Inflation Explained: Restaurants balance rising costs with consumer preferences

Editor’s note: This is the third story in an occasional series on the causes and impact of inflation.

Economic struggles and too-good-to-be-true value menus go hand in hand.

Without the Great Recession, there would have been no $5 footlong from Subway.

That deal is long gone, but the latest economic hardship — this time from inflation — has spawned its generation of offers for customers looking to fill up cheap.

From McDonald’s $5 Meal Deal to the $7 Luxe Cravings Box from Taco Bell, the fast-food value wars are on — a sure sign that customers are unable or unwilling to pay sit-down prices for assembly line eats.

“If we see a drop in any sign of traffic, we expect these value meals, value deals will start showing up,” said Shubhranshu Singh, a professor at Johns Hopkins University who has studied fast food economics.

Mom-and-pop establishments in Western Pennsylvania don’t have the same luxury.

They say they’re feeling the crunch from all sides, whether it’s higher wages for a dishwasher or more costly chicken wings. In an industry with notoriously slim margins — between 2% and 7%, one expert estimated — restaurateurs face little choice but to raise menu prices.

The Consumer Price Index, compiled by the Bureau of Labor Statistics to track price changes, shows that costs for food away from home rose 4% in August compared to the same time last year.

Groceries prices rose less than 1% — though it’s worth noting this comes after peaking at 13.5% in August 2022. Year-over-year price hikes for food away from home topped out at 8.8% in March 2023, lagging several months behind inflation trends for most other categories.

“You have to hold the line as best you can to keep regulars happy,” said Joe Kolek, owner of the Anchor Inn, a sea-themed diner in Harrison that’s been around for more than 70 years.

But holding the line isn’t always possible. On top of industry-specific pressures, Kolek has to factor in utilities, insurance and taxes, which have led him to recently cut hours and raise prices.

“My gas bill is up 25% to 30%. My electric bill this summer, every month it opens your eyes,” he said. “Once inflation hits the fixed costs … you’re screwed.”

Going shopping

Restaurants feel the sting of inflation in the same way most people do at the supermarket, according to Stan Ernst, a professor of agribusiness at Penn State University.

Data from the National Restaurant Association shows around 70% of restaurants have just one location, and 90% have fewer than 50 employees. These small-time operations aren’t buying in bulk, so they don’t get bulk deals, he explained, making them subject to most of the same supply kinks that jack up grocery prices.

“Typically, the chains will get a better deal on some purchases,” Ernst said, noting many fast food franchisees don’t procure their own ingredients. “Smaller mom-and-pop-type restaurants … they have a little less choice because they don’t need as much stuff.”

Jose Tecuanhuehue, owner of Taqueria El Pastorcito in New Kensington, has partly solved this issue by opening his own grocery store in Monroeville, a move known in the business world as vertical integration.

“This helps me a lot,” he said.

Still, to run two food trucks and the New Kensington storefront, he spends $4,000 a week on groceries.

Last week, TribLive examined how global disruptions, like the war in Ukraine and droughts in Africa, have impacted the costs of food commodities. Experts also blamed the pandemic for restricting total food production as consumers acquired more discretionary income, in part from government assistance, like stimulus checks.

But restaurants, unlike shoppers, are doing more than just seeking the best bang for their buck.

“You’re not shopping around for the lowest price, because at the same time, you’re trying to maintain the highest quality you can possibly achieve and still try to make a profit at the end of the day,” said Ben Fileccia, senior vice president of strategy and engagement at the Pennsylvania Restaurant and Lodging Association. “Each of these steps is a financial and aesthetic and business decision.”

And customers can be fickle. They’ll ditch their favorite pizza spot over a dollar or find a new go-to burger joint because the condiments are no longer to their liking.

“I live in Pittsburgh and if I had a Hunt’s bottle on my table, most of my customers would probably walk out,” said Fileccia, only partly joking.

Labor costs

In good news for restaurant owners: The era of devastating short-staffing is mostly behind them.

August marked the first time the number of workers in the hospitality market exceeded pre-pandemic levels. But in the process, wages went up “significantly more than other industries,” Fileccia said, and experience went down as longtime workers moved on to less volatile industries.

According to the Bureau of Labor Statistics, leisure and hospitality workers in Pennsylvania took home an average of $543 each week in the first quarter of this year, up from $408 just three years ago.

Back-of-house and non-tipped staff have seen the greatest raises, whereas most servers still make the state-tipped minimum of $2.83 an hour, Fileccia said. With tips, wait staff make an average of $27 an hour in Pennsylvania.

Kara Kurz, owner of Chef Dato’s Table in Derry Township, has seen this first hand at her mid-priced establishment, which serves an eclectic mix of Italian, German and American favorites. She’s had to raise back-of-house wages by 30% compared to five years ago.

“Not because it’s five years later, it’s now the going rate of those positions,” Kurz said.

She also has raised bartender wages while leaving servers’ hourly pay untouched. It’s an issue of fairness, she said, since servers tend to make more money than other staff members. Strong demand has helped the wait staff get by anyway.

“The servers, just because we are busy, they make more money than they did pre-covid,” Kurz said.

Savvy customers

Ernst, the Penn State professor, said the rest of the year will tell whether higher bills and, in some cases, smaller portions will sour appetites for eating out.

“Are consumers reacting to that … or are they kind of not happy with it and they pay the price anyway?” Ernst said.

Mindful of this, Kurz said she’s tried to keep prices “reasonable” and portions as “big as we’ve done them in the past,” even though meat prices and labor costs have ticked up. The other restaurateurs who spoke with TribLive say they’re fighting the same battle.

The problem, according to Fileccia, is consumers are too savvy. They might not know their price ceiling on a car or cellphone, but most have a good sense of what they’ll pay for a meal.

“All it would take for a restaurant to lose a customer is perhaps raising the price of their wings,” he said.

For restaurants caught between input costs and consumer preferences, Fileccia advises them to lean into something that not even the best home-cooked meal can replicate: The experience of dining out.

“What I tell my members and my friends in the business … your No. 1 priority should be hospitality, training your staff and the way you make your guest feel. If anything, I think a lot of customers will agree with me. There’s nothing like being a regular at a place,” Fileccia said. “If you deliver great hospitality, a guest will pay a couple of extra bucks for a side of fries.”