02 November 2022
Inflation increases margin pressure on restaurants. Can data help?
Lightspeed Commerce has new insights to bring new metrics and automation to restaurants.
(Photo by Simon Karemann on Unsplash)
Lightspeed Commerce has new insights to bring new metrics and automation to restaurants.
Inflation remains at 40-year highs, and is spreading price pressure across the economy. But it’s worth remembering that this economic phenomenon doesn’t affect everyone in the same way.
Inflation rates are different across consumer categories, and they vary across the different businesses within those categories. As a business owner, the most important thing is to understand how to manage to address your own particular challenges.
That comes to light in recent data on restaurants from Lightspeed Commerce, a point-of-sale and ecommerce software provider.
It’s one of the categories that is the subject of variation. According to the US Consumer Price Index, the year-over-year inflation rate across the economy in August was running at 8.3%. Meanwhile, food prices are running higher than the inflation, as inflation was 11.4% in August from the year prior.
However, analyzing sales data from 6,000 US hospitality merchants, Lightspeed Commerce found that menu prices at restaurants increased only 5.56%. That’s a big difference from CPG brands, which have in many cases raised prices to pass on the costs of inflation to consumers. The realities of supply chains and competition in restaurants creates a different picture.
“The restaurant prices are not keeping pace with inflation,” said Peter Dougherty, general manager of hospitality at Lightspeed Commerce. “...What that means for restaurants is that their margins are getting further compressed, beyond what is already happening in an industry that has low margins.”
It means restaurants must think carefully about how to grow a business at a time when consumers are already paying more for everything else. One option is to fine-tune offerings to keep customers coming back, but that must be balanced with maintaining margins.
The obvious choice may not always be the right one. Dougherty offers an example: Say a restaurant has a fish dish with a $7 margin, and a salad with a $5 margin. A restaurant owner’s instinct may be to lean more heavily toward the fish, given that it has a higher margin.
But Lightspeed’s tools can bring data points together that may tell a different story. Its insights consider data on what sells more, not just what makes a higher margin at the outset. This may tell a restaurant owner if they serve the salad instead of the fish, a customer is twice as likely to come back to a restaurant.
“So instead of making $7 a margin on the fish, I'm going to make $10 of margin from [a customer] over two visits,” Dougherty said. “And ultimately, that is how restaurants win, especially in this environment of inflation.”
Analysis like this has helped restaurants using Lightspeed Commerce to grow 68% faster than the restaurant industry as a whole, Dougherty said. The particular look at margins and sales volume is among the capabilities that Lightspeed Commerce is rolling out as part of a suite of tools called Advanced Insights.
These features help restaurants break down the popularity of menu items and the impact of changes, as well as data on a restaurant’s busiest times, sales comparisons and server report cards that can assist with decisions on staffing and management. Other features create profiles of a guest from credit cards to help determine which devices and flows increase ticket size and cover count and identify how guests respond to new hours, events, or marketing pushes.
When prices are higher, loyalty matters. Like many industries, restaurants are looking at stats such as customer acquisition costs and customer lifetime value. Being able to bring a customer back means that they won’t have to spend more to acquire a new one.
“To bring new consumers back into the restaurant is a key value for restaurants so they can run a more efficient business without having to attract new guests,” Dougherty said.
Dougherty said it can help with another issue that restaurants continue to face: the labor shortage. This started more than 16 months ago, as restaurants staffed up again when they were able to reopen to in-person dining as COVID-19 restrictions were relaxed. Initially, restaurants paid salaries and benefits to compete during a time that was billed as The Great Resignation. Yet server shortages continue, and some restaurants are operating fewer tables because they cannot staff to meet the size of a space.
“So now what restaurants are doing is they're turning to technology,” Dougherty said. “How do I fill the gaps in the experience, not with people because I just can't hire them, but with technology? And so, bringing guests back is important, but I think another part of this is automation.”
Automation in restaurants has been evolving for years, Dougherty said. Decades ago, there may have been five people washing dishes. Now, there may only be one as a result of dishwashing machines. These types of advances in efficiency can extend to the front-of-house as well.
“In the Lightspeed context, when we bring together the [point-of-sale], we bring together payments, we bring together mobile experiences and insights,” Dougherty said. Not only am I going to help you better schedule [the best server’s] event to make sure you are getting the most out of people. But we're also going to make sure…you have the full point-of-sale right on your phone.”
There’s a fine line. You don’t want tech tools to get in the way of a customer’s experience. Dougherty said Lightspeed’s experiences have been designed for this. Mobile point of sale systems mean servers don’t have to keep running back to a terminal, and Lightspeed uses technology such as a private blockchain to sync iPads, and ensure they stay up and running at busy times.
“It's about the people interacting with the guests,” he said. “But what this automation does is it frees up the people to focus on the high value activities in the restaurant, which is impressing the guests.”
