Inflationary prices won’t lag behind for long in foodservice – shrinkflation as an alternative

As the foodservice industry begins to recover from the pandemic, it also faces an uphill climb with inflation which may get worse before getting better. At a high level, when you compare the U.S. Consumer Price Index increase with the foodservice industry, there appears to be a lag. So, for the most part suppliers and operators may have been able to hold off on passing down higher costs. They see that currently, the “glass is half full.” However, this lag will not last long and they will be forced to start passing the cost on, bringing the foodservice industry in line with inflated costs.

Before “passing the buck or the dish” begins, foodservice operators may still see a bit of a reprieve in their business, this is due mostly to patrons continuing to dine out. As the pandemic winds down, people are enthusiastic about coming out of quarantine. Logic would dictate that people are tired of cooking and their desire to get back to normalcy includes dining out, regardless of a rise in prices.

What is shrinkflation?

Let’s also look at “shrinkflation,” a derivative of inflation. In order to maintain an affordable price point, restaurants are instituting a reduction in portion size to help keep costs down. What’s the bright side of shrinkflation? If the demand to eat out is driven by pent up frustration, this can be a good thing both for the patron and the restaurant. For the restaurant proprietor, smaller portions may mean that patrons are going to also order an appetizer or dessert which typically have higher margins. In addition, patrons receiving smaller portions sizes and count onto plates can have a positive impact on their overall health while also producing less leftover or wasted food.

On the flip side, if the “glass is half empty” then one of the biggest challenges facing the manufacturer is an effective pricing strategy. As restaurants increase prices or reduce portion sizes, there is a need to understand at what price they will remain competitive. Recent financial results from consumer companies further highlight the importance of inflation in the minds of management teams and investors.

The real pressure began during the 2022, Q2 earnings season when several large non-food and beverage consumer companies saw huge drops in share price. This was rooted in investor reaction to these companies discussing inflationary cost pressures, but not talking about how they were going to offset inflation with price increases. The concerns were not fully addressed by a comprehensive, proactive pricing action plan or strategies on how to improve margins short- and long-term. By contrast, several major food and beverage companies have experienced recent share price outperformance by announcing aggressive pricing actions. These actions were historical in size and scope, and include list price increases, price pack configuration, and consistent communication across most of their product lines to their customers. Premium brands and secondary brands alike took a major hit.

2 easy tips on how to get started to develop or refine your pricing strategy:

1. “Learn from the past, to fix the future Marty McFly”
   Take a look at the “less-than-stellar” pricing decisions made in the past. Take this opportunity to clean up your current pricing management strategy, analysis and solutions to effectively manage and communicate with your customers.

2. “Structure and discipline young Jedi”
   Companies typically, broadly apply price increases to counteract cost inflation of the largest raw materials. We know that pricing strategies which leverage differences in product, channels, seasonality and customers, can surgically target price increases in stages. Effective pricing foundations are strategic in terms of value, price-sensitivity, and the cost of doing business. It’s not only about the raw material cost due to inflation. Strategic decisions require data, analysis and effective solutions.

Read part 2 of this blog, Keeping Your Glass Half Full on inflation that further explores pricing strategies and the impact to the foodservice industry.