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How restaurants address inflation, from McDonald’s to mom and pops

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Customers at a McDonald’s restaurant

Scott Mlyn | CNBC

Because the restaurant industry battles inflation, the massive size of chains and their access to money gives them the upper hand, but independents have benefits of their very own when managing higher costs.

Feeling the pressure on their budgets, consumers have been cutting back on their restaurant visits in recent months. Monthly same-store restaurant traffic has been shrinking compared with the year-earlier period for eight consecutive months, in response to industry tracker Black Box Intelligence. In response to that drop-off, each chains and independents are working to handle the price factor without alienating diners.

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Prices for food consumed away from home have risen 8.6% over the past 12 months, as of October, in response to the Bureau of Labor Statistics, as restaurants raise menu prices to handle the soaring costs for ingredients, labor and even energy.

Aaron Allen, founder and CEO of restaurant consultancy Aaron Allen & Associates, compared restaurant chains to grease tankers and independents to speedboats. Chains have greater budgets, broader scale and other tools like advanced technology. But they’re also often slow to act and mired in bureaucracy.

A mom and pop restaurant, alternatively, doesn’t have the identical access to money or the advantages of size but can move more quickly to make changes.

Scale matters

Relating to inflation, restaurant giants like McDonald’s and Starbucks have some obvious benefits over independent burger joints and occasional shops. Their massive size helps chains lock in prices early when buying ingredients from suppliers, and so they can often apply pressure to receive more favorable contracts.

“For those who’re a series, you have the facility of bargaining strength and leverage with suppliers, which is what’s happening,” Allen said. “Independents do not have lots of wiggle room to modify suppliers, apart from non-core things.”

Of the greater than 843,000 restaurants, food trucks and ghost kitchens in the US, roughly 37% are a part of chains with greater than nine locations, in response to food analytics firm Datassential.

Noodles & Company, which has greater than 450 locations, recently signed a deal for its 2023 chicken supply. The corporate expects the contract will help it save about 2% relative to its third-quarter margin for cost of products sold.

“As you leaf through the entire disruption in the provision chain environment, vendors want some level of certainty when it comes to purchase quantities, not only price,” Noodles CEO Dave Boennighausen said.

Because chains are placing larger orders, suppliers typically prioritize their orders over those for independent restaurants. Adam Rosenblum, chef and owner of Causwells and Red Window in San Francisco, said uncertainty securing ingredients has caused him to purchase two or 3 times what he normally would after they’re available. And carrying that higher inventory puts more pressure on his razor-thin profit margins.

“I do not have the buying power, I do not get to set my prices annually, and I’m just not going through enough product to matter to a number of the greater corporations,” Rosenblum said.

In the UK and other European markets, which have seen even higher inflation than within the U.S., large franchisors have said that they are providing financial assistance to operators who’re struggling to address higher costs. For instance, McDonald’s executives said in late October that the fast-food giant may offer “targeted and temporary support” to European franchisees who need it.

Independent operators do not have the identical luxury. Kate Bruce, owner of The Buttery Bar in Brooklyn, said she’s been facing higher costs for all the pieces from labor to cooking oil to energy.

“It’s expensive to run a restaurant lately, and ours is small. So these costs matter, and all the pieces could be very tight,” she said.

Nimbler and more flexible

However, independent restaurants have the advantage of speed. If a mom and pop notices much higher prices for a key ingredient in an entree, the restaurant can quickly change prices, slim down the portion size and even remove the item from the menu.

For instance, Bruce said that if she raises the worth on one item, she likes so as to add something else to the menu that is cheaper.

“Yes, we’ve Wagyu beef, but [we] even have some salads which might be somewhat cheaper and chicken entrees that are not going to scare anyone away from coming in,” she said.

Portillo’s restaurant chain CEO Michael Osanloo said independents do have greater flexibility in the case of changing prices. Fast-food customers expect the identical prices at every location, but menu prices can vary based on where the placement is and if a franchisee or the corporate owns that restaurant. “There’s somewhat little bit of price shock,” Osanloo said.

Consumers care more about prices after they’re visiting a series restaurant, in response to findings from a survey of roughly 2,400 U.S. consumers conducted by PYMNTS. Greater than a 3rd of respondents said on a regular basis prices mattered when picking a series restaurant, while just 22.5% said it factored into their decision making when choosing an independent eatery.

And while beloved chains have brand recognition and the pricing power that comes from that, independents also earn goodwill from some consumers by virtue of being a small business.

“There’s this perception of authenticity, like a family Italian restaurant versus an enormous chain like Olive Garden,” Allen said. “That sentiment has began to hurt chains.”

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