Chicago restaurants battle inflation and labor costs

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“The price always goes up and never goes down. It’s every week,” he says. “You can’t keep up.”

Inflation is hitting Chicago restaurants harder than it has in decades. Operators are struggling to keep pace and watch rising costs wipe out the progress they have made in pandemic recovery. With customers limiting their own spending, restaurants are reluctant to raise prices too high and scare them away. As a result, many are losing money.

The food producer price index, a benchmark for restaurant raw material costs, rose 13% year over year in May after rising 16% in April. The last time it jumped this high was in 1974, according to data from the Federal Reserve Bank of St. Louis.

The increases are driven by a confluence of factors: the impact of Russia’s invasion of Ukraine on global food supplies, a spike in oil prices, and the broader supply chain squeeze caused by the pandemic, says Joe Pawlak, chief executive of market research firm Technomic. On a two-year basis, the producer price index rose 26% in May.

“It’s a very bad time from a cost perspective for restaurants,” he says. “Costs go up, labor goes up, rents go up, everything goes up and something has to give. The pressure valve needs to be released, so they definitely increase the price.

Menu prices rose 7.4% nationally in May, the largest year-over-year increase since 1981. They were up 11.7% over two years, according to Pawlak. Even so, restaurants aren’t raising their prices enough to fully cover rising costs, hoping to hold on to finicky customers who eat out less often.

Inflation isn’t the only financial pressure for Chicago restaurants. Many are spending more on employee wages and benefits, in part to keep pace with wage inflation, but also to reset industry norms that have driven many workers into new careers after the hit of COVID. Restaurants are also still trying to recoup two years of pandemic losses and rebuild customer traffic.

In the loop, Berghoff’s revenue is only around 60% of pre-pandemic levels, even after the German restaurant raised menu prices by 4% earlier this year. Fourth-generation owner Pete Berghoff predicts another 4% price hike soon, which will “keep us out of trouble.” But finances are tight. The restaurant received $2 million in Paycheck Protection Program loans, and Berghoff said he also invested $1.5 million of his own money.

The Berghoff is now eating costs and juggling supply chain issues on a daily basis. She switched turkey suppliers when prices rose nearly $2 a pound. This removed steaks from the menu altogether. He had to buy different spinach for his famous creamed spinach dish. The cornstarch he usually uses to bind sauces is not available. Different cornstarch means the sauces are “quite different,” says Berghoff. He doesn’t know how the restaurant can adapt otherwise.

Berghoff’s great-grandfather founded the place in the late 1890s. It survived Prohibition, two World Wars, the Spanish flu (which Berghoff’s grandfather caught in Europe while he fought in World War I), Korea, Vietnam, the energy crisis of the 1970s and the Great Recession. Berghoff spoke to his father, Herman, who ran the place for 55 years, about the situation.

“We have never seen anything like it. We’ve never seen an economy like this,” Berghoff said. “I don’t know what will happen next. . . .The situation we live in, we will live with for the foreseeable future.

Inflation is likely to remain elevated through the end of this year and into next, said Phillip Braun, clinical professor of finance at Northwestern University’s Kellogg School of Management. In the 1970s and 1980s, the Federal Reserve had to raise short-term interest rates above the rate of inflation to cool prices, eventually triggering a recession. Restaurants would feel more pain if the current round of Fed rate hikes had the same outcome.

Alpana Singh, a Chicago sommelier and restaurateur, was working as director of wine and spirits at Lettuce Entertain You when the Great Recession hit in the late 2000s. At the time, the restaurant group was focused on creating value for its guests – a conundrum that restaurateurs also face.

That recession also triggered an unemployment crisis that caused hundreds of people to turn up for job interviews at restaurants, Singh says. This is a stark contrast to the current situation. Chicago restaurateurs say even after raising wages and adding benefits, they are still struggling to fill some jobs, a symptom of a tight job market caused by the pandemic.

When Parachute, an American Korean restaurant in Avondale, reopened last month after two years, it reset wages. Instead of paying servers minimum wage, he pays $25 an hour. Co-owner Beverly Kim says the restaurant is covering some of the extra labor costs with new service charges on customers’ checks.

Raising wages was the right thing to do, but it hasn’t come easy amid inflation, Kim says. Profit margins at restaurants start out low, and she just hopes to break even now. She also wants to make sure that customers understand why it is necessary to increase the cost of food to cover these living wages.

“The whole industry was underpriced because we were based on an unfair living wage,” she said.

Food and labor aren’t the only rising costs for restaurants. Suppliers have added additional delivery charges to cover their own higher gasoline costs. With some restaurants getting half a dozen deliveries a day, those fees add up quickly, says Michael Hogan, co-owner of The Call, a bar in Andersonville. The appeal raised the price of some drinks by 50 cents to $1, to help cover rising costs.

Hogan says shortages are another issue. He hasn’t been able to get Patrón tequila since The Call reopened in April 2021 and also has trouble with whiskey.

“We have just been advised that Jameson is unavailable,” Hogan said. “That says a lot.”

Experts say the surge in inflation is unlikely to drive restaurants out of business at the same rate as the Great Recession. The pandemic has already eliminated the weakest restaurants. But higher menu prices are probably here to stay.

Typically, restaurants raise menu prices once a year to offset normal levels of inflation. Technomic’s Pawlak reports that the 20-year average for restaurant inflation is around 2.7%. But menu prices rarely come back down, says Darren Tristano, CEO of research and consulting firm Foodservice Results.

“Restaurants raise prices, but they almost never lower prices,” he says. “If we see a continued increase, it’s going to stay and it’s not going to go away.”

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