It seems the restaurant industry just can’t catch a break. After perhaps its most tumultuous period ever navigating disparate regulations and anxious consumers related to the Covid-19 pandemic, the industry is now facing a completely new set of challenges incited by historic inflation.

That inflation is hitting consumers from every angle, gas, groceries, rent, and you name it. Inflation impacts everyday decisions in restaurants: how they price their food, what type of service they provide, which menu items they can afford to serve, etc. The fiscal conservatism that comes with inflation can also negatively impact a restaurant’s overall brand image if marketing and maintenance are allowed to slide.

And of course, inflation reserves its largest punch for the consumers themselves, those who are patrons of the restaurant industry. Restaurants are stuck between a rock and a hard place. To cover the inflationary costs of food, restaurants might be forced to raise prices, or they have to take the more expensive options off the menu entirely. If restaurants choose not to pass the added costs on to consumers, with food prices still skyrocketing, they likely will endanger their own profitability.

It’s a tough bind to be in. But whatever it takes, the toughest part of handling inflation for restaurants is not to scare off the customers. So is inflation risking restaurants losing their loyal customers? We find out.

Customers Stick to Their Favorite Joints

According to Vedant Pasari, Founder of edabba, over the last few months, costs across categories have increased significantly. “Recently we have had to revise our prices marginally. Although, our customers relatively price inelastic because they love our food and are therefore loyal to our brands. Consumers are also aware of the price increases due to inflation since commodity prices have gone up. Their cost proposition to order something will remain the same and hence the industry should not be affected at large,” he said.

Similarly, Chef Pawan Bisht, Corporate Chef, and R&D executive at One8commune and culinary advisor at Neuma commented that he is not witnessing customers moving away because restaurants are being very careful in increasing their prices, so as to not grieve the customer. “And people still do want to go out. It's been two years of the pandemic. People don’t want to stay in anymore,” he added.

External Factors May Affect Decision

Indeed, consumers may tend to get a bit more conservative about their spending when fuel prices pass the higher mark. “We’re entering month three at that level with no discernible end in sight and the lingering pressure is starting to shift consumer behavior. According to a new survey from a media giant, 53 percent of India now plan to cut back mostly on dining out. This surely scares us out,” the Owner of Party Dome Pub in Lucknow commented. 

With the spike in fuel prices, drive-thru concepts tend to bear the brunt of this shift, as 39 percent of customers plan to cut back on driving because of higher prices.  Transactions have also fallen at McDonald’s, according to its Q1 results, while Wendy’s has indicated that during the company’s recent call that consumers who fall under mid-income salaried have started to rein in their visits to the chain. Regardless, a drop or potential drop in traffic is never good for the thin-margin restaurant business and that is especially true now in the throes of recovery.

Of course, operators are also getting hit with staggering costs, for gas, food, labor, paper, and everything in-between. Restaurant owners have agreed that they are struggling with high gas prices.

Spiking food prices hurt the economy because they depress the number of money people can spend on food and drinks. This affects overall restaurant profitability because people elect to stay home. It becomes harder for people to justify spending money on non-essential luxuries such as dining out instead of saving up for groceries and cooking at home.

The Pain Passes from the Related Industries

“Our costs have surely gone up. Prices of diesel and basic vegetables and meat are high and it affects our profit margin. Because the market is a very competitive and aggressive price hike, it is not in lieu of the rising costs,” Karna Timbadia, director of Saj Hotels commented.

While they’re raising menu prices to offset some of these costs, those increases haven’t been enough to protect margins. And there’s a very fine line to balance to not turn off consumers, as is becoming clear.

In March, inflation was nearly seven percent, and this was mirrored in transportation and communication inflation. “Unless the government intervenes and lowers fuel taxes, the burden of inflation will only weigh on discretionary spending such as travel and tourism, which will ultimately affect the food and beverage as well,” Rahul Khetrapal, director of Majestic Group of Hotels and Casinos shared.

According to experts, domestic and international flight tickets have increased by 20 to 40 percent, which has a significant impact on budget-conscious tourists, and what is the clear outcome is hampering of F&B industry in the tourist destinations. “While ticket and fuel costs directly impact the tourism industry as a whole, we do have our regulars who frequent the casinos,” Khetrapal also informed.

Hope for Optimism 

If the restaurant industry has a reason for optimism, it’s that food-away-from-home prices are also high, leaving consumers with a choice as to where they want to feel their pinch. When that’s the case, and perhaps now more than ever, consumers tend to choose convenience. This is evidenced by the continued growth of third-party delivery despite its premium costs. In the share-of-stomach competition for convenience, restaurants have both the footprint and the omnichannel presence to win. Or, at the very least, survive this latest round of challenges. 

Restaurants can add more digital options when it comes to takeout, delivery, and customer engagement through their app. It’s going to be a long haul, but if the restaurant industry can overcome a once-in-a-century pandemic, it can overcome this period of extreme inflation as well. Covid taught the industry resilience and it will utilize this resilience going forward.