Such is the inflationary environment that restaurants can raise their prices at rates higher than they’ve been in 40 years and still watch their margins get squeezed.
But that’s the situation operators are in right now.
Over the past year, limited-service menu prices are up 8%. Full-service prices are up 7.5%. Few people operating today remember raising prices to that extent.
Yet their own prices have increased at rates well beyond that. According to the U.S. Department of Labor’s producer price index, food prices rose 13.7% year-over-year in February.
Meanwhile, average wage rates for leisure and hospitality employees are now up more than 11% over the past year.
Food and labor are restaurants’ two prime costs. That operators are not capturing all those costs despite raising prices at levels nobody has seen before is indicative of just how bad the operating environment has been. In other words, operators have actually been disciplined about price increases.
Soaring prices, higher costs
Source: U.S. Bureau of Labor Statistics
The good news for operators is that consumers have been willing to pay higher prices—likely due to a combination of high grocery prices and “pent-up demand.” As such, sales remain strong, and have continued to be strong even as gas prices have spiked. The fact is, consumers are more accustomed to an inflationary environment right now.
This is why so many operators say they have “pricing power.” Because they do.
The result of all this is an odd dynamic. Restaurants are reporting strong sales. The brand collector Fat Brands, for instance, said this week that its newly purchased Fazoli’s brand had two-year same-store sales of 25.6%. Twin Peaks, which it also purchased, was up 15.8% over the same period. Those are video game numbers.
Meanwhile, as my colleague Joe Guszkowski reported, steak chains continue to kill it, even through the recent omicron variant surge.
Not everybody is watching their margins thin. Companies like Texas Roadhouse have enjoyed improving margins thanks to consumer demand, fueling strong sales that ultimately improve profitability.
Yet margin compression remains an issue throughout the industry as costs rise faster than prices. The best example of this came from Carrols Restaurant Group, the large publicly traded operator of more than 1,000 Burger King locations.
The company noted that, in the fourth quarter of last year, its EBITDA margin, or earnings before interest, taxes, depreciation and amortization, dropped 430 basis points to just 3.3% of restaurant sales. This was despite same-store sales of 7.4%. Such sales should generally improve profits. They did not. “There’s no question that our current cost challenges are among the toughest, if not the toughest, I have seen in all of my decades as a restaurant operator,” CEO Dan Accordino told analysts last month. He is retiring after 50 years in the business.
The good news is that some of these costs could ease in the coming months. There is plenty of evidence that the labor shortage is easing as people feel more confident returning to the workplace with the easing of the pandemic. That should take some pressure off the labor line. At the very least operators should be able to get more people.
The bad news is that supply chain concerns aren’t easing any time soon. This week’s episode of my podcast, A Deeper Dive, features Keith Anderkin, the chief supply chain officer for Zaxby’s, who told me that he doesn’t expect supply chain problems to ease until the middle of next year. That would be 2023.
