Quantifying Inflation For Restaurant Owners
Carpenter is the CEO of CHS who helps hospitality businesses expand with grow-focused strategic accounting….
Carpenter is the CEO of CHS who helps hospitality businesses expand with grow-focused strategic accounting.
The official rate of inflation as of March 2022 is hovering around 8.5% year over year, but the true rate differs for everyone. Inflation is more properly defined as the increase in the amount you are paying for goods and services. This varies from industry to industry, business to business and person to person. The consensus though is that everyone is paying more.
Our firm works with many industries and can verify firsthand it is affecting everyone. A client of ours recently purchased a delivery truck for 40% more than what they paid for the same model the previous year. A landscaping business we account for is finding their fuel costs have almost doubled year over year.
Our focus on the food and beverage sector provides a wealth of data, enabling us to compare the change in prices for thousands of food and beverage items. Using this data, we compiled the year-over-year price change for April this year versus last to arrive at the latest one-year wholesale food and beverage inflation rate.
To calculate this number, the average price paid this year for each individual SKU was subtracted from the amount paid for the same item the previous year and multiplied by the quantity purchased in the current year. This provides the difference in the amount paid currently versus what these items would have cost in the prior year. We then weighted the price change by dollar volume purchased to calculate an overall percentage price change by category. For instance, an item purchased in quantities of $100,000 will have 10 times the weight of an SKU with only $10,000 in purchases.
The results are enlightening. While the official inflation statistic is 8.5%, it is very different for the food and beverage industry. In terms of categories, beer was up the least at 6%, seafood the most, at an astounding 31%. Between these extremes, costs for nonalcoholic beverages like coffee and soda went up 21%, dry goods like butter, flour, olive oil and more went up 20%, dairy went up 11%, and wine went up 7%. Produce saw a 19% increase and liquor went up 16%.
Aggregating and weighing all categories of food and beverage, prices have increased for the average hospitality establishment we account for by 18% overall. This is in line with a reported 17% increase announced by the Bureau of Labor Statistics. Putting this 18% figure in perspective, an establishment spending $1,000,000 in food and beverage in 2021 can expect to spend $1,180,000 for the same in 2022. For some, this $180,000 difference in itself means the difference between profit and loss. It is imperative businesses react accordingly, when possible, by increasing prices if cost reduction is not possible.
Calculating the amount of sales price increase necessary to recoup the inflation effect can be derived from a simple formula. Take the cost of sales and divide it by the total sales for each of the two periods, most likely the most recent month-end period versus the same month from the prior year. The change in the percentage between the two numbers is the percentage change needed in sales price.
For example, at the hypothetical ABC Restaurant, April 2021 sales were $230,000 and April 2022 were $250,000. Cost of sales were $55,200 in 2021 and $70,800 in 2022. Therefore, cost of sales was 24% and 28.32% for 2021 and 2022, respectively. The change in sales price necessary is (28.32% – 24%) = 4.32%.
In this example, food and beverage costs rose by $15,600, but of that, $4,800 is due to higher volume sales. The remaining $10,800, all things otherwise equal, is the inflationary effect. If we take the $250,000 in sales and multiply it by the result from our calculation, we get $10,800, the exact amount of the change due to inflation.
It should be noted that the same calculation should be made regarding all expenses across the business, especially payroll costs, to arrive at a sales price increase that encompasses the full effect of inflation for the entire business.
Also, remember when making the calculation that inflation is a moving target. A price increase needs to address not only current but also future increases. Anticipate further increases by assessing drivers of inflation such as fuel costs, supply chain issues, labor shortages and consumer demand. If these factors are continuing as before, inflation is likely to continue. Since increasing prices takes time, effort, expense and customer acceptance it needs to be done sparingly, so a business owner needs to be ahead of the curve.
The information provided here is not investment, tax or financial advice. You should consult with a licensed professional for advice concerning your specific situation.
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