The New Economics of Dining: How Successful Restaurants Are Navigating Rising Costs

In the restaurant world, passion often outweighs profit.

The restaurant industry, known for its wafer-thin margins, attracts individuals motivated by their passion for food and genuine hospitality. These entrepreneurs are driven by an innate desire to create memorable experiences and foster connections through shared meals, rather than solely by financial gain.

“It's like a lot of people have this misconception, even people that work inside the company that, well, you're an owner, so you must be rich,” says Michael Ungaro, CEO of San Pedro Fish Market, a fourth generation family-run restaurant with three locations in Long Beach, Calif. “And they don't understand that in the average restaurant, you're lucky if you could pull 8 to 10% as your profit margin.”

Americans are acutely aware that the cost of living is high. For independent restaurants, when the cost of doing business increases, often their menu prices do, too. 

We spoke with a mix of restaurant owners, operators, and managers from around the country to learn about their experiences navigating rising costs. These unique concepts have unique approaches to the same issues facing independent operators: Food and operational costs, labor costs, operational expenses, and market changes – to name a few. Let’s explore how they’re adapting to this changing market, and what they’re doing to stay competitive. 

Key takeaways:

• Rising Costs: Restaurants are facing increasing expenses across the board, including food costs, labor, and operational expenses, leading to tighter profit margins.

• Labor Market Evolution: The industry is experiencing significant wage pressure, with some regions seeing labor costs reach 20-25% of expenses.

• Operational Efficiency: Hidden costs like local taxes, waste management fees, and utilities create additional pressure on restaurants' bottom lines, requiring careful location planning and cost monitoring.

• Market Dynamics: While food prices continue to rise in 2024, the rate of increase is decelerating compared to previous post-pandemic years, with projections showing slower growth in 2025.

When Did Life Get So Expensive?

The Consumer Price Index for Food Away From Home is a monthly measure of nationwide restaurant purchases. This index reported a 0.3% increase in September 2024, up 3.9% compared to June 2023, as summarized by the BLS in a recap of noteworthy month-over-month changes. 

While 2024 is on pace to see all food prices increase by 2.3%, this marks a deceleration compared to the post-pandemic years. The USDA's Food Price Outlook suggests that 2025 is "expected to increase more slowly than the historical average rate of growth."

What does this mean for restaurants and their guests? We will likely continue to see the cost of menu items increase but at a slower rate than in previous years. 

34% of operators polled say they increased menu prices due to inflation in 2024, with many establishments implementing 5-10% increases to offset higher expenses.1 On the bright side, while guests may still be feeling the pain of rising menu prices at restaurants, fewer restaurant respondents said that they raised prices this year compared to last year.

Toast found that there were price increases across the board for popular lunch foods at quick-service restaurants in Q2. The prices for sandwiches and wraps (+4.6% YOY), bowls (+4.6% YOY), burgers (+4.6% YOY) salads (+2.7% YOY), and burritos (+4.3% YOY), all saw prices increase from 2023.

Plate Cost Breakdown

When your meal arrives at the table or on your doorstep, the cost of the items before you is best described as a careful balancing act. Shaz Khan, Co-Founder of Tono Pizzeria and Cheesesteaks, a 7-location concept in the Minneapolis–St. Paul area of Minnesota, breaks down this complex equation.

"Whether it's labor, food, or anything else, ultimately the customer ends up bearing a good portion of the cost," Khan explains. He adds that even when restaurants try to absorb some of the increases, "there is a significant portion, including [Software-as-a-service (SaaS)] fees, that's going to be passed along to the customer." 

This balancing act between costs and pricing is at the heart of every restaurant's operations.

“So, between inflation and costs rising, we as consumers, myself included, we're just eating it – no pun intended.” 

The mathematics behind menu prices, known as plate costing, is a calculation of the costs required to prepare a menu item. Most dishes contain different recipes, each made up of multiple ingredients. Those ingredients may fluctuate from one week to the next, especially with today’s rising costs and supply chain challenges.

Most restaurants shoot for a prime cost, the combination of your cost of goods sold (COGS) and your labor costs, that’s 60-65% of their sales, with cost of goods sold (COGS) and labor costs sharing an even 50/50 split, or 30% a piece. 

By managing these controllable expenses, restaurants can increase profit margins without raising menu prices, making prime cost management a crucial strategy alongside effective menu pricing. 

Food Costs

For Charlie Eblen, founder and owner of Single Tree BBQ in Murfreesboro, TN, the cost of meat has doubled since he opened his first concept, a food truck, three years ago. 

