The Cost of Doing Business for Restaurants Has Gone Up

And just like that, we’re officially approaching late summer. The economic and social recovery in America has soared to new heights—even while some states revisit mask mandates and threats of potential restrictions due to the Delta variant loom eerily in the not-too-distant distance. Despite the quiet fear of a relapse—or perhaps in a preemptive response to it—people continue to clamor for community, culture and camaraderie. And what better way to enjoy those than over a memorable meal?

Guests are dining out in droves, seemingly unfazed that rising food, fuel and labor costs are driving increases in their check as well. To say money is no object would be irresponsible, but consumers are certainly making up for lost time with family and friends—and spending accordingly. To quote Jeff Goldblum in Jurassic Park, “life finds a way.”  

So the industry has indeed been recovering, and business is responding in many ways we could have predicted—plus a few we did not. On the demand side in particular, we expected to see expansion and for there to be a massive surge in consumption. We readied and steadied ourselves (some more successfully than others) by trying to staff up, and dealt with the realities of a difficult labor market.

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But we were struck by a degree of contraction on the supply side, and a larger than expected challenge with commodities. Like many operators we had been focused on emerging from the pandemic relatively intact, taking care of guests, and bringing our people back to work. Meanwhile with supply tightening, costs escalating where product is available, and labor pressures, the cost of business is on the rise. Out of the frying pan, into the fire.

We’ve done what we can to mitigate it, but unequivocally the labor and food supply issues in our industry are driving inflation. These increased costs of doing business must be recovered somewhere, however, and restaurants are responding in a number of ways. We are beginning to see wide-scale price increases, even among quick-serves and fast casuals. Chipotle recently announced taking 3.5–4 percent in Q2, with the expectation of taking more before the end of the year. Concern over pricing out of core guests’ comfort zones has led some restaurants to explore the other side of the equation, reducing or “right-sizing” portion sizes instead.

Some are even eating the rising costs in order to retain guests, predicting that costs will normalize by 2022 and this is a short-term problem. Others still have opted to limit or de-list menu items where commodity increases are too high, rather than raise their prices too high for their guests’ palates. For a restaurant that proudly proclaims, “Meat is What We Do,” however, as Smokey Bones does, taking proteins off the menu is forcefully not an option.         

The key for us is balancing the dual objectives of brand strength and financial strength, prioritizing long-term benefits over short-term ones. We’ve approached this challenge from all angles—on the hard side, using the traditional disciplines like cost negotiations, pricing analysis, studying the labor market and benchmarking best practices, all to support our margins given these pressures.

On the soft side, we’ve leaned into and on our culture to create a more cohesive company and more constructive workplace, investing in our team and earning the coveted “Great Place to Work” designation, all of which we believe have allowed us to recover quickly and even outperform. Even though we still face challenges with labor, we’re not as hard hit as some of our competitors, many of which have had to shut down locations or reduce hours of operation due to lack of staff.

Fortunately for us all, guests appear to understand (to an extent) what we are up against, and seem to overlook some of our imperfections. But the longevity of that tolerance is unknown, and expectations are liable to reset in the near future. It is likely we will see a normalization of sorts. This will not mean return to normal as we knew it, per se, but rather the creation of a new normal.

Over time and post the current Delta concerns, more people will become comfortable eating in restaurants, and as time passes demand will likely increase further. More people will enter the workforce as unemployment benefits subside, making it easier to meet those demands. As a result, some of the supply chain pressures (many of which are rooted in the COVID labor issues) should also ease toward the end of 2021 and into 2022. And similarly, inflation will hopefully begin to subside somewhere between Q4 and Q1 (although it may not fully normalize until mid-2022), making it easier to predict and manage costs. Those restaurants that have managed to survive thus far will likely live to tell the tale.

That is, as long as we steer clear of curveballs.

But whatever ball we get thrown, we at Smokey Bones will remain resilient, and creative, and true to ourselves. We are compelled to—it’s a core value of ours.