A New Restaurant

I wrote about the steady rise in business costs in the past, but the problem has gotten a lot worse since then, and it seems to be accelerating.  As a restaurant owner, you need to come up with a game plan that will get you through the difficult times that very likely lie ahead.

It’s a deadly cycle for all businesses, but restaurants really feel the brunt of it.  As the cost of living goes up, people start making cuts, and the first area that gets cut is the entertainment budget.  That means less movies and restaurant visits.  It’s a lot less expensive to stay at home and watch pay-per-view and order a pizza.

That leaves restaurant owners with a huge dilemma: You can’t afford to keep your prices where they are because your costs are rising, and you can’t afford to raise your prices because you are already struggling to keep customers coming back.

There are a couple of reasons that costs are skyrocketing.  First is the cost of oil.  That makes it more expensive to operate at a number of levels.  Farm equipment is more expensive to operate, trucking costs are more expensive, and packaging materials are more expensive.  There are cost increases at every level of production, and those cost increases are passed along to the next person in the production cycle.

The second reason for price increases is ethanol.  I know it’s not very politically correct to attack ethanol on Earth Day, but the reality is, it contributes to the price increases you are facing.

With an increase in the production of ethanol, there is an increase in demand for corn.  A bsic rule of economics is, as demand increases, prices increase.  As the cost of corn increases, the cost of everything that is made from corn, contains corn byproducts, or eats corn increases.  But it’s not just corn. It’s every grain.

As the cost of corn increases it becomes more profitable to grow and sell corn.  Farms that used to sell other grains are now switching to corn crops.  Fields that once grew wheat and soy or now corn fields.  This creates pressure on the other grain markets, and forces those prices higher as well.

All this to say; you need to figure out a game plan for handling the inevitable price increases.  Don’t just sit back and assume it will work itself out.