Restaurants that survived the pandemic are now threatened by inflation

It was a lot of hard work, and a little bit of luck, that helped 34-year-old Joseph Charles steer his Boston pizza place through the worst of the pandemic.

Rock City Pizza had the advantage of being on the outskirts of the city, instead of in the mostly deserted downtown, and it had the benefit of having a takeout window already built in. When indoor dining was banned in March 2020, Charles worked seven days a week adapting his business model and hustling pizzas and subs out the window to masked customers on the sidewalk or into delivery cars.

"It was real tough," Charles recalls. "Real trying times. But we did what we had to. And fortunately we're here now."

Unfortunately, however, doing business now is no less trying.

"Inflation is just ridiculous now," says Charles. "It's harder to do business than it was in the pandemic. It is."

While his sales over the last two years rebounded to about 75% of what they were pre-pandemic, Charles says they've now slumped back down to about half, as his customers — who are also feeling the pinch — are cutting spending.

Food prices aren't the only higher cost

Rock City Pizza is one of the countless restaurants around the nation that are struggling with sky-high food prices — as well as higher costs for rent, labor, gasoline and cooking gas — but are limited in how much of those increases they can pass on to their customers. It's especially challenging for lower-priced places, as their profit margins are typically tighter and their clientele tends to be more price-sensitive.

"These establishments cannot deal with these rapid escalating costs," says Hudson Riehle, senior vice president of research and knowledge at the National Restaurant Association. It's a kind of "double whammy" the industry hasn't seen in generations.

Wholesale food costs were 17% higher in March than the same time last year, according to the Bureau of Labor Statistics. And, as of December, average hourly earnings for restaurant and bar employees had risen 15% in the prior year, more than any other year on record.

Charles says his payroll has ballooned even more; he's paying staff 1 1/2 times what he paid them two years ago, and even more to his delivery guys, as gas prices have spiked. On the weekends, he says, the $400 he used to pay for deliveries has swelled to about $1,000, as he is now paying drivers more and also reimbursing them for gas.

"You've got to be creative to keep them," he says. "You really do."

At the same time, Charles' rent has jumped about 15%, and some basic paper goods that are his staples, such as bags, plates and containers, have quadrupled in price.

"It's just nuts," he says, sighing.

To compensate, Charles has been raising menu prices — so often that he stopped printing paper menus and switched to a digital menu only. But he's all too aware that there's a limit to how much inflation his customers will tolerate.

A large plain pizza is already 19 bucks; add mushroom and onion, delivery and tax, and it's $31 and change. And that's before any tip for the delivery person.

"At the end of the day, we still sell a pizza. We're not selling diamonds," he says. "And you have a ceiling to what you can charge the customer."

Indeed, his customers are paying attention.

The lunch special of two slices and a drink "used to be $5," muses Alexis Lee, who has come to pick up an order. "Now it's like $7. It's up $2 more."

When she's working across the street, Lee says, she's still willing to shell out the extra cash. But other things she used to buy have already become too much.

"I just say forget about it."

Even popular items are disappearing off the menu

It's a lesson Charles learned the hard way. When the cost of steak shot up, and he raised the menu prices of his steak dishes accordingly, his customers abruptly stopped buying them.

"Sometimes I would go three or four days without selling a steak sub, [or] steak rice bowls, which are a huge, huge seller," he says. "It was a clear message. The consumer has spoken."

Charles ended up pulling steak off the menu for a while. He did the same thing with chicken, eighty-sixing even his bestselling Buffalo chicken pizza.

It all left him thinking about the unthinkable.

"It's scary times," he says. "It makes you think, should you be doing something else with your time and energy. It's just real tough to sustain this long term."

Some 90,000 restaurants in the U.S. have closed down temporarily or permanently since the pandemic, according to the National Restaurant Association. Those that survived, Riehle says, are running on razor thin margins, often as little as 1% of sales.

At the same time, independent, affordable places are also under more competitive pressure from casual dining big chains like Chipotle or Panera, says Steven Carvell, professor of finance and strategy at the Nolan School of Hotel Administration at Cornell University's SC Johnson College of Business.

"Because they're larger, they have better supply chains [and] more consistent costs on their inputs, so it gives them more leeway to maintain a profit margin," says Carvell. "That's another threat to these restaurateurs."

Some people are eating out less and cooking at home

Recent surveys suggest restaurant spending is one of the first things people would cut because of rising prices.

Indeed, at a supermarket around the corner from Rock City Pizza, many shoppers say they've already traded eating out for more cooking at home.

"Yeah, for me it's seltzer water and ground turkey for the time being," says Chris Puzacke, leaving the store with his groceries. He says he's already gone from his usual three to four dinners out a week to less than once a week.

Even when he found himself walking by his favorite chicken wing place last week, Puzacke says he kept walking.

"The first thing that came to mind was 'I can only imagine how expensive a plate of chicken wings is right now,' " he says. "So I skipped it. I'm definitely holding back."

Retirees Tom and Debbie McGovern have also cut back on their dinners out, indulging on special occasions only.

"We used to go out every day pretty much," says Tom McGovern. And definitely for "every Red Sox game and every Bruins game."

"I like to be with people and get that energy," adds Debbie McGovern. "But now it's just once in a while. It's just too expensive."

Restaurants, meanwhile, continue trying new ways to draw more customers back in, from "Frequent French Fry" reward programs to offering buy-one-get-one deals or discount coupons. Restaurants lose revenue on those deals in the short run, but Sean Jung, assistant professor at Boston University's School of Hospitality Administration, says they can pay off in the long run.

"You have to build that loyalty with that customer in order to actually rake in that profit of that coupon you provided," Jung says.

Charles has been feeling it at Rock City Pizza, where he continues to offer promotions to his price-sensitive customers.

"It's tough right now to give out coupons," he says. "But you've got to do whatever it takes."

He has also come up with other ways to try to boost revenues. Instead of raising prices per pie, for example, "you've got to be creative," he says. "Maybe you go up on the toppings, 10 cents on the pepperoni, and 10 cents on the sausage. And you ask customers, 'Hey, would you like a pepperoni pizza instead of just a cheese pizza?' "

Still, as hard as he tries, he is all too aware it might not be enough. Opening Rock City Pizza in 2003 was his dream come true. He had worked seven days a week as an employee of another pizza place, saving every penny he could to open one of his own. Now, after all his hard work building a successful business and surviving even the pandemic, it's hard to fathom, he says, but it's possible that he could end up having to surrender to inflation.

"It's like you thought you won, but we're not done yet," he says. "It's really tough to stay afloat right now, [and] it's drastic enough to reevaluate the situation."

Everything, he sighs, "is on the table."

Copyright 2022 NPR. To see more, visit https://www.npr.org.