Inflation written in a newspaper.
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The easiest way for restaurants to offset inflation and protect margins is through pricing, says Jim Balis, managing director of CapitalSpring’s Strategic Operation Group.

Understanding the Inflationary Impact of Supply Chain and Labor

Restaurants have been forced into several adjustments, such as pricing and hiring retirees. 

The restaurant industry is still facing its fair share of pandemic-related challenges. Both producers and consumers have seen prices for food, rent, gasoline, and a bevy of other goods increase steadily over the last year and even more so in the last few months.

The producer price index, or wholesale inflation, increased 8.6 percent in October year-over-year. Beef and veal (41.5 percent), pork (17 percent), and fats and oils (44.5 percent), each saw significant increases in cost, according to the Bureau of Labor Statistics. The cause for skyrocketing prices can partially be traced back to continued disruption of the supply chain. In late October, Goldman Sachs reported that roughly 77 ships were outside docks in Long Beach and Los Angeles, waiting to unload $24 billion worth of goods.

Staffing issues continue to plague operators of franchise and independent restaurants, as well. Accommodation and food services had 1.4 million job openings in September, according data from the Bureau of Labor Statistics. That’s up from 751,000 last year.

“If somebody said to me last year that 2021 would be harder than 2020 I would have laughed in their face,” Jim Balis, managing director of CapitalSpring’s Strategic Operation Group, says. “But here we are. Who knew operating in a post-pandemic setting would be harder than operating in a pandemic?”

CapitalSpring is a private investment firm that focuses specifically on investing in the restaurant industry. The firm has invested $2 billion in more than 60 brands across North America.

Balis says one of the major issues the industry continuously deals with is the gummed-up supply chain. Operators are aware of consequences brought on by delays (increased costs of goods, equipment shortages, etc.), but he says new issues are arising.

The effects of inflation are being felt and restaurant owners must determine how to salvage margins.

“Right around the beginning of Q2 is when we started to see those [inflationary] pressures hit,” he says. “We have close to 3,000 restaurants that we’re involved with and through that we started speaking with experts and various brands to discuss with them how to be proactive and reactive to what was happening in the market at that time … It’s really about protecting margins.”

The easiest way for restaurants to offset inflation and protect margins is through pricing, Balis says.

“Historically restaurants have taken price one to two times a year,” he says. “We’re seeing companies take price four times this year, with another price increase potentially coming.”

As menu prices increase it would be logical to think customers would be weary of spending more money on the same product that cost less just months ago, but that isn’t the case says Balis. Because inflation is happening across the board (at gas stations, grocery stores, etc.) consumers are not turned off by the costs passed onto them.

“At some point the consumer is going to say enough is enough,” he says. “But today, grocery costs are going up, as well. The consumer is looking at the alternative and realizing going out to eat isn’t much more than cooking at home, and in some cases dining out is potentially less expensive.”

Brands can also save costs through other direct measures like managing their utilities more effectively. Balis says restaurants should look into technologies that do a better job of managing climate inside stores and energy consumed by equipment that isn’t being operated. According to the consumer price index, energy costs were up 30 percent in October compared to a year ago. Restaurants can also leverage kiosks, which are contactless and help with labor costs. 

Properly staffing restaurants continues to be another major issue operators are facing. With many companies increasing wages, offering better benefits, and enticing potential hires with incentives like free child care, those looking to fill open positions are forced to get creative when it comes to attracting new talent.

Balis says some restaurants under the CapitalSpring umbrella have used nontraditional methods. Potential hires will sometimes be offered a $250 cash bonus or $100 worth of Bitcoin. Many of them, he says, end up selecting Bitcoin.

“We’ve had some success offering Bitcoin as an incentive to come work for us,” he says. “We’ve seen some success with that both in getting applicants and retention. … We’ve had to be very scrappy around labor.”

Being scrappy means seeking potential hires from unusual pools of workers. Balis says some restaurants have had success hiring retirees. Hiring someone who was formerly retired fills the obvious need for workers, but it also has an unforeseen benefit, he says. The older workers in many instances provide a morale boost in the restaurant and often act as a mentor and parental figure for the other workers while on the clock.   

“They’ve been very good for the culture,” he says. “That’s been a positive consequence.”

While there isn’t a panacea for the issues surrounding staffing shortages and supply chain hold ups, Balis says morale in the industry isn’t waning. He says he hopes to see relief from inflationary pressures by Q2.

Those in the business are strapping in and figuring out the best way to face the issues plaguing their industry, he says. Owners are doing their best to adapt to a challenging landscape, being pragmatic when they can, and saving on costs when possible. Having to secure goods through different vendors or settling for lesser quality paper products is becoming more common, but that isn’t a deterrent.

“We’re just reacting to it,” Balis says. “Navigating through the stormy waters of the supply chain. Rather than wallowing in the misery of it all, we’re saying now is the time. It really is a reflection of who we are as operators. I think that’s more of the mentality right now.”