Surviving Food Inflation — How Colorado Restaurants Adapt to Rising Costs and Labor Challenges

Like countless other industries, the restaurant industry has been completely redefined by the pandemic. Restaurant owners felt optimistic about the post-COVID world but were immediately presented with a continued headline problem — food inflation.

READ: 5 Ways Small Business Owners in Colorado Can Survive Inflation 

According to new data released from the U.S. Bureau of Labor Statistics, prices for food away from home, which include restaurants, vending machines, schools and other foodservice facilities, increased 8.4% year over year in the first quarter of 2023.  

Same-store sales began decreasing in July 2022 after 17 months of continuous increases, according to the National Restaurant Association. Many operators also reported lower customer traffic beginning in June, which was when gas prices hit record highs. 

Other supply chain-related events, which spanned from restaurant equipment (creating issues for restaurant development and timing) to the Avian flu and eggflation issues, also negatively impacted the industry. 

Where are restaurants now? 

Inflation has had a far-reaching impact on the restaurant industry — affecting everything from the cost of materials to wages. 

Although average food prices had decreased slightly by the end of summer 2022, they increased 16.3% from July 2021 to 2022, according to Bank of America. Locally, according to the Colorado Restaurant Association, food prices increased more than 11% in 2022, the most in four decades. Many critical food items like eggs, cheese and butter have seen even more dramatic increases, leaving restaurants no choice but to increase menu prices in response.  

READ: Plant-based Protein is Taking Root in Colorado’s Food Economy

Climate issues like drought, fires and record-setting heat have also limited the availability of crops, exacerbating the food inflation problem. Food brands have found themselves short on vital food products like potatoes and other grains. 

One especially stressful part of the equation for restaurant owners today is how much food inflation passes on to customers. Restaurants need to remain competitive while still retaining a profit. If your restaurant is taking a 10% menu price increase and competitors are only taking 5%, you’re out on a limb.  

In addition to struggling to combat increased food costs, restaurants are also navigating increased labor costs. Although restaurant industry employment has rebounded, employment is still 5% below pre-pandemic levels, according to the Bureau of Labor Statistics. Two-thirds of operators said their restaurants still don’t have enough employees to support higher customer demand. In Colorado, 8 out of 10 local restaurants are struggling to hire enough staff even as industry wages have risen an average of 20%, according to the Colorado Restaurant Association. 

Together, food and labor costs account for about two-thirds of every dollar of a typical restaurant’s sales, according to the National Restaurant Association, which is why 2022 has proved so challenging for restaurant operators and their bottom lines.  

Restaurants have increased wages not only to attract workers but also to compete with other employers, particularly retail outlets. When major employers like Target, Amazon and CVS move to a $15 wage, it doesn’t matter what the federal minimum wage is. Restaurants must compete. 

READ: Rising Food Costs Create Unique Challenges for Hunger-Focused Agencies

What’s next? 

Although the outlook is uncertain with the threat of a possible recession on the horizon, indicators are displaying that any recession will likely be modest and manageable. Restaurants should take advantage of the lessons they have learned in the past few years and find hope in the signs that the worst is behind us. 

Grocery store costs increased at a higher rate than restaurant costs in the summer of 2022. Now, that widening price gap makes restaurant meals a better deal for many consumers. With about half (46%) of adults reporting that they are not eating at restaurants as often as they would like, the higher cost of groceries could drive customers back to restaurants. 

What’s more, chicken prices are expected to decrease in 2023 due to a significant improvement in production, although the impact of a lengthy war in Ukraine still hovers over future supplies and prices. And the labor situation seems to be stabilizing as well, as stimulus payments have ended, and people are reentering the workforce. Job openings peaked in March but tumbled by 1.1 million by August. 

The key components for restaurant owners are employees and partners, making labor and training significant factors for restaurants. The labor market continues to be tight but there are signs of hope. Restaurants have learned to operate with fewer people and rely more on technology which is necessary as the labor market continues to tighten. Unemployment appears to be on the rise which allows for more workers to be available to work in restaurants, serving as line cooks, servers and hosts, among a number of other services. 

READ: Veteran Unemployment: Untapped Workplace Resources

Restaurants must learn how to quickly pivot, whether that means embracing innovation or improving their services by being more flexible and adaptable. Restaurants must also learn to operate with fewer employees and rely more on technology.   

While restaurants have faced countless challenges and rising food inflation in the past few years, the setbacks have only proven how resilient the industry is. Those that made it through 2022 relatively unscathed should be proud. The future seems promising for brands that can weather these storms and welcome eager consumers back to their tables.

 

Cristin O’Hara headshotCristin O’Hara is the Managing Director and Head of Restaurant Group at Bank of America.

 

 

 

 

 

 

 

 

 

 

 

Ty M. Aslin headshot

 

Ty M. Aslin is the Colorado Market Executive for Business Banking at Bank of America