The recent surge in inflation is now a significant issue for smaller firms, and nowhere is this more evident than in the restaurant industry.
As smaller firms search for ways to survive, it is clear that the substitution of technology for labor is going to be part of the mix.
While large firms can hedge volatility and medium-size firms can increase efficiencies to mitigate price increases, smaller firms don’t have as many resources yet still must contend with higher prices for both goods and labor.
As smaller firms search for ways to survive, it is clear that the substitution of technology for labor is going to be part of the mix as the supply shock persists into next year.
Restaurants are a good example. They took the brunt of the pandemic early on, with many closing for good. Now, those restaurants that have survived face new challenges: Prices of supplies are substantially higher than just six months ago, and labor costs are also higher as workers have become difficult to find.
Paul Brewster has seen these dynamics play out at his neighborhood restaurant, Fitzgerald’s 1928, in Glen Ridge, N.J.
“In good times, the average restaurant makes 5% annually,” said Brewster, a longtime food service executive. “These are anything but great times.”
To start with, he is paying more for food. Chicken wings cost 62% more in June than at the end of last year, and the vegetable oil used to fry those wings costs 71% more – a result in part of labor shortages at processing plants and shortages of truck drivers.
Then there is the labor. Brewster finds himself competing with Amazon’s $15 per hour starting salary. And offering signing bonuses has not brought in any prospective employees.
It’s not just in New Jersey. In Austin, Tex., line cooks can command a $17 per hour starting salary with other local firms bidding up that wage to compete for labor. And this is in a metropolitan area where it takes roughly $26 per hour to afford a basic two-bedroom apartment and meet basic living needs around one of America’s fastest-growing cities.
The cost of basic supplies is also rising. Firms must pay more than $100 to buy a box of latex gloves used in food preparation – a 25% increase since the end of last year.
Given the resurgence of demand for protective gear needed to address the emerging delta variant by medical professionals and first responders, it is almost certain that demand will continue to outstrip supply for these goods, causing those costs to move higher as well.
Still, Brewster can count himself as one of the lucky ones. Roughly one-third of the small operators that were open before the pandemic are permanently closed and those that survive are having to adapt to demand outstripping supply until the pandemic eases, whenever that may be.
Looking ahead
So what’s a small business owner to do? Increase the price charged for basics to the point where consumers pay for $15 tacos and $20 burritos? There is little doubt that operators need to increase their prices, but they can’t go so high that customers end up eating at home.
We anticipate that some of the supply issues will be sorted out as we move further from the outright production shutdowns during the pandemic. Some of the labor issues will be reduced after unemployment benefits expire around Labor Day and child-care pressures are relieved when schools reopen.
But there is also the possibility that restaurants have lost at least a portion of their labor-market share to employers like Amazon or Walmart. And there is the chance that the meatpacking and agricultural sectors will continue to be affected by employee defections, with adverse immigration policies limiting the supply of replacements.
Ultimately, it means that firms will have to take a new look at the mix between labor and technology. For restaurants, that means a move toward the integration of online apps into their basic service offerings. Or it could mean that self-serve kiosks that are now ubiquitous at grocery stores and large fast food chains like McDonald’s will have to become a fixture among small local fast fresh providers.
The takeaway
Until these broader challenges can be addressed, small operators will have little choice but to adapt to a new landscape that few could have envisioned at the start of the pandemic.
For more information on how the coronavirus pandemic is affecting midsize businesses, please visit the RSM Coronavirus Resource Center.
