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JUL. 15, 2022

Are those fish nuggets or gold nuggets?

When talking about how inflation can hit businesses, a fish and chips shop is surprisingly the best example: the increase in food prices is captured in their main inputs (haddock, potatoes, and cooking oil), the supply chain bottlenecks are captured in the higher packaging prices, and the energy price soar is reflected in the higher cost of running gas powered fryers.
It is not only the fish and chips joints that are affected but also the whole restaurant industry: according to the industry portal Restaurant Business, 72% of restaurants across North America fear that inflation will put them out of business. The same portal reports that 1% of restaurants surveyed in May 2022, planned to cease operations by the end of June.
The market conditions for this sector look dire. What are the options left for restaurant owners to remain in business?

The first option is to cut costs not directly affected by the inflationary pressure, namely labor. Getting rid of the helper in the kitchen and asking servers to wait more tables during a shift are quick ways to save money and avoid increasing prices. Nevertheless, they can affect the dining experience and negatively impact the remaining personnel. Considering that not long ago, there has been the so-called “great resignation,” cutting personnel does not seem a wise decision.

Another option is to save money using cheaper sources: frozen fish instead of fresh, intensive husbandry instead of grass-fed beef, or simply serving cheaper cuts instead of filet. This option has a noticeable effect on the quality of the final product, but it also goes beyond the rubbery seafood served at a cheap restaurant. Cheaper food sources are also associated with bad practices such as hormones and antibiotics abuse, unsustainable fishing practices, and other negative externalities in general.

When cost saving is not possible, the most straightforward method to compensate for high production costs is to transfer those costs to the customer. For example, the fish and chips we mentioned at the beginning of the article went from £7.99 to £9.99 in the last two months. A higher bill can help the restaurant to stay in business without affecting the quality of the dining experience. However, it will affect the number of times the customer will go to a restaurant and, ultimately, the bottom line of the business. Even when the price increase is hidden with smaller quantities sold for the same price (remember shrinkflation, which we’ve talked about a few weeks ago?), the recovery from higher production costs can at best be partial.

It looks like all the straightforward options have some drawbacks, but some restaurants found a way to remain afloat by reducing food waste. J. Alexander’s, an American restaurant chain, is now making burgers out of filet trimmings and other fatty meat parts that are usually discarded. Considering the source of the meat, those burgers must be delicious and considering that food waste is among the most significant contributors to climate change, they are twice as good. Solutions like these require creativity and the ability to readapt the business to adverse conditions, two traits that distinguish successful business owners.

We thank you for your continued support.

The FAM team