(June 29/17) Although menu prices have stayed on track with Restaurants Canada’s fall forecast, things could change. Menu prices in the first five months of 2017 rose 2.4% compared to the same period in 2016. By way of comparison, menu inflation was 2.6% in 2016 and 2.8% in 2015. Menu inflation is typically stable, ranging between 2% and 3% a year. However, a number of pressures could drive up menu prices in the second half of this year, and into 2018.
The high cost of food
Food costs, which are the largest share of operating costs (roughly 35% of operating revenue), are a significant pain point for seven in 10 restaurant operators, according to Restaurants Canada’s Restaurant Outlook Survey (login required). What consumers pay for food at grocery stores gives us a glimpse at some of the changing prices faced by restaurateurs:
Beef prices jumped an average of 16.5% between April 2014 and October 2015. While prices have moderated (falling 3.3% in May 2017 compared to May 2016), a new report by Dalhousie University expects meat prices to climb between 7% and 9% by the end of the year.
Fresh vegetable prices rose an average of 14% between September 2015 and April 2016. Although inflation has moderated to 2.5% in May 2017, lettuce prices have soared by 23.6% due to crop losses in California. The Dalhousie University report predicts prices for fresh vegetables will increase by 2% to 4% by the end of 2017, down from an earlier forecast of 4% to 6%.
Fresh fruit prices rose by 11.8% between September 2015 and April 2016, but have slipped by 1.0% so far this year. Fruit and nut prices are forecast to climb by 3% to 5%.
Minimum wage adds the pressure
Labour costs are the second-largest expense for operators, accounting for 30% of operating revenue. Recently announced minimum wage increases, especially the push to $14 in Ontario by January 2018, will drive up labour costs. Preliminary results from Restaurants Canada’s minimum wage survey showed that nine out of 10 operators in Ontario feel they will have to raise menu prices to help offset the dramatic jump in minimum wage.
Real estate woes
Rising rental and leasing costs and utilities will further aggravate cost pressures, forcing operators to drive up menu prices.
Few cost-cutting options
In an industry with razor-thin profit margins, operators are running out of options on where to cut costs. In a previous forecast, Restaurants Canada anticipated that menu prices would rise by an additional 2.4% in 2018. Given the extraordinary cost pressures, menu inflation will likely be higher than predicted. Watch for our Foodservice Industry Forecast: 2017 to 2021 to better plan for what’s next.
By Chris Elliott, Senior Economist