Norms' Bigger Better Breakfast combo.
Norms Restaurants

In the face of inflationary pressure, restaurants haven’t changed portions, quality, or how meals are prepared.

How a 24/7 Breakfast Chain Battles Inflation in Costly California

The Golden State has one of the highest minimum wages in the country and recently passed legislation that will likely increase commodity costs. 

For Norms Restaurants, a 22-unit, 73-year-old diner based in Southern California, inflation reared its ugly head in the spring of 2021.

As indoor dining slowly ramped up, processing facilities, slaughterhouses, and factories faced a tight labor market and product was short, says David Cox, Norms’ vice president of food and beverage. Also, with a majority of consumers still home, manufacturers changed much of their operations to suit growing retail demand as opposed to restaurants. 

At this point, grilling season was coming up, a time when Norms does a lot of business with beef and steak. Typically, the casual-dining chain makes purchases or at least contracts product ahead of time to get through elevated summer costs. But inflation arrived sooner than usual, forcing the company to take menu price increases.

In the months since, challenges have remained—not only for Norms, but for the entire restaurant industry.

“We started back up, our business was there, the demand was there, but a lot of our suppliers were behind the eight ball because of those changes and the labor constraints, which caused shortage of product on the market. Supply and demand—basic principles—were stressed, and as a result, prices went up,” Cox says.

CEO Mike Colonna notes Norms just isn’t facing inflation; it’s doing so in California, one of the most expensive states in America. The executive says “it’s a different animal” in terms of labor and commodities.

To his point, the Golden State had the fourth-highest cost of living in 2021, according to the Missouri Economic Research and Information Center, trailing Hawaii, Washington, D.C., and New York. Minimum wage in California is $14; only Washington, D.C., Washington State, and Massachusetts are higher.

Also, there is no tip credit in California. While states like North Carolina can pay tipped employees $2.13 and let cash tips make up the difference of the $7.25 minimum wage, California operators must pay the full $14 per hour to all workers, which cuts into funds a restaurant could spend on the back of house, Colonna says.

Additionally, California concepts face pressure from Proposition 12, legislation mandating better living spaces for pigs and cage-free eggs. The stricter standards will presumably mean increased costs for restaurants. Colonna calls it a “double whammy” for a breakfast concept like Norms.

“It's very difficult to do business in California,” the CEO says. “The real estate is higher, the labor is higher, the commodities are higher on the coast, insurance is higher. It's a higher-cost area to do business than say Nevada, Vegas, other states. The positive is you got a lot more people, and you get more people that are willing to spend money.”

“The average volumes in California nationally—and you can pick any concept that you want, any national brand—and I would be willing to bet that probably 80 percent of them, 85 percent of them have higher volumes in California,” he adds. “The question is, is it enough to offset the additional costs? You have to do volume here in California in order to be a business.”

In the face of inflationary pressure, Colonna says restaurants haven’t changed portions, quality, or how meals are prepared. In January, Norms released an LTO menu featuring the Sirloin Steak Trio—6-ounce sirloin steak, four fried shrimp, three chicken tenders, choice of potato and vegetable, soup, salad, and dessert—for just $18.99. There’s also the quarter-pound Beef Quesabirria Burger with red chile broth and fries for $11.99.

Norms Restaurants

The Sirloin Steak Trio.

Norms Restaurants

The quarter-pound Beef Quesabirria Burger.

On the core menu, entry-level items are as low as $7–8 dollars, like the $7.99 Classic Breakfast Sandwich (two fried eggs, with choice of ham, bacon, or link sausage, with American Cheese on a toasted brioche bun served with French fries or tater tots) and the $6.99 stack of three hotcakes, which allows customers to add eggs for $2.

“If you're household income of $50, $60, $70, $80,000, you're looking for affordability,” Colonna says. “So it's very important to have entry-level items, affordability items, while you try to maintain your value proposition. As long as you maintain a delta or a difference between the competition. We also offer soup and salad and etcetera. We give more food, more product, for the price than any of our competitors bar none right now. We have to maintain that distance.”

In terms of commodities, Cox says Norms prefers to have products like beef and pork contracted prior to spring and summer, but when prices are so elevated, a more hand-to-mouth approach may be necessary so the brand isn’t locked into higher costs for too long.

As for labor, Norms takes a three-pronged approach. The restaurant has an hourly and management program that provides workers a stipend if they refer an employee that stays at least 90 days. The same offer is extended to guests; if they successfully recommend a worker, customers receive $200 worth of Norms coupons.

The third strategy is external and internal marketing of what the restaurant is about, like its 401(k), health insurance, competitive wages, and free employee meals.

Normally, Norms stores are open 24/7, but those operating hours haven’t been as feasible during COVID given the restrictive labor pool. National diner chain Denny’s has had the same issue. As of February, 50 percent of its U.S. footprint was open 24/7, which was only a small uptick from 48 percent at the end of December. Stores with full operating hours outperform restaurants with limited hours by nearly 20 percentage points.

Norms’ goal is for 11 restaurants to reach 24/7 in 2022. Colonna says graveyard cooks will also need to be paid about $2–3 more.

“I'll be honest with you, we are not fully staffed right now,” Colonna says. “But we peck away at it every day. I think the market is getting a little bit better. The employees that wanted to work whether it's in the kitchen or in the dining room, in the front of house, they're just not there, and we could come up with all these reasons why they're not there in the quantity that there used to be. So it's a scramble for everybody right now.”

The company opened two locations last year, one in Encino and another in Rialto. In 2022, Norms is eyeing three more spots in Ontario and West Hollywood, California, and Las Vegas. Each of those new stores will require resizing and value engineering, Colonna says, since construction has increased 20 percent compared to 2019. For instance, the upcoming unit in the Ontario Mills shopping outlet is a former Chevys Fresh Mex.

Equipment that used to take three to four weeks to obtain now takes eight to 12.

“There's a supply chain issue with construction, whether it's lumber, stainless steel, electronic parts, refrigeration,” Colonna says. “That's really a crapshoot right now, as far as trying to plan an accurate development calendar.”

From a customer perspective, Colonna senses growing concern with rising prices. The good news, he says, is that if guests go to the supermarket, their wallets will be squeezed there, as well. However, there’s also the idea that consumers could trade down to convenience stores or fast casual and quick service.

Colonna doesn’t know how long it will take, but he knows a larger reaction is coming.

“It's really a slow burn versus the revolution that we have to keep our eyes on,” the CEO says.