Inflation Poses Challenges for Emerging Restaurant Brands’ Expansions

As major brands leverage their scale to price below inflation, smaller brands are put in a more difficult position, forced to get creative. Brands that are in a growth stage, accustomed to the lower prices of smaller markets, are forced to contend with geographic price variations as they plot their expansions into denser areas.

In an interview with PYMNTS, Don Varady, co-founder of Clean Eatz, a health-focused café chain with nearly 70 locations and more on the way, spoke with PYMNTS about how inflation concerns change as the company expands.

“We are researching the idea of hiring somebody to come in and evaluate the menu,” he said. “They can do a menu analysis by ZIP code, which we’ve never done, because we’re just so young, we’ve never really had to. We’re looking into that, because we are expanding into more major metropolitan cities, where our price points should probably go up a little bit based off the cost of living and so on.”

City by City

Currently, the chain’s location map shows nearly as many existing stores as those coming soon, and some of these forthcoming locations are in metropolitan areas where the company does not yet have a presence.

Prices differ enormously across U.S. locations, and these disparities can be seen both in the data and anecdotally.

“In the area where I am, I’ve noticed menu pricing really hasn’t changed much,” Varady said. “I’ve gone to other places where I have seen a change. We were just in Denver, and … the prices there have inflated a lot.”

Certainly, the cost-of-living variation state by state can be dramatic. Findings from a survey conducted by the Council for Community & Economic Research found that 2021 annual average cost of living index in the most expensive state, Hawaii, was 2.3 times the annual average cost of living index in the least expensive state, Mississippi.

The Calm Before the Storm

Varady noted that, so far, inflation has not been too much of a problem.

“I don’t think [inflation has] really hit us yet. I think it will,” he said. “We’ve been able to do things on the back end with some of our cost of goods without having to raise menu prices.”

He cited that the example that the company has been swapping out paper products with the chain’s logo for non-logo alternatives, enabling the company to cut costs without raising prices for consumers.

In an interview with PYMNTS’ Karen Webster last month, Andrew Robbins, CEO of Software-as-a-Service (SaaS) customer experience management (CXM) solutions provider Paytronix, noted that inflation has not yet significantly dampened demand on the consumer side, making it a much less pressing challenge for now than staffing shortages.

“That’s not what [operators are] worried about right now,” he said. “It’s all about labor.”

You may also like: Labor Challenges Stifling Would-Be Restaurant Boom, Paytronix CEO Says

Moreover, for now, restaurant inflation is actually less high than the price increases in other food categories, meaning that restaurants do not necessarily need to worry about consumers turning to grocery options to ease their cost anxieties.

According to data from the most recent edition of the U.S. Department of Agriculture (USDA), Economic Research Service (ERS) Consumer Price Index for Food, updated March 25, food-away-from-home (i.e., restaurant) prices increased 0.4% in February, less than a third of the increase seen in food-at-home (i.e., grocery) prices, which amounted to 1.4% in the same period.

However, restaurants may be due for greater increases in the months ahead, and the ERS predicts that food-away-from-home prices will increase more over the course of 2022 than food-at-home, with restaurant prices expected to rise 5.5% to 6.5% and grocery prices expected to rise 3% to 4%.

The Road Ahead

One of the ways that the company is looking to anticipate and mitigate the damage of this forthcoming inflation is through menu changes, reducing the total number of ingredients used across all items, set to go into effect.

“Say that we have 30 ingredients on our menu,” Varady said. “They’re going to reduce it down to 20 without losing menu options, so we’ll use some of the same ingredients in different menu items, which I think will help.”

Research from PYMNTS’ Main Street Economic Health Survey, created in collaboration with Melio, which drew from a poll of 532 U.S. small and medium-sized businesses (SMBs) conducted in January and February, found that inflation is the top-ranked obstacle that these companies are concerned about going forward. Twenty-three percent ranked inflation as their number one challenge, and 54% expressed concern about inflation overall.

See also: Inflation, COVID Top List of Concerns for Main Street Businesses

“It’s not going to surprise me if pricing does go up with a lot of restaurant chains, with the supply chain issues that everybody is experiencing and inflation,” Varady predicted. “I just haven’t noticed to be a really big problem yet.”