How chains like McDonald’s and mom and pops are coping with inflation

Customers at McDonald’s restaurant

Scott Mlyn | CNBC

As the restaurant industry struggles with inflation, the sheer size of chains and their access to cash gives them an advantage, but independents have their advantages when it comes to managing higher costs.

Consumers feeling the pressure on their budgets have been cutting back on restaurant visits in recent months. Monthly same-store restaurant traffic has declined year-over-year for eight consecutive months, according to industry tracker Black Box Intelligence. In response to this decline, both chains and independents are trying to address the cost factor without alienating diners.

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According to the Bureau of Labor Statistics, prices for food consumed outside the home rose 8.6% in the last 12 months through October, 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 independent companies to speedboats. Chains have bigger budgets, bigger scale and other tools like advanced technology. But they are often slow to act and bogged down 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 more quickly to make changes.

A matter of scale

When it comes to inflation, the restaurant giants like it McDonald’s and Starbucks has some clear advantages over independent burger joints and coffee shops. Their large size helps chains lock in prices early when purchasing ingredients from suppliers, and they can often press for more favorable contracts.

“If you’re a chain, you have bargaining power and leverage with suppliers, and that’s what’s happening,” Allen said. “Independents don’t have much room to switch suppliers, except for non-essentials.”

About 37% of the more than 843,000 restaurants, food trucks and ghost kitchens in the United States are part of chains with more than nine locations, according to food analytics firm Datassential.

Noodles & CompanyWith more than 450 locations, it recently signed a contract to supply chickens in 2023. The company expects the deal to contribute about 2% to third-quarter margin savings for cost of goods sold.

“When you look at all the disruptions in the supply chain, sellers want some level of certainty in terms of purchase quantity, not just price,” said Noodles CEO Dave Boennighausen.

Because chains place larger orders, suppliers usually prefer orders for independent restaurants. Adam Rosenblum, chef and owner of San Francisco’s Causwells and Red Window, said the uncertainty surrounding ingredient safety has led him to buy two or three times more than he normally would if it were available. And carrying higher inventory puts more pressure on its razor-thin profit margins.

“I don’t have the buying power, I can’t set my prices every year, and I just don’t go through enough product to matter to some of the big companies,” Rosenblum said.

In the United Kingdom and other European markets with higher inflation than the United States, major franchisors have said they are helping operators struggling to cope with higher costs. For example, McDonald’s In late October, executives said the fast-food giant could offer “targeted and temporary support” to European franchisees in need.

Independent operators do not have the same luxury. Kate Bruce, owner of The Buttery Bar in Brooklyn, said she faces higher costs for everything from labor to butter to energy.

“It’s expensive to run a restaurant these days, and ours is small. So those costs are significant and everything is very tight,” he said.

More flexible and more flexible

On the other hand, independent restaurants have a speed advantage. If a mom-and-pop sees higher prices for a key ingredient in a meal, the restaurant can quickly change prices, reduce portion sizes, or even remove the item from the menu.

For example, Bruce said that if he raises the price of an item, he likes to add something else to the menu that is cheaper.

“Yes, we have Wagyu beef, but [we] There are salads that are a little more affordable and chicken dishes that won’t deter someone from coming in,” he said.

Portillo Restaurant chain CEO Michael Osanloo said independents are more flexible when it comes to changing prices. Fast-food customers expect the same prices everywhere, but menu prices can vary depending on where the location is and whether the franchisee or company owns the restaurant. “There is a bit of a price shock,” Osanloo said.

According to a PYMNTS survey of nearly 2,400 US consumers, consumers pay more attention to price when visiting a chain restaurant. More than a third of respondents said daily prices were important when choosing a chain restaurant, while only 22.5% said it influenced their decision making when choosing an independent eatery.

While beloved chains have brand recognition and the resulting pricing power, independents gain goodwill from some consumers by virtue of being a small business.

“With a big chain like Olive Garden, there’s a sense of authenticity as a family-run Italian restaurant,” Allen said. “It’s starting to hurt the feeling chains.”

The CEO of Dickey's Barbecue says we still need to get a reduction on our menu that we haven't had in 30 to 40 years.

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