Food Inflation: The Impact on the Food & Restaurant Industry

Foodservice is one of the most thriving industries in the world. The industry has been growing steadily over the past few years despite recessions and other economic downturns. While restaurants and other foodservice establishments are keeping up with these trends, they are not, however, immune to the effects of inflation. 

It is therefore important for restaurant owners and foodservice providers to be aware of how inflation can impact their business so they can make the necessary adjustments.

If you are amongst the millions of people who live paycheck to paycheck, you are probably wondering how inflation will affect your spending power when it comes to food. In this article, we will discuss how inflation impacts on the food & restaurant industry and what you can do to keep your business afloat during these times.

What Is Food Inflation?

Inflation is, in layman’s terms, the upsurge of food prices. It is different from the overall inflation rate because it only takes into account the changes in prices of food items and excludes other commodities and industries. 

For a restaurant owner, it is important to take note of the food inflation rate because of its direct impact on your business budget. Allowing yourself to see through this will help you adjust your prices properly so that you do not end up overcharging or undercharging your customers.

What Causes Food Inflation?

According to USDA Economic Research Service, food prices in 2022 are expected to be higher than the increases the market experienced back in 2020 and 2021. An increase of 10 to 11% for food consumed at home and 6.5 to 7.5% for food purchased away from home is already being projected. Here are some of the factors that drive these prices up:

1. Rising Costs of Labor and Other Production Inputs

Labor shortages, salary adjustments, and other related issues can cause an increase in the cost of food production. This will eventually be passed on to the consumer in the form of higher prices. As such, restaurants and food service providers will have to spend more on labor costs, which can either be in the form of higher wages or additional training and benefits. This will again reflect within menu prices, which will lead customers to pay more for their meals.

2. COVID-19 Effects

During the COVID-19 pandemic and in post-pandemic times, the majority of businesses have seen many disruptions in various facets of their operations. The food and beverage industry is no different. From supply chain issues to labor shortages, restaurants have had a hard time coping with these extra expenses. In fact, there are a handful of food services and restaurants that have shuttered permanently because of the pandemic’s ripple effects.

3. Agriculture

The cost of agricultural products is also one of the main drivers of food inflation. The cost of these commodities depends on a number of factors, such as weather conditions, pests and diseases, and global demand. Quality is also an issue for the industry, as farmers and manufacturers end up being able to afford smaller quantities of the supplies they need to grow or manufacture their product. They are then forced to charge more money for their product in order to continue to bring in the revenue necessary to continue to produce for the demand, which ultimately affects the consumer’s pocket.

4. Government Policies

Not all countries welcome imports or export food products to other nations. There are some that have embargoed items, such as the United States does with its sanctions against Iran, North Korea, Cuba, and Syria. These and many more restrictions can limit the supply of food, which eventually drives up the prices.

How Does Inflation Directly Impact Restaurants?

Labor, food supplies, and transportation are just some of the key areas that are affected by inflation. As many restaurants are dependent on these things, they feel the pinch when rates begin to inflate.

Higher Prices Causes Less Traffic

As prices surge upward, those who have been most affected in terms of finance by the pandemic may no longer be able to afford to eat out as often as they did pre-COVID. When you consider the uptick in food prices, the number of those customers who might still be eating out drops even more significantly due to job loss and financial restraint. Add to that that many places still cling tight to social distancing restrictions, and you can watch this number reduce even further. 

Shrinking Menus

According to Lumina Intelligence, menu options have shrunk by 18% globally since the start of the pandemic. This is due to the fact that restaurants have had to be more focused on core offerings and have had to limit their menu to only the essentials to save money. This was partly a response to demand and also to be able to spend money on less ingredients. 

Sourcing these ingredients from local suppliers has also become a trend as it is more practical, easier to do, and saves money on the expenses associated with transporting them, the last point being even more important due to the recent gas inflation.

Things You Can Do To Stay Afloat

As there are no certainties to whether or not things will go back to “normal” anytime soon, it is best to consider this economy to be the “new normal”. If you are a restaurant owner, it is important to find ways to cut down on costs. You can do so by doing some of the following: 

1. Review Your Menu

It is normal for a restaurant to have a few items that do not sell as well as the others. Reviewing your menu and comparing each item to its sales can help you decide which dishes can be removed to save on recipe-specific ingredients or to reduce the amount of money spent on ingredients shared with other menu items. Not only will this help you save on food costs, but it will also help streamline your operations and make things more efficient from kitchen to customer. 

2. Compare Suppliers

Suppliers are arguably one of the biggest factors when it comes to pricing your meals. The lower the cost of your supplies, the lower your menu prices can be. When you are trying to save on costs, it is best to look for suppliers who can give you a better deal without sacrificing the quality of the product. You can also try to source your supplies locally to avoid the high transportation costs while also helping out small businesses in your community.

3. Automate Your Operations

If you have not done so already, now is the time to automate your restaurant operations. There are a lot of softwares and applications that can help you with this. Automating your operations will help you save on labor costs as well as help you become more efficient, thereby offering your customers a better experience in the long run. 

For example, you can now use an online ordering system for take-away orders so that your customers can place their orders themselves using an app or your website rather than dedicating an employee to just taking phone orders. This way, you can use that labor for something else that will further streamline your restaurant.

4. Offer Discounts and Promotions

Offering discounts and promotions are a great way to attract customers and get them to come back. You can offer discounts on certain items or you can have a promotion where customers can get a certain dish for a lower price when they order another dish. Just make sure that the discounts and promotions you offer are not too high as it will eat away at your profits.

5. Consider Price Changes

To balance out the costs, you may need to slightly increase your menu prices. You can do this by evaluating your competitors and seeing how much they are charging for similar items. You can then adjust your prices accordingly. Just make sure that you do not increase your prices too much as it will deter customers from coming to your restaurant.

What Does the Future Hold for Restaurant Inflation?

There is no saying whether inflation will continue to rise or if it will start to go down in the coming months. However, what is certain is that the food and beverage industry will continue to be affected by it. 

Restaurants will need to find ways to cope with the rising costs while still being able to provide quality food and service to their customers. They will need to be more creative with their menu offerings and find ways to cut down on costs without compromising the quality of their dishes.