A slogan saying "homemade vs. restaurant" is printed on top of a picture, where cooked pasta is shown on the left and cooked gnocchi w/ shrimp on the right. — Photo by BuzzFeed.com

"Everything is getting more expensive every day!"

Is that how you feel about today’s inflation? Consumer prices at grocery stores, for example, had increased 13.1% in July 2022 from a year before.

Higher food prices and increasing wages pressure restaurant operations

Food and beverages are the core product that a restaurant sells. Food and labor make up a restaurant's two highest variable costs. Besides higher food prices, labor costs in the second quarter also surged 5.1% from last year, recording the largest rise since 2001. Restaurants are under high pressure to increase meal prices.

Restaurants manage to raise the menu prices at a lower rate

Consumer prices at restaurants in July 2022 only increased 7.6%, resulting in the most significant inflationary gap between grocery stores and restaurants since the 1970s. By comparison, restaurant meals have become a “bargain” now. More people go to fast food restaurants for cheap bites instead of cooking at home. Taco Bells, which sells burritos and tacos for $1, had seen an 8% increase in-store sales in the second quarter of 2022.

How do restaurants make eating out a better value than cooking at home?

While restaurants cannot control food costs, offering meals in smaller portions can be a solution. Introducing/promoting items with higher profit margins (e.g., chicken sandwiches) or substituting a higher-priced item with an alternative (e.g., using green beans instead of asparagus) can also help.

Meanwhile, robots are finding their way to restaurants. Introducing automatic services to front- and back-of-the-house operations can help restaurants cut labor costs without dealing with the HR challenges like labor shortage, “Great Resignation,” and soaring wages.

It is challenging for restaurants to avoid a price hike, but so far, the industry is doing an excellent job in keeping it at a reasonable level. Now, it is time for restaurants to communicate their value to customers.

Do you think the restaurant industry is doing an excellent job in keeping the meal prices down? What suggestions will you make for restaurants to conquer the rising food and labor costs?

Linchi Kwok
Professor at The Collins College of Hospitality Management, Cal Poly Pomona
CAL Poly Pomona

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