Dougherty said change has already come in Europe. Countries in the region already have higher labor costs, and inflation has been present for longer. Restaurants turned to more technology.
“We see the US restaurant market starting to look more like the European restaurant market a couple of years from now, where rather than having 10 waitstaff or 50 tables, you might have five waitstaff for the same. And the guest experience is going to change. That's just the reality. But it doesn’t mean it’s getting worse, it's just going to change to something that's a little bit different.”
Tools that provide advanced data analysis and automation have helped ecommerce businesses grow with efficiency. Lightspeed shows how this technology can be applied to run in-person businesses, and help manage sweeping economic factors like inflation at the table level.
The retailer's marketplace is expanding quickly.
When it comes to ecommerce growth, was the pandemic a blip or a new trendsetter?
As we move further from the height of COVID-related closures, it’s a question that will start to be answered through the lens of history.
So far, the narrative of ecommerce growth in the U.S. from 2019-2022 has gone like this: Ecommerce’s share of overall retail saw a huge spike at the height of the pandemic in 2020-21, when goods in general were in demand and online shopping was necessary to preserve health and safety. Experts looked out and saw a permanent exponential change in the penetration of ecommerce as a share of retail that would last beyond the pandemic. Then, in 2022, everyone went back to stores and the trendline came back to 2019 levels. Growth was no longer exponential. There was still growth, but it was not happening as fast as during the pandemic period.
With this in mind, it’s worth pointing out that 2023 is the first year that there likely won’t be a pandemic-influenced swing to influence ecommerce growth. It is also a year where demand has suffered challenges amid inflation and interest rate hikes.
So as we seek to determine the importance of ecommerce to overall retail, it’s worth it to continue taking a close look at what growth trends retailers are seeing now, whether ecommerce is remaining resilient amid consumer pullback and how retailers are preparing for the future.
The latest example arrived this week from Macy’s. It’s a fitting one for the times. Overall, Macy’s is seeing a slowdown as consumers pull back on discretionary purchases, with sales declining 7% in the first quarter versus the same quarter of 2022. Digital sales were down 8%.
Macy’s is particularly susceptible to the macroeconomic headwinds that many brands and retailers are facing, as spending among the middle-income consumers it counts as a primary customer base is particularly softening, said GlobalData Managing Director Neil Saunders.
But while ecommerce is slowing overall, the importance it gained to Macy’s business during the pandemic is remaining in place.
In 2019, ecommerce made up 25% of Macy’s revenue, CEO Jeff Gennette told analysts on the company’s earnings call. That jumped to a high of 44% in 2020. By 2022, digital reached 33% of sales after the pandemic boom. In the first quarter of 2023, it remained at 33%. So, while the trend line dipped after shoppers returned to stores, ecommerce share still settled in at a higher post-lockdown point than it was before the pandemic.
This came in a quarter in which traffic was “relatively good” across both online and in-store, Macy’s CEO Jeff Gennette said. It was “flattish” online, and slightly up in stores.
“We do expect that this is the reset year with the penetration between them,” Gennette said. “But we do expect more aggressive growth in digital in the future versus stores as we think about '24 and beyond. And that's going to be foisted by a lot of ideas and strategies.
Over the last year, the retailer has made investments in boosting ecommerce, even as shoppers returned to stores. In a bid to boost the assortment of goods available online, Macy’s launched a marketplace in September 2022 that welcomes goods from third-party sellers.
The marketplace had an “outstanding” first quarter, said Macy’s President Tony Spring, who is poised to succeed Gennette as CEO next year. Gross merchandise value increased over 50% when compared to the fourth quarter of 2022, while the average order value and units per order for marketplace customers was 50% above those not shopping at the marketplace.
Macy’s is continuing to build the marketplace even as it racks up sales. The retailer added 450 brands, ending the quarter with 950 brands.
This is helping to draw in new customers, as well as younger existing customers who are buying more items, resulting in increased basket size.
“We're very excited as to how marketplace is really attracting the Gen Z customer, particularly in categories where it was not economically feasible for us to carry in the past,” Gennette said.
In the end, Gennette said a strong digital and social presence is key to attracting younger consumers. That's a different type of shopper than other age groups.
“We know the younger customer starts first online,” Gennette said. That behavior will still be in place as the generation gets older, and gains more buying power in the process.
Going forward, Macy’s is seeking to expand the model to other retail banners in its portfolio. Bloomingdale’s will open a marketplace in the early fall.
The Macy’s ecommerce trajectory isn’t that different from the wider U.S. ecommerce narrative detailed above. With one quarter of 2023 data, there is evidence that ecommerce share settled out at a higher point after the pandemic than where it started before COVID arrived. There is flattening now, but the retailer is taking it not as a sign of a slowdown, or a signal to change course. Rather, it sees changing consumer behavior as a reason to build for the future.