How chains like McDonald’s and Mother and Pops are dealing with inflation

Customers at a McDonald’s restaurant

Scott Mill | CNBC

As the restaurant industry battles inflation, the size of chains and their access to cash gives them the upper hand, but independent businesses have their own advantages when it comes to managing higher costs.

Consumers have felt the pressure on their budgets and restricted their dining out in recent months. Monthly same-store restaurant traffic has declined for eight straight months compared to the same period last year, according to industry tracker Black Box Intelligence. In response to this decline, both chains and independent restaurants are working to address cost without alienating diners.

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Prices of food consumed away from home rose 8.6% over the past 12 months, according to the Bureau of Labor Statistics in October, as restaurants increase menu prices to cope with rising costs on ingredients, labor and even energy .

Aaron Allen, founder and CEO of restaurant consultancy Aaron Allen & Associates, compared chain restaurants to oil tankers and independents to speedboats. Chains have bigger budgets, a wider scale, and other tools like advanced technology. But they are also often sluggish and mired in bureaucracy.

A mom and pop restaurant, on the other hand, doesn’t have the same access to cash or the benefits of size, but can make changes more quickly.

Scale matters

When it comes to inflation, restaurant giants like MC Donalds and Starbucks have some obvious advantages over independent burger shops and cafes. Their massive size helps chains set prices early when buying ingredients from suppliers, and they can often apply pressure to get cheaper deals.

“When you’re a chain, you have the power, bargaining power and influence over suppliers, and that’s what happens,” Allen said. “Independents don’t have much leeway to switch suppliers, except for non-core items.”

Of the more than 843,000 restaurants, food trucks, and ghost kitchens in the United States, about 37% belong to chains with more than nine locations, according to food analytics firm Datassential.

Noodles & Co, which has more than 450 locations, recently signed a contract for its chicken supply for 2023. The company believes the deal will help it save about 2% compared to its third-quarter cost of sales margin.

“When you look at all the disruptions in the supply chain environment, suppliers want some level of certainty about purchase volumes, not just price,” said Dave Boennighausen, CEO of Noodles.

As chains place larger orders, suppliers typically prioritize their orders over those for independent restaurants. Adam Rosenblum, chef and owner of Causwells and Red Window in San Francisco, said the uncertainty of securing ingredients has prompted him to buy two or three times what he would normally buy when they become available. And carrying those higher inventories is putting more pressure on its razor-thin profit margins.

“I don’t have the purchasing power, I can’t set my prices annually, and I just don’t go through enough products to be meaningful to some of the larger companies,” Rosenblum said.

In the UK and other European markets, which have experienced even higher inflation than the US, major franchisors have said they will provide financial support to operators struggling with higher costs. For example, MC Donalds Executives said in late October that the fast-food giant could offer “targeted and temporary support” to European franchisees who need it.

Independent operators don’t have the same luxury. Kate Bruce, owner of The Buttery Bar in Brooklyn, said she has been struggling with higher costs for everything from labor to cooking oil to energy.

“It’s expensive to run a restaurant these days and ours is small. So that cost is a factor, and it’s all very tight,” she said.

Faster and more flexible

On the other hand, independent restaurants have the advantage of speed. When Mom and Dad notice much higher prices for a key ingredient in an entree, the restaurant can quickly change the price, decrease the portion size, or even remove the item from the menu.

For example, Bruce said if she increases the price of an item, she’s happy to add something else to the menu that’s cheaper.

“Yes, we have Wagyu beef, but [we] also have some salads that are a bit more affordable and chicken appetizers that won’t put anyone off coming in,” she said.

Portillos The restaurant chain’s CEO, Michael Osanloo, said independents have greater flexibility when it comes to price changes. Fast food customers expect the same prices at every location, but menu prices can vary by location and whether a franchisee or the company owns the restaurant. “There is a small price shock,” Osanloo said.

Consumers care more about prices when they visit a chain restaurant, according to a survey of about 2,400 U.S. consumers conducted by PYMNTS. More than a third of respondents said daily prices played a role in choosing a chain restaurant, while only 22.5% said it played a role in their decision-making when choosing an independent restaurant.

And while popular chains have brand recognition and the resulting pricing power, independent companies also deserve the goodwill of some consumers because they’re a small business.

“There’s this perception of authenticity, like an Italian family restaurant compared to a big chain like Olive Garden,” Allen said. “This feeling has started to hurt chains.”