How can chains like McDonald’s and mom and pops cope with inflation

Customers at McDonald’s restaurant

Scott Mill | CNBC

As the restaurant industry battles inflation, the large size of the chain and their access to cash give them the upper hand, but independents have their own advantages when managing high costs.

Feeling the pressure on their budgets, consumers have cut back on their restaurant visits in recent months. Monthly same-store restaurant traffic has shrunk compared to the prior-year period for eight consecutive months, according to the industry Tracker Black Box Intelligence. In response to that decline, both chains and independents are working to overcome cost factors without alienating diners.

Prices for food consumed away from home have risen 8.6% in the 12 months through October, according to the Bureau of Labor Statistics, as restaurants raise menu prices to offset rising costs of ingredients, labor and even energy.

Aaron Allen, founder and CEO of restaurant consultancy Aaron Allen & Associates, compared restaurant chains to oil tankers and independents to speedboats. The chain has a bigger budget, a wider scale and other equipment such as advanced technology. But they are also often slow to act and get bogged down in bureaucracy.

Mom and pop restaurants, on the other hand, don’t have the same access to cash or scale advantages but can be quicker to convert.

Scale matters

When it comes to inflation, restaurant giants like McDonald’s and Starbucks have some obvious advantages over joint independent burgers and coffee shops. Their massive size helps the chain lock the first price when buying materials from suppliers, and they can often apply pressure to receive more favorable contracts.

“If you’re a chain, you have bargaining power and leverage with suppliers, which is what happens,” Allen said. “Independents do not have much wiggle room to switch suppliers, except for non-core things.”

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

Noodles & Company, which has more than 450 locations, recently signed a deal for its 2023 chicken supply. The company expects the contract to help it save about 2% relative to its third-quarter margin on cost of goods sold.

“When you look at all the disruption in the supply chain environment, merchants 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 prioritize their orders more than independent restaurants. Adam Rosenblum, chef and owner of Causwells and Red Window in San Francisco, said the uncertainty of securing ingredients has caused him to buy two or three times what he usually does when they are available. And carrying more inventory puts more pressure on thin profit margins.

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

In the UK and other European markets, which have seen higher inflation than in the US, large franchisors said they were providing financial assistance to operators struggling to cope with higher costs. For example, McDonald’s executives said in late October that the fast-food giant could offer “targeted and temporary support” to European franchises that need it.

Independent operators don’t have the same luxury. Kate Bruce, owner of The Buttery Bar in Brooklyn, says she has faced higher costs for everything from labor to cooking oil to energy.

“It is expensive to run a restaurant these days, and we are small. So the cost is a problem, and everything is very strict,” he said.

Nimbler and more flexible

On the other hand, independent restaurants have the advantage of speed. If a mom and pop notices a much higher price for a key ingredient in an entree, the restaurant can quickly change the price, slim down the portion size or even remove the item from the menu.

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

“Yes, we have Wagyu beef, but [we] also have some cheaper salads and chicken dishes that won’t scare away others who come,” he said.

Portillo’s The CEO of the restaurant chain, Michael Osanloo, said that independents have greater flexibility when it comes to changing prices. Fast food customers expect the same prices at each location, but menu prices may vary based on location and if the franchisee or company owns the restaurant. “There was a bit of a price shock,” Osanloo said.

Consumers care more about price when they’re visiting chain restaurants, according to findings from a survey of 2,400 US consumers. done by PYMNTS. More than a third of respondents said that the daily price is important when choosing a chain restaurant, while only 22.5% said that it makes the decision when choosing an independent restaurant.

And while beloved chains have the brand recognition and pricing power that comes with it, independents also gain goodwill from some consumers for being small businesses.

“There is this perception of authenticity, like a family Italian restaurant versus a big chain like Olive Garden,” Allen said. “That sentiment has started to hurt the chain.”

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