Almost three years since the pandemic began, lockdowns and travel bans in Australia have ended, but the hospitality industry is still going through a challenging period. The New Year begins under the clouds of global economic pressures, with rising inflation and interest rates impacting both business budgets and consumer spending – meaning hospitality venues face financial pressures on multiple fronts.
As a result, everyday purchases – like raw ingredients and monthly utility bills – are becoming more expensive, making it more costly for small hospitality businesses to operate. Add to that the fact that consumers will likely spend less on non-essential items and activities due to the rising cost of living, it poses a question for small hospitality businesses: do I absorb the cost of inflation, or do I adjust menu prices and pass the expense on to customers in 2023?
Keep up-to-date on industry and economic trends
The first step is keeping up-to-date on price changes in the market and understanding rising inflation and its impact on suppliers. It’s crucial to understand what costs are increasing to make an informed decision that will benefit your business in the long run.
According to Business Advisor for the WA Government, it’s likely that freight suppliers, packaging suppliers, farmers etc. will look to pass additional cost increases to the next business in the supply chain. Like, for example, hospitality businesses. Therefore, always keep an eye on invoices and supplier pricing to plan and raise questions when necessary.
Carry out a financial health check
Conducting regular financial health checks is now more important than. Examine and analyse your most recent profit and loss (P&L) statement and compare it to last year’s reports. Look at the cost of goods sold, staff wages and rent. Doing this should paint a clear picture of which costs are increasing, by how much, and how that impacts the business.
Should menu prices absorb the rising cost?
There is no right or wrong answer. Increasing menu prices can be a delicate balancing act for many hospitality venues. With sky-high operating costs making it increasingly difficult to turn a profit, there’s also a risk of upsetting customers with increased menu prices. With price hikes happening across Australia, increasing menu pricing may prevent people from visiting venues as the extra cost puts them off. Whatever is right for the business, education, and communication are key.
Customer education is key
Research from CommBank found that 85 per cent of Australians intend to buy from local businesses to support them on the road to recovery. With an understanding attitude, Aussies still seem willing to support hospitality businesses, particularly if they appreciate why they’re being charged more for the same products. That’s why communication is essential.
How to absorb rising costs
Armed with data from a POS (point of sale system), businesses can carry out menu optimisation. This is a great way to maximise your margins and cover additional operating costs caused by inflation.
If specific menu categories are always a hit and have high-profit margins, a reduced menu featuring these categories and a couple of side dishes can be offered to customers. Or if certain dishes take a long time to prep and produce, they can be removed from the menu to speed up kitchen efficiency. Lastly, high-cost ingredients can be replaced with similar substitutes. Recently, for example, lettuce has cost up to four times more than usual, so many venues replaced this costly ingredient with cabbage.
The decision whether to absorb the cost or adjust menu prices is up to businesses and how they think it’ll benefit the business and their customers. However, the impact of whichever decision will be made can be alleviated through research, communication, and technology.
