How Inflation Impacts Menu Costs

What Are Menu Costs and What Is The Influence?

Menu costs are a transactional cost that's incurred by a firm when prices are changed. Economists believe that macroeconomic sticky prices can impact an economy negatively.

The Influence of Menu Costs
Rising menu costs don't necessarily mean price adjustments are frequent. Those price changes only take place as the profit margin starts to slip. Only when a great amount of revenue is going to be lost will menu costs cause pricing adjustments.

The expense to change prices largely depends on the technology being used. For example, reprinting menus, updating price lists, or manually retagging products will all vary in expense. When price changes take place on a menu, it can make customers apprehensive about a purchase. This can create a loss in sales which is a subtle menu cost type.

A 1997 study examined data from five supermarket chains against menu costs. the study revealed menu costs per store had an average of 35% net profit margins. In other words, the items needed to fall under 35% profitability to justify an updated item price.

Key Takeaways:

• Menu costs are what businesses face after it change price on an item.
• Menu costs are one explanation for sticky prices.
• Sticky prices are a descriptive term for prices that don't respond to macroeconomic changes.
• Price changes that don't occur with inflation can contribute to a recession.
• Companies that develop pricing strategies can reduce menu costs.

The Impact of Inflation on Menu Costs

Rising inflation comes with many costs including a volatile and uncertain economic growth. Extreme levels of inflation can destabilize the economic system and the society attached to it.

With changing price lists this is the cost that comes. High inflation means prices are changing frequently enough to incur costs. The largest increase in 2008 was over a 12-month period. It saw menu price inflation at a lower rate of about 5% annually.

Menu prices are steadily rising. As consumers continue to migrate towards more fast-food and delivery options, operators are being paid higher labor which is reflected in price changes for consumers. The willingness of consumers to pay higher prices for these services is what lead the demand.

However, a 4.1% increase at full-service markets within that same timeframe was the highest annual rate of growth since October 2018, according to the Labor Department.

The data suggests that full-service restaurants are facing higher labor costs and are changing prices as a result. Sales at full-service restaurants started to bounce back after the pandemic, as customers returned to dining out. However, filling open positions with experienced workers remains a challenge thus causing an increase in labor costs to entice job seekers.

Labor costs are taking the brunt of the blame as prices continue to rise. Over one-third of the revenue a restaurant takes in goes towards staff pay and benefits. As wages rise, the prices rise for consumers as well. By contrast, the grocery and supermarket sector saw a rise of 0.7% in 2021 as they are less dependent on labor intensive positions.

Higher wages for labor aren't the only thing impacting higher costs. Restaurants are currently facing shortages on supplies as well. Everything from meats, produce and ingredients is in short supply which is leading to rising price changes.

Conclusion to Menu Costs

• Menu costs are incurred when price changes are made by a business.
• Economists believe that macroeconomic sticky prices can have a negative impact on the economy.
• When a company develops a pricing strategy, they can reduce menu costs.
• Price changes that don't occur with inflation can contribute to a recession.