How inflation is impacting the Australian hospitality industry | Kraft Heinz Food Service

How inflation is impacting the Australian hospitality industry

With the cost of living rising and inflation increasing, the hospitality industry has taken another hit. So, how can you adapt your venue to stay afloat?

Inflation is impacting all areas of life across the globe. But learning how to adjust your business can help it survive the uncertainty that lies ahead.

Saying it’s been a tough few years for the hospitality industry would be an understatement. First it was staff shortages, then it was Covid-19 and natural disasters. Now the industry is facing inflation and rising interest rates.

Inflation is an increase in the prices of goods and services and is typically measured as the rate of change in those prices. The most well-known indicator of inflation is the Consumer Price Index (CPI), measured in Australia by the Australian Bureau of Statistics. As at January 2023, the annual change in CPI in Australia was 7.8% (year on year, to December 2022), the highest annual CPI inflation since 1990.

And it’s natural that with inflation and rising interest rates consumer spending tightens. It also impacts food costs and leaves some restaurants struggling to cover their overheads.

The July Deliveroo HospoVitality Index Report noted that Australian restaurateurs have begun making business decisions and demonstrating strong innovation that could help them navigate through the pressures of inflation over the next 12 months, with many business owners choosing to localise their food and beverage supply chain; offering promotions to attract new customers; and making changes to their menu to help their bottomline.

“Despite the unwavering resilience amongst restaurant owners, the impacts of rising costs and inflationary pressures, and difficulties with the supply chain are being felt far and wide,” Ed McManus, CEO Deliveroo Australia said.

“Restaurants have already demonstrated their ability to innovate and adapt through challenging periods, and it’s incredible to see how they’re responding to these current pressures by localising their supply chain – and some even growing their own produce – it is clear this innovation has not slowed.”

However, there are signs of optimism returning over the next 12 months. According to the Deliveroo HospoVitality Index Report, 66% of respondents felt positive about their business prospects for the next 12 months.

While the hospitality industry faces challenges, customer experience remains a crucial point of differentiation. Peter Kennedy CommBank Senior Manager, Hospitality – Business Banking explains: “Regional tourism and hospitality will continue to benefit from a renewed enthusiasm for domestic travel, with the increased local demand requiring greater thinking around flexible offerings that promote the local area as a destination for accommodation, food and beverage, and recreation.”

When it comes to inflation, there is very little control we have as business owners. However, it is important to remember that there are some things you can do to provide some security for your business and set yourself up for success in the long run.

When it comes to adjusting your venue to help manage inflation, look no further than your menu. While this is your marketing and selling tool, it’s also one of the most expensive costs of running your business due to food and labour costs.

Inflation has not only impacted the price of raw ingredients, but also influenced the cost of fuel for transportation and delivery. That’s why many venues are adapting their menus to try to ease the rising cost of produce, by replacing high-cost ingredients with affordable options or removing unpopular items altogether.

Jackie Middleton, who co-owns Earl Canteen in Melbourne told The Guardian they’ve adapted their menu by substituting expensive vegetables with cheaper ones and finding inventive ways to use seasonal produce. “We essentially changed the whole menu,” she said

“Baby cos is now three or four times the cost, but if we only use half that’s eight times the cost and if we throw some of it away, because of the quality, you might be at 10 times the cost. [But] fennel is really cheap, our menu might have been crunchy lettuce and now it’s more shaved fennel and other thicker vegetables that will give a nice crunch."

To help steer away from rising costs of meats, chicken, and seafood venues are beginning to offer more vegetarian and vegan options which can provide higher profit margins. As an added bonus it also aligns with current food trends within the industry.

Also consider opting for value-added products that don't require much prep work to save on labor costs. This can include pre-cut chicken fillets or pre-seasoned protein.

Another menu change to help boost profits comes with adjusting your pricing. While increasing prices can help offset rising food costs, it also has the potential to discourage guests from visiting your venue.

So, if you choose to change your prices, make sure you keep a close eye on the impact it has on your bottomline and guest satisfaction levels. You should regularly review your sales data and answer the following questions:

It’s important to remember that making any changes to your menu can have both a positive and negative impact on your business. That’s why it is valuable to highlight menu items that aren't selling and remove them; not only will it remove unnecessary food costs, but also help lower your labour costs.

Along with inflation, many businesses are also battling the skills shortage that continues to cause havoc across the industry. In Australia, almost a third of businesses reported having difficulty finding staff and of these over 40% of SME’s reported having business operations impacted as a result

Therefore, when it comes to adjusting your business to cater for inflation, staffing and operating hours are another avenue that can be reviewed and adjusted accordingly.

Minimising labor costs can help maximise your profits in line with inflation. You can do this by making the prep work as simple and efficient as possible to cut back on the number of skilled cooks needed in the kitchen.

If you’re a large business, looking into operating a production kitchen can help remove the need for skilled staff, while also helping minimise food wastage and expenses. Reduced and limited service could also lead to sustained margin growth, but it is important to remember it could in turn impact customer satisfaction.

It is important to regularly analyse your sales data and work out how profitable your business is and when. This type of data analysis can help you decide if you can cut operating hours without having too much of an impact on your customers, especially your loyal ones.

At the end of the day, everything links up to trying to save costs in all aspects of your business. So, while making changes to your menu items and reducing staff and operating hours all contribute to your bottomline, there are some additional tasks you can do to help maximise your margins.

It’s important you take the time to properly assess your budget on a regular basis. Going over your costs will help bring unnecessary outgoings to the surface, allowing you to then cut them out of your budget to minimise your overheads.

To help with this, a good inventory system is important as it supports you to better understand where your margins are coming from. Inventory also allows you to reduce food costs, improve ordering processes, increase profit margins, analyse trends, and better serve your customers.

A good inventory system will also help you conduct a waste audit so you can understand where you can save on costs within the venue. Once you know how much food is being wasted, you can then develop solutions and systems within your venue to minimise the outgoing costs.

Additionally, there are a number of ways you can maximise your margins. Some ways are by offering freebies to loyal customers, price matching other restaurants within your area or organising events to attract new customers.

It is important however, to be sure to cost these extra services properly and make sure you have the budget for them. The use of social media can help you promote your business to new audiences, although if you are going to invest in this make sure you have the time and resources for regular posting.

While these changes can benefit you and your business, remember that the goal should be to protect your customers and maintain healthy margins. Therefore, make sure to regularly review and adjust accordingly before more damage is done

Inflation provides us with a level of uncertainty; how much will it increase, for how long and how will businesses last? But alongside all the uncertainty, there are many aspects of your business that can be adjusted to help provide a level of comfort.

Whether it is reassessing your menu and ingredients, adjusting your staff’s rosters to cater to skill shortages or securing your bottom line through price increases; each step can help set your business up for the future. But one thing that’s for certain is making sure you don't change too many things at once.

Take it one step at a time and make the transition smooth and unnoticeable to your customers. Because while most guests understand that restaurants need to increase their prices as food, labor, and expenses rise, there will be a small portion who won’t, placing the risk on them going somewhere else.

Looking to make changes to your menu but don’t know where to start? Download our tip sheet here.