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Higher prices on the menu for 2021

Feb 24, 2021

RTS Partner Mike Lukianoff argues it’s time to reshape the economics of a historically unprofitable industry. Here’s why.

Even before Covid-19 wrought havoc on the our industry, restaurants struggled with increasingly difficult unit-level economics. With average profit margins of just 5%, every blip of operating cost pressure needed to be offset, either through price increases or other cost decreases.

However, decades of new unit expansion led to overbuilding and saturated markets – making competition for customers and employees ever harder. For customers, this meant better choices, higher quality and great prices. For restaurants it meant constant margin pressure, with diminishing ability to pass cost increases on to consumers without losing them. Worse yet, for many restaurants the economic pressure was already existential, especially in oversaturated markets with large minimum wage increases.

Then the pandemic hit, and the industry that was forecast to surpass $900 billion in sales for the first time ended 2020 with just $659 billion in sales. That 23% drop over the prior year included the record closing of 110,000 restaurants in 2020.

To illustrate points made in post.
Even if the proposed federal minimum wage hike to $15 fails, state and local efforts to boost hourly wages will continue and likely be successful.

 

In the midst of this carnage, however, we have seen widespread digital adoption, some of the largest price increases on record and innovative practices we wouldn’t have imagined in normal times. So what appears to be emerging is a very different industry landscape.  Perhaps restaurant operators will also have a rare opportunity to rethink and reshape fundamental economics as they begins to emerge from the ashes of the pandemic devastation.

Higher Restaurant Prices Are Coming

Here’s why the post-pandemic environment is likely to see even more rapid price escalation on average. 

  • The large number of restaurant closures has reduced competitive saturation in many trade areas. This creates pricing power for survivors, who can increase prices with less risk of losing customers.
  • Third-party channel partners that enable delivery and curbside ordering have made tremendous market penetration during the pandemic. Yet the economics are impossible to sustain due to high fees restaurants are charged. In many cases, the only way to make the transaction profitable is a price increase of as high as 25-30% of the transaction value – a stunning change in the total price of a restaurant experience.
  • Labor costs will continue to swell for restaurant employees. Even if federal minimum wage initiatives are not passed, local municipalities and labor market pressure will drive up labor costs.
  • The required minimum investment in technology increased significantly in 2020, and much of this tech infrastructure is now the minimum cost of doing business. Higher prices are a way restaurants will support these investments; some franchisors have already introduced technology fees to support the new paradigm.

–Mike Lukianoff

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