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Tuesday, April 05, 2011

Can Higher Sales Offset The Rapid Food Cost Inflation?

As operators find more diners in their restaurants, they are seeing major increases in their invoices for food and supplies.  Higher prices for food, utilities, gas for vehicles, paper, linen and other supplies are shrinking margins.  Can your higher sales numbers offset the rapid rise in food cost?

A 10% rise in your invoices will cost you 3.5% of sales at a 35% previous food cost level.

This may be too much to take if you rely heavily on coupons and discounts to attract patrons.  On the other hand, most operators would gladly part with 3.5% of sales to see more revenue.  Many of these people will eat the cost increases for some time.  They will follow their competition in any price increases.  Fearing a drop in business just as they see a pick up, restaurant managers are holding prices in check at many locations.

Is this a good strategy?  Happy to have survived the recent bloodbath, many people I speak with are happy to wait the competition out.  They quote $5 foot longs, 2 entrees and an appetizer for $20, 2 pizzas for 1 nights, and numerous competitors offering a meal with full service for $9.95.  Patrons have downsized from prime steaks to upscale burgers.  Burger places are popping up everywhere I go.

If you decide to lead in the price increase game, I would expect your competition to follow pretty quickly.  Everyone sees higher prices at the supermarket and gas pump.  Many patrons expect increases.  By taking the lead, you can set your own pace for price increases.

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