Inflation is forcing restaurants and mom and pop chains like McDonald's to build on their strengths

Inflation is forcing restaurants and mom and pop chains like McDonald’s to build on their strengths

Customers at a McDonald’s restaurant

Scott Mill | CNBC

As the restaurant industry battles inflation, the chains’ large size and access to cash give them the upper hand, but independents have their own advantages when dealing with higher costs.

Feeling the pressure on their budgets, consumers have reduced their frequentation of restaurants in recent months. Monthly same-store restaurant traffic has declined year-over-year for eight straight months, according to industry tracker Black Box Intelligence. In response to this decline, chains and independents are scrambling to address the cost factor without alienating diners.

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Prices for food consumed outside the home rose 8.6% over the past 12 months in October, according to the Bureau of Labor Statistics, as restaurants raise menu prices to cope with soaring food costs. ingredients, labor and even energy.

Aaron Allen, founder and CEO of restaurant consultancy Aaron Allen & Associates, compared restaurant chains to tankers and independents to speedboats. Channels have bigger budgets, bigger scale and other tools like cutting edge technology. But they are also often slow to act and mired in bureaucracy.

A family restaurant, on the other hand, does not have the same access to money or the advantages of size, but can act more quickly to make changes.

Scale Matters

When it comes to inflation, restaurant giants like McDonald’s and Starbucks have obvious advantages over independent burger joints and cafes. Their massive size helps chains set prices early when buying ingredients from suppliers, and they can often lobby for more favorable contracts.

“If you’re a chain, you have the power to negotiate and influence suppliers, that’s what happens,” Allen said. “Freelancers don’t have much leeway to switch providers except for non-essential things.”

Of the more than 843,000 restaurants, food trucks and ghost kitchens in the United States, about 37% are part of chains with more than nine locations, according to food analytics firm Datassential.

Noodles & Companywhich has more than 450 locations, recently signed an agreement for its 2023 chicken supply. The company expects the contract to help it save about 2% from its third-quarter margin for the cost of goods sold.

“As you look at any disruptions in the supply chain environment, suppliers want some level of certainty in terms of purchasing quantities, not just prices,” said Noodles CEO Dave Boennighausen. .

Since chains place larger orders, suppliers generally prioritize their orders over those of independent restaurants. Adam Rosenblum, chef and owner of Causwells and Red Window in San Francisco, said uncertainty about securing ingredients has led him to buy two or three times what he normally would when they are available. And carrying that higher inventory puts more pressure on its extremely thin profit margins.

“I don’t have the buying power, I can’t set my prices every year, and I just don’t consume enough product to matter to some of the bigger companies,” Rosenblum said.

In the UK and other European markets, which have seen even higher inflation than in the US, major franchisors have said they are providing financial assistance to operators struggling to cope with higher costs. For instance, McDonald’s Executives said in late October that the fast-food giant could offer “targeted and temporary support” to European franchisees who need it.

Independent operators do not have the same luxury. Kate Bruce, owner of Buttery Bar in Brooklyn, said she faced higher costs for everything from labor to cooking oil to energy.

“Running a restaurant is expensive these days, and ours is small, so those costs are significant and everything is very tight,” she said.

More agile and more flexible

In contrast, independent restaurants have the advantage of speed. If a mom and dad notice much higher prices for a key ingredient in an entree, the restaurant can quickly change prices, reduce portion sizes, or even remove the item from the menu.

For example, Bruce said that if she increases the price of an item, she likes to add something else to the menu that is less expensive.

“Yes, we have Wagyu beef, but [we] also have salads that are a bit more affordable and chicken dishes that won’t scare anyone to come in,” she said.

Portillo’s The restaurant chain’s CEO, Michael Osanloo, said independents have more flexibility when it comes to changing prices. Fast food customers expect the same prices at each location, but menu prices can vary depending on where the location is located and whether a franchisee or the company owns that restaurant. “There’s a little price shock,” Osanloo said.

Consumers care more about price when visiting a chain restaurant, according to results of a PYMNTS survey of approximately 2,400 US consumers. More than a third of respondents said everyday prices mattered when choosing a chain restaurant, while only 22.5% said it factored into their decision-making when choosing a restaurant. an independent restaurant.

And while beloved chains have brand recognition and the pricing power that comes with it, independents are also earning the goodwill of some consumers as a small business.

“There’s this perception of authenticity, like a family-run Italian restaurant versus a big chain like Olive Garden,” Allen said. “That feeling started hurting the chains.”

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