Operations
Examining alternatives to raising menu prices
In the second part of a two-part series on raising prices, we examine how much is too much and potential alternatives to increasing prices.
April 11, 2022 by Mandy Wolf Detwiler — Editor, Networld Media Group
This is part two of our two part look at raising prices. Click here for part one.
In the first part of an in-depth look at raising prices, experts provided insight on how to approach increasing menu prices, what needs to be taken into account and best practices in developing a strategy.
But how much should a restaurant operator increase prices and what can be done if raising prices is not a feasible or winning proposition?
How high is too high?
How much a brand should raise its prices should be based on inflation, which is currently around 7% to 8%, according to Matthew Lukosavich, strategy director, restaurant division for Vericast. QSR checks tend to average $10 to $15 to north of $50 for fine dining.
"Start with the inflationary number, and then from there understand the impact it has on your business," Lukosavich said in a phone interview. "Customers are noticing — 61% agree prices are making dining out too expensive. As a brand, the more you know your consumer, the better served you'll be when you start looking at that price equation for you brand."
As food prices rise, restaurants should try to stay within their target ratio for food cost to gross food revenue in order to maintain target profits, according to Ben Johnston, COO of Kapitus, a finance company that provides growth capital to small businesses. "To do this, restaurants will either need to use lower cost food items or raise menu prices. It is also important to manage labor costs to a target percentage of gross food revenue," he said in an email interview. "One way to lower food costs is to purchase more unprocessed foods, which require additional preparation labor. However, a restaurant must be careful not to replace food with additional staffing expenses that outweigh the savings in food."
On the other hand, many companies fail to take into consideration customer needs and how much a customer is willing to actually pay.
"Two scenarios could arise," Mohit Agrawal, manager at Simon-Kucher & Partners Dubai, a global consulting firm specializing in strategy, marketing, pricing and sales. "Either the customers no longer see the value for money in the product, wherein they may switch to an alternative with lower cost or better value perception, or the company simply left money on the table, wherein the customer appetite to pay was much higher," he said in an email.
On the other hand…
While raising prices may seem like the only answer to rising costs, some brands have found ways to avoid boosting menu prices.
"We've seen something like 'shrinkflation.' A good example would be Domino's lowering their wing count from 10 wings to eight wings for $7.99 and so they're cutting the quantity of what they're giving," Lukosavich said.
New menu items can be priced at current costs and introduced with fanfare as long as a brand isn't pricing itself out of the market.
"When you speak to your consumer about that value message, any form of your advertising, from tv to radio and print to digital, being able to highlight what your value message is critical when trying to win consumers right now," said Lukosavich:
He recommends raising prices once a year, but taking a look at how supply chain issues, labor and food costs and inflation are impacting the restaurant's bottom line before boosting prices.
"Labor-price dynamics highly depend on the regulatory environment of a specific market (e.g. trade union agreements, minimum wages etc.) as well as on the supply and demand situation in a respective labor market," Agrawal said. "For example, the bigger the supply of relevant labor force, employers might be reluctant to increase wages. In the event of work force shortage however, employers will compete much more to obtain the required employees to grow their business and will be more generous with compensation, including non-monetary benefits."
Lise Wilson, vice president of Retail Strategy, a retail experience company, said in a phone interview that Wingstop began ordering whole chickens when chicken-wing prices went up.
"They started a online brand called Thighstop where customers could order thighs online," she said. "You still get that great taste, but it's a little less costly. It was a way for them to look at their business in an alternative way and be able to provide their guests with a taste of Wingstop or Thighstop with a little bit different methodology."
Keeping a menu, and adding an LTO, like a slightly smaller version of a current menu item, as a snack pack or small versus medium meal deal, also utilizes the products on hand without having to bring in more.
"It still allows the guest to have their favorite taste from that restaurant or that brands but be able to do it as an LTO at a little bit less cost than what the new prices for that traditional 10-count might be on the menu," Wilson said.
"Is it possible to look at what you're making in-house and see if there's a pre-made product available that doesn't change the outcome of the finished product, like a sauce or salad dressings? That's an option to get something at a lower cost sort on the front end … and still have the same kind of guest experience at the back end," Wilson said.
One trend in play is that brands are narrowing down menus given the pandemic years and changing the overall aesthetic of menus.
"Some restaurants have also driven profitability by featuring lower cost but higher margin food items through menu placement and attractive pictures," said Johnston.
About Mandy Wolf Detwiler
Mandy Wolf Detwiler is the managing editor at Networld Media Group and the site editor for PizzaMarketplace.com and QSRweb.com. She has more than 20 years’ experience covering food, people and places.
An award-winning print journalist, Mandy brings more than 20 years’ experience to Networld Media Group. She has spent nearly two decades covering the pizza industry, from independent pizzerias to multi-unit chains and every size business in between. Mandy has been featured on the Food Network and has won numerous awards for her coverage of the restaurant industry. She has an insatiable appetite for learning, and can tell you where to find the best slices in the country after spending 15 years traveling and eating pizza for a living.
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