Recently hitting a 40-year high, U.S. inflation has been hitting restaurant operators hard, raising prices on ingredients across the board and taking a toll on consumer spending. To combat inflation, the Federal Reserve has begun increasing interest rates, making it more expensive to borrow money. As custom, the goal is to reduce consumer demand in an effort to reduce prices overall, and the Fed is expected to continue incremental raises into 2023.
Slowing down the economy, however, involves walking a tightrope. Step too far, and the country could be tipped into a recession, inevitably straining businesses even further.
While operators shouldn’t panic – or make drastic moves out of recessionary fear – there are some smart strategies to protect yourself financially, whether a recession hits or not. Remember, recessions are temporary. But building financial health is important for the long run. We break down 10 steps for operators to take now.
From proteins to produce, product pricing has skyrocketed. If you’re not tightly managing inventory, you’re not only going to swallow significant losses but also have trouble developing appropriate menu pricing.
“My number one piece of advice is get a handle on your cost of goods sold, and you simply can’t do accurate pricing that protects your profit margin if you don’t do regular inventory,” says Lauren Fernandez, former restaurant operator and founder of Full Course, an investment and consulting company for independent restaurants.
If weekly inventory management feels too overwhelming, it may be time to consider an inventory management solution. Tracking sales, managing orders and storage, optimizing supply, plus keeping track of all the corresponding invoices and data, is no doubt a cumbersome process. But existing technology solutions can make data management seamless and provide complete and real-time visibility on inventory levels. This kind of investment typically pays off in time-savings alone, but also drives informed decisions that can help you accurately meet consumer demand and minimize waste.
Given the highly volatile nature of the current supply chain, you can no longer wait for an entire season to go by before updating menu prices. In fact, like inventory checks, it may make sense to make pricing part of your weekly routine. And you should adopt a menu style that allows for it.
“Everybody’s expecting prices to rise, but if you’re still blacking out and handwriting in pricing, that’s offensive to a customer – it slaps them in the face before they order,” says Fernandez. “Take the time to print new menus or move to a menu style like a QR code that allows you to dynamically adjust your pricing.”
Watch the market, assess your margins, and adapt prices accordingly.
Given today’s climate, few restaurants have loads of spare cash to set aside for a rainy day fund. But you can talk to your bank about establishing an emergency line of credit, something that should be done in advance of a recession.
“You want to make sure you get a line of credit when you can and not when you have to,” says Manny Frangiadakis, co-founder and principal of Twelve Points Wealth Management. “Banks provide easier rates and access to capital during good times because they can see the cash flow, whereas banks usually tighten ships during recessions.”
Talk with your current commercial banker to learn about your options.
Even if you do have cash for a rainy day fund, allocate some of that money towards a skilled accountant first, says Fernandez.
“You’ll catch so many more pennies with a really good accountant and doing regular inventory,” says Fernandez. “You'll probably catch some theft, you’re going to catch huge amounts of waste, and that’s sometimes up to two to three percent [of your margins].”
Getting your books in line will help you identify financial trends and plan accordingly. For example, if July and August routinely show up as slow months, you know to prepare in advance.
“I don’t believe in shoving money aside for no purpose – it has to have intentionality, and to do that, you have to know the business,” says Fernandez.
Of course, in a true recession, cash is king. If sales are strong and your books are clean, you can begin to build a rainy day fund and think ahead for how that money may be used.
“A really good rainy day fund covers your costs for three to six months,” says Frangiadakis.
A solid loyalty program helps retain customers – even in the worst of times. And it’s why it’s important to continuously strengthen your program.
“When customers are reducing frequency and spend, your loyal customers are the ones that are most elastic, so tap into your loyalty program, and don’t under-staff,” says Fernandez. “Your team’s mission needs to be love-bombing on those top customers, because people still eat out [during recessions], but you’re fighting for their frequency.”
Consider creating staff incentives, like a $25 gift card, for signing up X number of people for your loyalty program in a week. And if a recession does hit, communicate with your staff about the reality of the situation.
“It’s important to be transparent – ‘Here’s our plan, and here’s what you can expect. It’s going to be a little harder to upsell someone on dessert, and that’s OK, but make sure you thank them for coming and ask them when they’re coming back,’” says Fernandez.
Any time there’s a looming threat of recession, your leveraging powers with your landlord go up.
“If the market seriously corrects [from a recession], the landlord might have a hard time finding a new tenant in that environment,” says Frangiadakis. “Let’s say you have one or two years left on your lease – you can go to your landlord, and say, ‘Why don’t we come to the table now and see if we can find something that mutually benefits us.’
For more tips on how to initiate and navigate that process, click here.
Operators are prone to immediately slash their marketing budget when times start to get tough. And that’s often a mistake, says Fernandez.
“In consumers’ minds, you always want to be top of mind, and the way you do that is through connecting to your loyal customers,” she says. “Just be smarter about where you put the [marketing] spend, which could mean a mix towards your loyalty program and engaging with customers on social media.”
Dial up your marketing to target your best customers, shifting your social media strategy away from attracting new visitors to focus on current patrons. Posts may emphasize customer appreciation or even marketing incentives to boost visits.
“Tell them to come in this week to receive a commemorative, limited-edition mug with purchase over $25, for example, and now you’re incentivizing your current customer base to spend over $25, and you’re also thanking them at the same time,” says Fernandez.
Desserts, drinks, and other extras often get cut when people reduce their dining budget. This makes it important to evaluate center-of-plate ingredients and ensure entrees are priced appropriately.
You can also package some of those bonus products into bundles. “Let’s say you sell a ton of an amazing breakfast sandwich, and it has a decent but not great margin. Now’s the time to bundle it with that breakfast cocktail,” says Fernandez.
Bundles can change people’s perception so that the extra spend is no longer viewed as too indulgent and instead seen as a deal.
Assessing and optimizing labor costs is an ongoing journey. But when margins start to squeeze even tighter, it’s an immediate and mandatory task, and it’s partially why we’ve seen numerous restaurants in recent years roll back operating hours.
“When a restaurant goes from operating seven days a week for lunch and dinner to four days a week for dinner only, now you don’t need a chef during the day, a day manager – your staff is cut in half, so your costs drastically decrease,” says Frangiadakis.
This isn’t an industry where you can just wing it. The most successful restaurateurs spend at least part of their week crunching numbers and strategizing for the future. But everyone knows that to survive in this industry, you have to have a little “hope for the best” mentality in you, too. And now’s a good time to grasp onto it tight.
Rising interest rates may very well cause some short-term stress. And that can prove critical for restaurants which have already dealt with several years now of turmoil.
But if the Fed’s strategy works as planned, it’ll ultimately help restaurant operators in the long run.
“A recession will dampen demand and allow supply to catch back up. Over the next one to two years, you should see declining food costs that’ll allow some operators to regain some of that lost margin,” says Frangiadakis.
Grace Dickinson is a reporter at Back of House. Send tips or inquiries to email@example.com.
[Photo courtesy Fauxels]