Strategies to Offset Ingredient and Labor Cost IncreasesPhoto: Reproduction/Freepik.
The restaurant industry continues to evolve, with new business models such as delivery services and dark kitchens gaining popularity. However, rising prices are affecting the US economy as a whole, and the food sector is no exception.
According to the U.S. Bureau of Labor Statistics, menu prices have increased by 27.2% since 2019. Additionally, both ingredient and labor costs are on the rise.
While these increases could harm operations, staying aware of the factors driving these challenges and investing in strategies to mitigate their effects can help protect business revenues in 2025.
What Are the Biggest Challenges for Restaurants in 2025?
With rising prices and uncertainty about future US economic policies, the Los Angeles Times has highlighted some of the key challenges restaurants will face in 2025:
- Labor Costs: many restaurants are struggling to maintain a full staff, which directly impacts service quality. In some locations, labor costs can account for up to 60% of net revenues.
- Food Prices: food prices have risen by 28% since 2019 and are expected to continue increasing in 2025. Factors such as production costs, fuel prices, and external issues like the war in Ukraine are driving this rise.
- Health Insurance: rising insurance costs are affecting the general population, and restaurants with 50 or more full-time employees are required to provide this benefit.
- Credit Card Fees: with the growing use of credit cards among Americans, the associated fees are becoming a significant challenge, especially for small business owners.
- Childcare: many employees face family responsibilities, and high childcare costs are impacting restaurant operations.
- Delivery App Fees: as delivery services expand globally, fees for meal delivery are rising. In some cases, the commission can reach up to 30% of the total order value.
- Service Fees and Tips: extra costs for consumers, such as service fees and tips, remain a controversial issue within the industry, and there is ongoing debate in the US over how to manage these charges.
How Is Inflation Affecting the Restaurant Industry?
The cost of preparing meals has increased by 29% in recent years, alongside a 31% rise in labor investments. Current data shows that restaurant traffic is still below pre-pandemic levels.
With high levels of debt and inflation remaining a concern, restaurants face difficulties in keeping prices affordable for consumers. To balance expenses, a price increase of about 19.9% would be necessary, not accounting for profits.
At the same time, inflation is eroding consumers’ purchasing power, leading to less disposable income for dining out, whether at restaurants or through delivery.
What Strategies Can Restaurants Adopt to Survive Economic Downturns?
Surviving economic downturns is challenging for restaurant owners, but various strategies can reduce the effects of a crisis:
- Cost Reduction Measures:
Conducting a thorough analysis of all operational areas can identify opportunities to reduce expenses, such as negotiating with suppliers, optimizing ingredient use, and eliminating underperforming menu items.
- Streamlined Menu:
Simplifying the menu can optimize ingredient use, focusing on popular items and offering a range of price points to attract diverse consumer profiles.
- Dynamic Pricing:
Analyzing data to adjust prices according to demand can help restaurants offer targeted promotions for peak times or slower periods.
- Focus on Service Quality:
During tough economic times, consumers become more selective about where they dine. Restaurants with exceptional service can stand out from the competition.
- Invest in dark kitchens:
Also known as Cloud Kitchens, these operations do not require a physical dining area and focus exclusively on delivery. This can reduce costs and improve efficiency, especially during economic downturns.
How Is the Labor Shortage Impacting the Foodservice Industry?
The labor shortage is also reflected in rising prices. The sector is struggling to maintain full teams, including waitstaff, cooks, chefs, and delivery drivers.
For example, according to the U.S. Bureau of Labor Statistics, the average hourly wage for waitstaff is $15.36, below the national average of $23.11 across all occupations. Additionally, the growth forecast for this category is below the national average.
This labor shortage can have several negative effects on customer experience, including longer wait times and potentially lower service quality.
What Trends Will Shape the Future of Restaurants in 2025?
Despite economic uncertainties, the restaurant industry will remain a vital part of the economy. Revenue in the food sector is expected to reach $863 billion by 2025.
Key trends to watch in 2025 include:
- Personalization of Service: advances in artificial intelligence are enabling personalized customer experiences by tailoring menus and offers based on individual preferences and past behaviors.
- Sustainability: environmental responsibility is becoming increasingly important, as customers are placing greater emphasis on sustainability when choosing where to dine.
- Automation and Robotics: automation, supported by AI, promises to improve efficiency and reduce long-term costs, from data analysis to robotic assistance in operations.
- Health and Wellness Focus: post-pandemic, consumers are more health-conscious, driving demand for healthier food options.
- Virtual and Hybrid Experiences: with the rise of delivery and dark kitchens, restaurants are expanding operations to include takeout, delivery, or dine-in services. Immersive experiences, including digital tours and virtual reality, are also becoming more popular.
- Data-Driven Decision Making: AI-based data analysis can optimize various operations, including menu offerings, inventory management, and digital marketing strategies.
- Inclusion and Accessibility: ensuring that all customers, including those with dietary restrictions or disabilities, can access and enjoy restaurant services will be increasingly important.
For restaurants, staying aligned to these trends is essential for remaining competitive in 2025 and preparing for the challenges ahead.
