The Cost Of Doing Business

The memes of Tony Montana slumped at his desk over a pile of eggs are funny. Funny until a supplier shows up with an egg invoice that’s triple what it was a year ago. While we’re not at the point where restaurants are living in terror of ruthless egg cartels, rising food costs can feel like a very sharp blade pressing against a restaurant’s carotid artery. And they’re not the only expenses pinching the industry. Insurance is up. The minimum wage will increase a dollar a year. Even once simple things—fryer oil, repair parts—have gotten astronomically more expensive.

Though the restaurant industry made nearly $900 billion in 2022, according to the National Restaurant Association, rising costs are causing many owners to work twice as hard for half as much money.

“Even though our revenues are 40 to 50 percent more than they were before the pandemic, we’re still taking a lot less home,” says Ryan Lavenia, CEO of Axe Hospitality Group, a pioneer in South Florida hospitality that owns Mama Hank’s Speakeasy + Kitchen and Chops + Hops in Ft. Lauderdale. “It’s an interesting dichotomy: How do you double your business yet end up with less take home? It’s a riddle that’s near impossible for anyone to solve.”

Though the economics are mystifying—and occasionally dispiriting—many restaurateurs large and small are thinking on their toes and coming up with crafty solutions.

The knee-jerk solution to increased costs is to raise prices. But in the fickle world of restaurants, passing costs on to customers can often do more harm than good.

“Unfortunately pricing for ingredients has raised so much it’s not viable to solely pass along the cost to guests,” says Kevin Danilo, an industry veteran and founder and CEO of Batch Hospitality, which operates four locations around South Florida. “A $12 burger going to $16 is a hard pill for consumers to swallow.”

The secret sauce, in his view? Rather than being the first restaurant in any given market to raise prices, watch the competition and raise prices once others have. Levina employs a similar strategy. “Making those types of decisions are hard,” he says. “When we do raise prices, we try not to exceed what the rest of the market is charging for comparable dishes.”

Though raising prices is often inevitable, choosing which items to charge more for is a critical art. Michael Ferraro, Vice President of F&B for the Tavistock Group, the heavyweight developer behind Timpano and other restaurants, says raising prices on your biggest sellers is the move.

“You have to make your margins on a small percentage of items, and if you have an item that’s in your top three, that’s where you have to pass costs along to guests,” he explains.

Batch’s Danilo also warns that restaurants should be aware of how their value is perceived, and try to price accordingly.

“When we did increase our prices most guests didn’t notice because we were so underpriced already,” he says. “At the end of the day the market determines the cost versus perceived value. A $22 burger at a steakhouse is considered a great deal. A six-dollar burger at McDonald’s? That’s expensive.”

Another way restaurants are mitigating food costs is by revamping their menus, treating them like jigsaw puzzles that can be recut and rearranged to create the same image. This doesn’t mean cutting portion sizes in half or sacrificing ingredient quality, but searching out where you can stretch food further, or re-engineering popular items to include ingredients with lower costs.

“We have these jalapeno deviled eggs with caviar, that was one of our better margin menu items because eggs were so inexpensive,” explains Lavenia. “They offset the low-margin items like skirt steak and short rib. Now the eggs’ margin is thin, and the discussion is: Do we take this off the menu and replace it with something equally shareable, without eggs?”

His restaurants now are moving towards smaller-plate menus, where big-ticket items like short ribs can go a lot further. Rather than charging $90 for a wagyu short rib entrée, they can split it up into things like short rib tacos or short rib sliders, and spread the cost out among several smaller, more-affordable dishes.

Food cost isn’t the only thing to consider when reimagining a menu. Streamlining items that take less prep time can also help save on labor, especially if they don’t require skilled chefs.

“A big thing we’ve done is to create dishes that take fewer hours to prep,” says Lavenia. “Fewer hours cooking recipes that can be cooked by a line cook versus a sous chef means saving on staffing costs.”

Even before Florida’s minimum wage increases, restaurateurs were getting hammered by wages the labor market was demanding. Danilo says Batch wasn’t affected much by the raises in 2022 since he was already paying much higher out of necessity.

“If you’d have told me three years ago we’d have to pay a dishwasher $15 an hour I’d say it would kill us,” he says. “But the market has been demanding a higher wage for so long, that by the time the law caught up, we were already above it.”

Beyond hard numbers, though, creating a culture of loyalty and work satisfaction can help control turnover costs too.

Talkin’ Tacos, whose fast-casual late-night taco shops span three locations across Dade and Broward counties, credits its lack of turnover as a big reason it hasn’t had to raise prices at all. “Our employees have a family type of bond. When they come to work they’re happy to be there,” says co-owner and co-founder Omar Al-Massalkhi, mentioning a recent Dave & Buster’s outing he took with his entire team. “I’d say our culture is the biggest aspect of why we’ve kept prices low.”

Talkin’ Tacos also only promotes from within. Co-owner Mohammad Farraj says when his employees know they have potential for growth, it motivates them to stay with the company.

Their shops also utilize automated touch screen ordering machines, which offer considerable labor savings over time. But you don’t need to go full roboto to save on labor either. Danilo noted that arming his Batch servers with pads that relay orders directly to the kitchen has allowed servers who could only handle four tables to manage five or six. Spread that over an entire shift, and he needs two or three fewer people on the floor.

No one in the business of pleasing palates, understandably, is going to champion sacrificing food quality as a means of getting through this turbulent moment. But finding lower prices for ingredients is now a crucial part of restaurant operations.

Farraj now scours South Florida suppliers tirelessly looking for the lowest prices. It’s time consuming, no doubt, but it is a major factor in Talkin’ Tacos’ consistent prices.

Being proactive about food costs can also save money in the long run. “Talk to your purveyors, they know what’s coming,” says Tavistock’s Ferraro. “Ask them, ‘What’s my best direction? What should I expect?’ Your butcher will 100% know what’s going on for the next 90 days, then you can make an educated decision.”

Maybe you’re now able to change up a menu before increases hit, or raise prices incrementally in anticipation of higher food costs. Restaurants can also begin budgeting for slimmer margins to absorb those costs and, as Danilo so eloquently puts it, “just take it on the chin.”

Right alongside those dizzying stories about the skyrocketing cost of eggs are the equally woeful tales of Florida’s insurance rates rising like flood waters during a king tide. Landlords aren’t absorbing those, so rents are spiking too.

Ferraro, whose Tavistock group owns many of its locations, has locked in longer term leases with sites it doesn’t own. Lavenia says his group worked with its landlord to spread costs out.

“The insurance our landlord had to take out went up 300 percent last year,” he says. “He worked with us to find ways it wasn’t such a jolt, and we’re paying last year’s increase over time. He’s also examining our own insurance policies to see if some of the coverages overlap with his.”

If a restaurant has loans out, Batch’s Danilo also advises paying them down now so expenses don’t get out of control when interest rates go up.

“If you’re sitting on any cash, paying down your debt is one of the most significant things you can do to get ready for the next 24 months,” he says. “I just got my last letter, and my interest is up from 6.5 percent to 10.5 percent. Debt creeps up on you and when you double the cost of your debt servicing, you’re screwed.”

Danilo’s overall outlook is hardly one of pure doom and gloom. The world of restaurants is inherently cyclical, with a long history of navigating challenges; he, like other restaurateurs, is confident that rising costs and economic uncertainty can be weathered with the right tools. Sure, 64-egg omelets might not be on menus for a while. But much like those funny memes imply, maybe it was too much of a good thing anyway.