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Menu pricing: making sense at the margins

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After having to close and pivot in the pandemic, operators now face a hike in costs of both food and labor. Howard Riell explains how the next obstacle is convincing the public that the price of a meal is worth paying

The pandemic has forced changes in nearly every facet of restaurant operations, including menu and pricing. Modulating those changes – by raising prices or altering menu offerings – is proving to be a tricky balance of art and science.

“Operators have a new task: rebuild their business’s pricing strategy and rethink operations and processes,” says Marco Amatti FCSI, CEO of São Paulo, Brazil-based MAPA Assessoria. “There is no time to raise prices as a simple reaction. If you are losing money, the ‘first instinct’ is to raise prices, but [it is] probably the worst solution if you lose the public. It’s time to stay in the market. Datasheet, KPIs (key performance indicators) and market research can support any decisions you make.”

Juan Martinez FCSI, principal of Profitality in Miami, Florida, notes that it was “some time” before a price increase from a major brand appeared in the press, a period that was broken when Chipotle and others announced increases. Operators can tell the proper time to raise prices by analyzing their cost structure and bottom-line profitability.

“As food, labor and other costs go up there is no option but to raise prices,” Martinez says. “Coming out of the pandemic there is no choice, since both of these costs have gone up.” One is related to shortages due to factory stoppages and changes in demand, he explains, while the other is the increase in hourly pay needed just to get employees to work for the restaurant.

Slowly and discreetly

Restaurants have “slowly and discreetly” raised prices over the last few years to compensate for the lower margins created by third-party delivery fees, according to Arlene Spiegel FCSI, president of Arlene Spiegel & Associates in New York City. “Now, with a much higher percentage of their business going to delivery fees than before the pandemic, they raised their prices dramatically without fear of customer pushback.”

Operators know it is time for a raise when the cost of goods and labor grow markedly higher. “The one saving grace is that landlords have become more reasonable, and are charging fairer rents since the pandemic,” Spiegel adds. “They’d rather have an occupied space paying less than an empty space paying nothing.”

Restaurants regularly spend time researching their competitors and the economic conditions of the markets they serve. “They usually get it right,” says Spiegel. “However, there is always room to add ‘value-oriented’ menu items to appeal to the price-sensitive guest.”

Whether or not price increases have been too long in coming “cannot be answered with singular yes or no,” says Karen Malody FCSI, founder and president of Culinary Options, LLC in Portland, Oregon.
While food, utilities, rent and labor costs have risen, many consumers’ incomes have not. “This creates a
schism: high consumer sensitivity to menu price-value ratios and a need to grow margins for operators.”

Raising prices “is both art and science,” Malody suggests. Thus, it is important to:

  • Study the menu mix first to understand what is selling and in what volume.
  • Go back to every recipe, repost according to current food prices, and determine food cost per menu item.
  • Go back to the menu mix and discover if the top-selling items are also the highest food cost items. “If so, adjust the selling prices accordingly based on your concept type and knowledge of your loyal client demographic.”
  • Adjust key item prices as much as your clientele will bear. For those items that are within a good price range but also convey a high value perception – such as specialty pasta dishes – “raise those prices minimally also to help improve your weighted menu cost average.”

Menu pricing deserves to be a systemized process, says Rudy Miick FCSI, founder of The Miick Companies in Boulder, Colorado. “Not paying attention, then getting caught in a ‘must-raise’ as a last resort is a sad, bad habit, and an unnecessary place to perform.”

Price alterations can be systemized quarterly, and at least semi-annually. Doing it annually, he feels, is “too slow and too noticeable.”

“You can start by moving .05’s to .09’s,” suggests Dennis Byrd, the President of Island Famous Inc., a multi-concept operator in Galveston Island, Texas. “Over the course of a year that .04% increase adds up.” If costs are increasing more rapidly “you might need to consider percentage-based increases on the items that are moving upward in cost. Our average increase on July 1 was 4%.”

Shifting offerings

Post-pandemic shifts in menu offerings have taken many forms, including launching quick-serve concepts based on a ghost-kitchen model to optimize output and revenue. Some establishments reworked offerings – for example, moving from tasting menu only to à la carte, or making menus more accessible by adding more affordable dishes and leaving options for smaller meals or plates.

“A hallmark of a fantastic leader is to stay on top of trends and identify those that will spill into long-term behaviors,” says Joseph Szala, managing director of Vigor, a restaurant branding firm based in Atlanta, Georgia. “The biggest question to answer is, how does one maximize check average, repeat visitations, and loyalty growth simultaneously?”

“I’m assuming cutting portions for an average restaurant would be the first option,” suggests Alexandra Emtsova, the owner/operator of Burnt Offerings, which serves “new Yiddish cuisine” in Las Vegas, Nevada. “High-end restaurants with tasting menus will always have their following, and price increases in those might go unnoticed.”

Smaller portions with lower prices are “absolutely common, as well as smaller menus in general,” Malody adds. Like labor, higher food costs are always associated with larger menus, “so reducing the number of items on a menu is key to profitability.”

During the pandemic, restaurants removed items that were driving complexity, primarily to simplify operations while  labor was lacking. Martinez predicts this practice will continue but wonders what will happen long term. “Will they go back to adding menu items to stay relevant?”

Another way operators have altered their menus is by offering more smaller plates and sharing plate options. Guests today, Spiegel says, are not limited to the traditional breakfast, lunch, dinner timeframes since many are now working from home. “By offering a variety of options throughout the day, they can customize the meal experience that works for them.”

Many operations are opting for more plant-based items, legumes, grains and pasta. Malody points out that some have gone to the extreme of offering “veggie-forward” center-of-the-plate formats, with proteins in varying sizes that can be ordered as sides.

Howard Riell

 

Photo: Getty