the worst-case scenario, customers may be venting to you and angry at the broader inflation issue.

If you raise prices without notice or reason, you will get negative responses. Nobody wants that. So pay attention to this next section on creating more positive customer responses to inflation-related changes.

Ideally, you give customers as much as a month’s notice about price level increases. During this time, you will be completely transparent with customers. You can post posters or send emails to notify customers about the increase. In these messages, you can also briefly explain inflation and its impact on your business.

Reiterate that you value your customers and look forward to providing a better service. And, if there will be positive changes to the service experience due to price increases, highlight them here.

Can you afford better quality food? Pay rises for staff? Anything wholesome or beneficial to customers belongs here in these messages.

Another essential way to create more positive reactions is to prep staff. All your staff, especially front-of-house members, should be happy explaining inflation and its impact that necessitates increasing menu prices.

This way, customers can stay in the loop. You can create an ‘us versus problem’ environment rather than a ‘business vs customer’ environment. It is always fantastic to have your customers on-side. In short, if you prepare properly, your customers should react fairly amicably.

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How Does Inflation Affect Food Prices?

So we’ve looked at a definition of inflation and a general overview of what causes restaurant prices to rise. Let’s get more specific in answering the question of ‘how does inflation affect restaurant.’ How does inflation affect food prices?

As we stated earlier, rising food prices are the primary indicator of inflation in the restaurant industry. Food prices rise in two contexts: ingredients and food costs. Rising ingredient costs are what restaurants face when sourcing food for their restaurant, driving an increase in menu prices. Food prices also rise when restaurants increase dish prices, increasing the cost for the consumer to maintain business profit.

Rising ingredients costs constitute a significant impact of inflation. This is a popular area of impact since much of the inflation is from failing crops or food supply chains.

Things like freak weather can disrupt supply chains, forcing sourcing from more expensive suppliers. It can also make certain foods more scarce - raising their value. This can cause a spike in demand for food or demand increased prices to cover profit margins.

Dish prices increasing is a natural step for the restaurant industry after events like the above. It is the second half of how inflation affects food prices and consumers’ consequences. Restaurants make a profit by having a profit margin on each dish. This means they charge a certain percentage more than the ingredients cost them.

However, during inflation, this percentage reduces as ingredients cost more. Or if things like energy or rent increase, the percentage of profits needs to increase to cover the extra costs. To stay afloat and maintain an adequate profit margin, restaurants must increase their prices per dish.

Inflation massively dictates food prices in the restaurant industry. It’s important to have this insight to fully understand its impact.

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How Does Inflation Affect Restaurants: What Happens When Inflation Rises?

What is the timeframe of inflation’s impact on restaurants? There’s no point in just knowing the answer to ‘how does inflation affect restaurants’. What happens when inflation rises? What can you expect as a business owner? These details matter.

  1. Inflation rises and causes initial panic and a decrease in profit.

The first stage of inflation is noticing raised costs of running your business and decreasing profits. Without inflation preparation, you’ll likely only realize when it is upon you - facing steeper costs and reduced profit.

The good news is that you can predict inflation trends. There are loads of websites online projecting inflection trends as far in advance as 2028. And by paying attention to news and foreign events that could impact your supply chain, you can stay better prepared. This means you can skip the panic in this first step and jump straight into preparation.

  1. You calculate the necessary menu pricing changes.

Not all inflation demands price increases. If the inflation is due to plateau after a few months, you can ride it out without adjusting menu prices. This has some brilliant benefits, including maintaining a positive customer relationship. But if you calculate significant losses, you must figure out how much increase you need.

  1. Notify customers of upcoming price changes.

Next, you notify customers of the upcoming changes. Let them know what inflation is and how it is impacting your business. Emphasize the unsustainability of the current menu prices and your appreciation of their support. And be ready to answer any questions.

  1. Implement changes to menu prices.

Only at this point do you implement changes to your menu prices. This way, you are confident that your changes are reasonable and adequate to maintain healthy profits during inflation. You will also have had time to prepare customers.

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How Does Inflation Affect Restaurants: How To Prepare for Inflation

After reading this guide, you should confidently be able to answer the question of ‘How does inflation affect restaurants.’As you can see, it’s essential to be proactive and precise with your business strategies in the face of inflation.

So how do you prepare yourself and your business? What steps can you take before the full brunt of inflation hits? Preparation really is key for tackling inflation.

Most importantly, pay attention to any upcoming inflation predictions. This way, you can forecast and flag any potential need for future changes to menu prices. You should also keep your books in check to ensure that you have all your profit margins closely monitored. It is much easier to notice changes and implement adjustments when you already have a backlog of profit margins.

Lastly, you should always invest in building healthy customer/business relationships. The better your relationship with your customers, the better you’ll manage inflation.

You can use tools like restaurant customer loyalty programs. You can also foster and encourage good communication skills amongst your staff members. And increase customer loyalty as much as possible.

Do you want some extra help with managing your restaurant amidst inflation? At Beambox, we are always excited to assist you with marketing your restaurant business. As experts in WiFi marketing and small business improvement, this is our bread and butter. We are more than happy to help navigate the question of ‘how does inflation affect restaurants’ and its wider impacts.

Beambox offers the best all-in-one WiFi marketing platform. We use a dynamic approach to connect, attract, and keep loyal customers. Start your Beambox free trial today, and let us help you maximize your potential - inflation or not.

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