"I remember walking into Sam's and seeing brisket eclipsing $3 a pound. I was just flabbergasted at the time," Eblen recounts. The situation has only intensified since then.

"I spoke to my food rep recently, and there are a lot of broadline briskets, farms that are charging $5 to $6 a pound for brisket," he adds. 

Despite these rising costs, Eblen remains committed to quality. "Don't get me wrong, I'm not pinching pennies," he said. "I'm never going to buy a Choice brisket because Prime is so much better. And Prime's gonna cost you more, it's just going to, you know?" 

This dedication to maintaining standards in the face of rising costs is a common commitment among successful restaurant owners. It reflects a belief that compromising on quality for short-term savings can lead to long-term loss of customer trust and loyalty. Instead, according to recent Toast data, operators have reduced their menu offerings (26%), tracked ingredient prices (36%), and adjusted food suppliers (37%).  

The Labor Dilemma: Balancing Fair Wages and Bottom Lines

Labor costs represent another growing expense for restaurants. The industry has seen a trend towards higher wages driven by a combination of market forces, legislative changes, and a growing awareness of fair labor practices. 

Toast data saw hourly base wages (excluding tips) for cashiers at quick service restaurants steadily increase from $12.46 in December 2023 to $13.02 per hour in April 2024.

Eblen provides insight into the shifting labor landscape:

"When we opened a little over a year ago, average wages were 13 to 15, 16 bucks an hour maybe. Now, entry-level, never worked in a restaurant before, you're still at the $14, $15 range."

This upward pressure on wages, while beneficial for workers, presents a significant challenge for restaurant owners already grappling with thin margins. 

But here's the kicker – this wage wave isn't hitting every shore with the same force. Some areas are feeling it more than others. As Elblen pointed out, "I was talking to somebody in California and their labor cost is 20 to 25%." Ouch.

To address this, restaurant owners are exploring various approaches. Some are implementing cross-training programs to increase staff flexibility and efficiency. Others are turning to technology solutions, such as advanced scheduling software or self-service kiosks, to optimize labor costs. The goal is to maintain quality service while keeping expenses manageable – a delicate balance in an industry known for its emphasis on hospitality.

The hidden operational costs

Running a restaurant involves a complex web of operational costs that extend far beyond food and labor. Rent, utilities, equipment maintenance, and various taxes and fees all contribute to the overall expense structure. These costs can vary dramatically based on location and local regulations, often surprising even experienced restaurateurs.

Shaz Khan highlights an unexpected expense in St. Paul, Minn. that caught him off guard. "We have a restaurant where there is about a 60% tax on garbage, and on recycling and pig buckets." This example underscores the importance of thoroughly understanding local regulations and potential hidden costs when selecting a restaurant location or planning an expansion.

To manage these escalating operational expenses, restaurant owners are employing various strategies. Some are negotiating more favorable terms with suppliers and service providers – 37% of operators we surveyed said they adjusted food suppliers, while 36% tracked ingredient prices.

Others are investing in energy-efficient equipment to reduce utility costs or implementing waste-reduction strategies to minimize disposal fees.

The key to managing operational costs effectively lies in a comprehensive understanding of all expense categories and a willingness to explore innovative solutions. As margins continue to tighten, this detailed approach to cost management is becoming increasingly crucial for restaurant sustainability.

The economics of modern restaurants

As demonstrated by operators like Michael Ungaro, Shaz Khan, and Charlie Eblen, success in today's challenging environment requires a delicate balance between maintaining quality and managing costs. While the industry continues to face pressures from rising food costs, increasing wages, and complex operational expenses, successful restaurants are finding innovative ways to adapt without compromising their core values.

The deceleration in food price increases projected for 2025 offers a glimmer of hope, but restaurant owners still need to remain vigilant in their approach to cost management. The most successful establishments are those that can maintain their commitment to quality while implementing smart operational strategies – from strategic supplier relationships to efficient labor management and careful attention to hidden costs.

2024 Survey Methodology

1To help better understand the restaurant industry, Toast conducted a blind survey of 755 restaurant decision-makers operating  16 or fewer locations in the United States  including both Toast and non-Toast customers from May 17, 2024 to June 2, 2024. Respondents include a mix of both full-service and quick-service restaurants. Respondents were not made aware that Toast was fielding the study. Panel providers granted incentives to restaurant respondents for participation. Using a standard margin of error calculation, at a confidence interval of 95%, the margin of error on average is +/- 4%.