Inflation & The Cost Of Living Crisis: Raising Menu Prices vs Absorbing Costs

The hospitality industry, it seems, can’t catch a break.

After a tumultuous two and a half years of Covid restrictions, supply chain issues, staff shortages, and travel bans, the next stumbling block in the road is a big one: rising inflation and a cost of living crisis.

The RBA predicts that inflation in Australia will hit 7.75% by the end of 2022. While the cost of living crisis will impact many Australians, hospitality venues face financial insecurity on multiple fronts.

Like everyday Australians, businesses are also feeling the pinch, as inflation is making everyday purchases more expensive, from fresh ingredients to utility bills. As a result, it’s becoming increasingly more costly for businesses to operate.

Rising inflation and a dramatic increase in the cost of living means many consumers will actively reduce the amount they spend on non-essential items and activities. Unfortunately, this change in behaviour will hit hospitality venues hard – from people reducing the number of takeaways they order to cutting out their daily coffees and skipping after-work drinks.

Understandably, many hospitality owners are anxious about what the next few months have in store and are weighing up their options. Is it possible to absorb the cost of inflation for now, or is it time to reassess your menu pricing and pass some of your rising expenses on to customers?

While there’s no one size fits all approach to dealing with inflation, this article will explore steps you can take to combat rising operating costs and drill down into the options of absorbing costs versus raising menu prices. 

Let’s dive in.

• Keep your finger on the pulse
• Conduct a financial health check
• Should you raise your menu prices?
• How to absorb rising costs

Keep your finger on the pulse

Keeping abreast of price changes in the market and understanding rising inflation and how it’s impacting your suppliers is an essential first step when managing soaring costs.

And it’s not just inflation that you must keep an eye on. With more wet weather and flooding predicted on the East Coast this summer, supply chains will be impacted again, further pushing up the prices of some products. 

No matter if you’re looking to absorb additional expenses or increase your menu prices, it’s crucial to understand what costs are on the rise so you can make an informed decision that will benefit your business in the long run.

Brian Childs, Business Advisor for the WA Government, shared his thoughts on rising inflation and its impact on small businesses.

“The inflationary ‘tide’ is coming in across the economy, and everyone is impacted. Your suppliers, freighting suppliers, packaging suppliers and so on are all likely to be experiencing inflation-driven cost increases. It is likely these suppliers will look to pass these cost increases along to the next business down the purchasing chain,” said Brian.

“Business owners can be absorbing a ‘death by a thousand cuts’ and not realise until the accumulated harm is evident,” he says. “They might see their costs rising item by item without checking the logic and scale behind the cost increase with their supplier.”

“I am seeing owners absorbing price rises of 10 per cent to 15 per cent without any comment provided by their suppliers,” said Brian. 

In a nutshell, inflation is impacting industries across the country, and suppliers will look to pass on these costs to hospitality businesses. Therefore it’s important to keep an eye on your invoices and supplier pricing to plan ahead and raise questions when necessary.

Conduct a financial health check

Regular financial health checks on your business should be part of your monthly, quarterly and yearly routine – but it’s now more important than ever to ensure your financial documents are up-to-date and accurate. 

Examine your most recent profit and loss (P&L) statement and compare it to last year’s reports. Take some time to analyse your total outgoings during both periods and pay particular attention to your cost of goods sold and overheads such as rent and utility bills. 

Typically, your cost of goods sold, staff wages and rent will account for most of your outgoings. Analysing and comparing your P&L statements should paint a clear picture of how much your main costs have increased over the year. In turn, this will help you to understand if your expenses are in line with current inflation or if they’ve blown out even more. 

Your P&L statements will also help you to identify which categories are costing more than usual, so you can take steps to curb spending in these areas where possible. 

Armed with this information, you’ll be able to understand if there’s some wiggle room to absorb rising costs or if it’s more financially viable to tweak your menu pricing and pass these costs onto your customers. 

Should you raise your menu prices?

There’s no right or wrong answer to this conundrum. And whatever you decide to do will depend on a range of factors, ranging from the financial health of your business to your customers and supply chain. 

Raising menu prices can be a delicate balancing act for many hospitality venues. On the one hand, sky-high operating costs are making it increasingly difficult to turn a profit. And with many businesses battling razor-thin profit margins, it can be tricky to balance the books. 

