Managing a Restaurant in Times of Inflation - What to Do? The Answer Lies in 3 Principles

According to American Revenue Management Solutions, the market situation in relation to rising prices will be even more challenging. All those operating in the gastronomy industry know it, but some may not know what steps to take to stay in the game. The key to "success" (yes, success in this industry has been redefined) is proper management of costs and prices in your establishment. Three principles have been developed that should guide restaurant owners in making pricing decisions in 2022.

Principle 1: Focus on the Guest's Perspective

With lower consumer purchasing power, introducing a pricing strategy regardless of the consumer is risky. A price increase on the menu may cause guests to stop visiting your establishment regularly or start looking for alternatives. On the other hand, basing pricing decisions on the guest's perspective optimizes the profitability of the business.

When following this principle, consider:

• Schedule of price changes: Smaller but more frequent price increases on the menu are less noticeable to guests. In uncertain times, more frequent price changes allow for adjustments on an ongoing basis, depending on needs.
• Properly balancing prices (and any changes) on the menu: Using a pricing strategy based on monthly sales data can assess where price sensitivity is high or low.
• Reverting to old prices: A reasonable pricing strategy requires gradual introduction of changes. The same applies to their withdrawal. Before making the right decision, price sensitivity of individual menu items should be researched and the impact of external factors should be taken into account.

Price sensitivity is the degree to which the price of a product affects consumer purchasing behavior.

Principle 2: Build Confidence in an Uncertain Environment

It's difficult to predict what's to come this year. Almost all fixed costs face inevitable growth, and inflation tests the ability and willingness of consumers to spend money on eating out. In times of uncertainty, a certain goal can be set: to take care of guest traffic in your establishment and maintain an appropriate margin.

To increase the flexibility of your pricing strategy while maintaining best practices, consider the following:

• Use POS data: Based on invoices and other purchase documents, determine current price increases and which products they affect.
• Start from a higher threshold: In other words, if you've determined that a 5% target price increase is necessary in your restaurant and have previously raised prices by 1-2%, it's worth starting at a level of 3%, with the remaining 2% applied at a later stage. An alternative solution is to raise prices in three stages: 2.5%, 1.5%, and 1%. A higher percentage at the beginning of the year should have a positive effect on the restaurant's financial performance in the following months.
• Remember that the goal of these actions is to maintain guest traffic in your restaurant and maintain an optimal value for the margin of the dishes and drinks sold. A 5% menu price increase may seem like the only way to survive, but as consumers become more price-sensitive, too large a jump may push them toward the competition.

Principle 3: Short-Term Panic, Long-Term Success

Rising labour and commodity costs are the reason for the current crisis. But will a similar situation persist in six months? The answer is: yes and no. Consider the following:

The increase in labour costs is likely to persist. The annual budget should be planned to balance long-term increases in labour costs, taking into account increases already undertaken in previous years. Analyze the increase in COGS (Cost Of Goods Sold). Based on data on the Consumer Price Index (CPI) for goods and services from November 2021, we know that this index for meat, poultry, fish, and eggs increased by 11.9% compared to 2020. Beef prices increased by 20.1%, and pork prices increased by 14.1%.

Summary

In the era of inflation, developing a pricing strategy for your restaurant is crucial. This strategy must not only meet business needs, but also take into account the perspective of the consumer - the restaurant guest.

At BVA, we work in the gastronomy industry to provide our clients with solutions tailored to their needs, including pricing strategies, menu engineering, and restaurant cost management. If you need support in a particular area, contact us today.