Inflation Nation

Over the last two years, the Ohio-based Donatos Pizza chain has captured record sales, opened new restaurants, expanded its presence in Red Robin restaurants and welcomed a host of new franchise partners.

But it isn’t all rosy for Donatos and its president, Kevin King. Like pizzerias across the U.S., the 59-year-old, family-owned enterprise is battling runaway inflation as commodity prices soar alongside labor and rent.

According to the U.S. Bureau of Labor Statistics (BLS), wholesale food costs in March were up 17 percent year over year. Meanwhile, the average hourly earnings for restaurant and bar employees have jumped about 15 percent over the last year. Tack on accelerating prices for paper goods, pizza boxes and gasoline and the nation’s pizzerias face a stifling, profit-draining reality.

“It’s unlike anything I’ve ever experienced,” says King, whose lengthy career in the restaurant game includes stops at Domino’s and Papa Murphy’s.

Though inflation eased a pinch in April, it still remained near a 40-year high, the BLS reported in May, and economists predict high inflation will remain well into next year despite government officials’ attempts to tame steep prices. Macroeconomic factors such as the ongoing labor shortage, persistent supply chain dilemmas and rising geopolitical tensions spurred by Russia’s invasion of Ukraine – two nations that together export about one-quarter of the world’s wheat supply – are having a mighty impact on everyone from pizza industry heavyweights like Domino’s to mid-sized chains like the 173-restaurant Donatos to the ma-and-pa eateries
dotting the American landscape. 

These inflation realities continue compelling – if not forcing – restaurant leaders to make calculated, prudent decisions to withstand the pressure, including: 

Re-evaluating purchasing habits

When faced with rising food costs, Gill Stansfield, a faculty member at Johnson & Wales University’s College of Food Innovation & Technology who also oversees the College’s purchasing and procurement, says operators must be in regular, respectful dialogue with their vendors. 

“Ask vendors about closeouts or bonus buys,” he says. 

If vendors have products they need to move, a creative culinary pro can likely craft enticing specials around those items, such as a limited-time rainbow pizza using rainbow tomatoes.

In addition, Stansfield urges operators to consider local product. While marketing dishes filled with local items is itself valuable, there is also sound financial rationale for purchasing local goods, namely the ability to escape onerous transportation charges.

Stansfield also recommends independent restaurants consider joining a group purchasing organization. In such a collective, operators can capture buying power akin to a larger chain as well as access to rebates and marketing perks. 

“Given what we’re seeing with inflation, it’s entirely worthwhile to investigate if a group purchasing organization is right for your business,” Stansfield says.

Reducing and revamping the menu

Doug Roth, a veteran restaurant consultant who heads Chicago-based Playground Hospitality, is currently working with various restaurants slicing their menus 25 to 30 percent to boost profitability and inform smarter purchasing.

To begin, Roth suggests pizzerias properly cost out each menu item. Thereafter, define which items are top sellers, have low food costs or possess high gross margin. Those are the keepers, he says. The rest, including items that rarely sell, carry inflated costs or require ingredients with volatile prices, are best eliminated.

Armed with popular dishes and low-cost, high-margin items, Roth says operators can then re-engineer their physical menu to encourage guests to order the most profitable items. The first or last items on the menu, for instance, regularly draw attention as do those placed in boxes or paired with photos.

“Create interest behind specific items and direct the eyes to items that will help you be more profitable,” he says.

Adjusting employee compensation and strengthening culture

King calls hourly labor the “first and most acute” inflationary pressure felt at Donatos. In the opening months of 2022, labor costs climbed nearly three points as a percentage of sales as the chain heightened its starting wage for hourly workers and drivers while also increasing the rate for those opening and closing stores. 

“There’s enormous pressure in the industry on raising wages at a time when we are already short staffed,” says King, whose company also introduced tip pooling at its restaurants. 

In response, Donatos has focused on enhancing its onboarding and training to create lively workplaces where employees feel valued and supported, which reduces turnover costs and boosts productivity.

“Our best managers have the least trouble staffing their stores,” says King, adding that Donatos also instituted an employee tracking system to respond faster to applicant interest.

Raising menu prices and reducing portion sizes

Though raising menu prices is not a popular option, such a move has been hard to ignore amid escalating costs. Pizzerias, after all, can only absorb inflation’s punishing hits so long. 

Eateries across the country have increased menu prices to offset surging inflation. In fact, restaurant menu prices jumped 6.4 percent from January 2021 to January 2022, the highest one-year leap the BLS had recorded in four decades. 

“As inflation looks permanent and not temporary, you have to adjust prices accordingly to compensate,” says King, whose chain raised its delivery fee from $3.85 to $4.49 in March to combat rising food and gas costs. “These are gut-wrenching decisions, but you have to layer in increases where there is opportunity.” 

One alternative to raising prices on menu items is reducing portion size, a practice commonplace with consumer packaged goods. A sleeker portion size allows a restaurant to hold the line on price and quality while countering inflation through reduced ingredient use or higher yields.

“Now, you have to be careful here because people are still looking for a value orientation, but reducing the size of items while maintaining price and quality can be a viable option,” Roth says.

To date, King has resisted altering portion sizes at Donatos. Instead, he’s pulled other calculated, inflation-battling levers, such as testing an automatic saucer at stores to improve productivity, drive consistency and reduce waste.

“We’re not changing portion sizes because we don’t want to sacrifice what people have come to expect from us,” King says. 

Daniel P. Smith  Chicago-based writer has covered business issues and best practices for a variety of trade publications, newspapers, and magazines.