On the other hand, you risk upsetting customers. With price hikes happening all across Australia, from fuel to groceries, increasing your menu pricing may prevent people from visiting your venue as the extra cost puts them off.

Despite customers resenting price rises, many hospitality businesses have their hands tied, as it’s becoming increasingly difficult to remain profitable in the current economic climate.

For example, the costs of fruit and vegetables rose 18.6% in August 2022 compared to last year. This is a considerable increase for hospitality venues to absorb. In many cases, it’s unrealistic for businesses to keep absorbing these expenses without passing on some costs to the customer.

How are venues coping with rising costs?

While price rises are an annoyance for customers, they’re not unusual or unexpected, and the price of restaurant meals increased by 1.4% in the second quarter of 2022.

A long-standing restaurant, Mother Chu, in Sydney’s Chinatown has raised its menu prices by 20% – 30% since the start of the pandemic, and even KFC has raised its prices three times this year to combat inflation, with many other fast-food giants doing the same. 

Customers are aware that big-name brands and independent venues alike are raising their menu prices, so it won’t come as a shock when their local bars, cafes and restaurants start to do the same.

The key to managing price rises successfully, though, is through effective customer communication and education.

Customer education is key

64% of people find customer experience more important than price, emphasising how customers are more likely to forgive a slight price hike if you’ve delivered a memorable experience with impeccable service.

In the wake of the pandemic, customer sentiment towards price rises in hospitality businesses has shifted. Aussie consumers have developed a deeper understanding of the challenges the hospitality industry faces and an awareness of how tough it can be for businesses and workers.

Recent research from CommBank Rewards found that 85% of Australians intend to buy from local brands and businesses to support them on the road to recovery. With an understanding attitude, Aussie customers seem more willing than ever to support hospitality businesses, particularly if they appreciate why they’re being charged more for the same products. 

Educating your customers about why you’re increasing your prices could be the key to their acceptance. Whether you do this face to face through conversations with your regulars, via your marketing channels, or a note on your menu, opening a dialogue with your customers will go a long way in aiding their acceptance of necessary price hikes.

How to absorb rising costs

For many business owners, increasing menu pricing can be a worrying prospect, as there’s an underlying fear that customers will be discouraged from coming to your venue if prices get too high.

While upping menu pricing is becoming increasingly common across the industry, other options are available if you think it’s more feasible to absorb these costs instead.

If this is the best option for your business, consider the following options to help ease the financial burden of inflation. 

Menu optimisation

Optimising your menu is a great way to maximise your margins and cover any additional operating costs caused by inflation.

Utilise data from your POS to understand which dishes and categories are most popular and which high-profit items perform well. Once you’re armed with this knowledge, you can start planning how to optimise your menu.

Here are some examples for inspiration.

• If specific menu categories are always a hit and have high-profit margins, offer a reduced menu featuring these categories and a couple of side dishes. 
• If certain dishes take a long time to prep and produce, remove them from your menu to speed up kitchen efficiency.
• Replace high-cost ingredients with similar substitutes. For example, recently, lettuce has cost up to four times more than usual, so many venues replaced this costly ingredient with cabbage.
• Use seasonal ingredients grown locally, as they’re almost always guaranteed to be considerably cheaper than out-of-season alternatives.

Cost-effective rosters

With labour costs accounting for around 30% of a hospitality business’s revenue and venues dealing with increasingly thin margins, having as much control over your labour costs as possible is crucial. 

Understanding how many team members are needed each day, who your best staff are and when to roster them is instrumental in keeping wage costs low, so there’s more money in your pocket to absorb higher costs elsewhere in your business.

There are plenty of ways to optimise your staffing costs to create a cost-effective roster. From rostering your best staff on busy shifts to staggering start times and costing the roster as you write it. The most important thing is to set aside time each month dedicated to diving into your staff and sales data to ensure that you’re never overspending on wages when you don’t have to.

Stick or twist: raising menu prices

With sky-high operating costs thanks to inflation and razor-thin profit margins, it’s now increasingly challenging for hospitality venues to turn a profit.

As a result, many venues opt to increase their menu prices to cover these costs. However, plenty of businesses are attempting to absorb these additional costs to avoid passing them on to their customers.

When it comes to increasing your menu prices, there’s no right or wrong answer, and the decision is up to you and how you think it’ll benefit your business or impact your customers and your bottom line.

This content is for informational purposes only and does not constitute legal or financial advice.