Customers in a McDonald’s restaurant
Scott Mlynn | CNBC
While the restaurant industry battles inflation, the large size of chains and their access to cash gives them the upper hand, but independents have their own advantages in managing higher costs.
Consumers feel the pressure on their budgets and have cut back on their restaurant visits in recent months. According to industry tracker Black Box Intelligence, the monthly number of same-store restaurants has shrunk for eight consecutive months compared to the same period last year. In response to that drop-off, both chains and independents are working to address the cost factor without alienating diners.
Prices for food consumed away from home have risen 8.6% since October in the past 12 months, according to the Bureau of Labor Statistics, as restaurants raise menu prices to address rising costs for ingredients, labor and even energy.
Aaron Allen, founder and CEO of restaurant consulting firm Aaron Allen & Associates, compared restaurant chains to oil tankers and independents to speedboats. Chains have larger budgets, larger scale and other tools such as advanced technology. But they are also often slow to act and entangled in bureaucracy.
A mom-and-pop restaurant, on the other hand, doesn’t have the same access to cash or the benefits of size, but can move faster to make changes.
Scale is important
When it comes to inflation, restaurant giants love it McDonald’s and Starbucks have some distinct advantages over independent burger joints and coffee shops. Their sheer size helps chains fix prices early when buying ingredients from suppliers, and they can often push to get more favorable contracts.
“When you’re a chain, you have the power of bargaining power and leverage with suppliers, and that’s what happens,” Allen said. “Independents don’t have much wiggle room to switch suppliers, except for non-core business.”
Of the more than 843,000 restaurants, food trucks and haunted kitchens in the United States, about 37% are part of chains with more than nine locations, according to food analytics firm Datassential.
Noodles & Companywhich has more than 450 locations, recently signed a deal for its chicken supply for 2023. The company expects the contract will help it save about 2% over Q3 cost of goods sold margin.
“As you look at all the disruptions in the supply chain environment, sellers want some degree of certainty in terms of purchase quantities, not just price,” said Dave Boennighausen, CEO of Noodles.
Because chains place larger orders, suppliers typically prioritize their orders over those of independent restaurants. Adam Rosenblum, chef and owner of Causwells and Red Window in San Francisco, said uncertainty about ingredients security has led him to buy two or three times what he normally does when they’re available. And carrying that higher inventory puts more pressure on its razor-thin profit margins.
“I don’t have the purchasing power, I can’t set my prices annually, and I just don’t go through enough products to be of interest to some of the larger companies,” Rosenblum said.
In the UK and other European markets, where inflation is even higher than the US, major franchisors have said they are providing financial support to operators struggling with higher costs. For example, McDonald’s executives said in late October that the fast-food giant could provide “targeted and temporary support” to European franchisees who need it.
Independent operators don’t have the same luxury. Kate Bruce, owner of The Buttery Bar in Brooklyn, said she’s faced increased costs for everything from labor to cooking oil to energy.
“It’s expensive to run a restaurant these days, and ours is small. So these costs are important, and everything is very tight,” she said.
More professional and flexible
On the other hand, independent restaurants have the advantage of speed. If a mom and dad notice much higher prices for a key ingredient in an entrée, the restaurant can quickly change prices, reduce portion size, or even remove the item from the menu.
For example, Bruce said that if she raises the price of an item, she’ll happily add something else to the menu that’s cheaper.
“Yes, we have wagyu beef, but [we] also have some salads that are a little more affordable and chicken dishes that won’t deter anyone from coming in,” she said.
Portillos Michael Osanloo, CEO of the restaurant chain, said independents have more flexibility when it comes to changing prices. Fast food customers expect the same prices at every location, but menu prices can vary based on where the location is and whether a franchisee or company owns that restaurant. “There’s a little price shock,” Osanloo said.
Consumers care more about prices when they visit a restaurant chain, according to findings from a survey of about 2,400 U.S. consumers conducted by PYMNTS. More than a third of respondents said daily prices mattered when choosing a restaurant chain, while only 22.5% said it played a role in their decision making when choosing an independent eatery.
And while beloved chains have name recognition and the pricing power that comes with it, independents also earn goodwill from some consumers because they’re a small business.
“There’s a perception of authenticity, like a family Italian restaurant versus a big chain like Olive Garden,” Allen said. “That sentiment is starting to hurt chains.”