How To Prepare Your Restaurant for the Effects of The Tariff Trade War
By: Charles Daly
Jul 29, 2019
Food culture is global, and the American palate is more eclectic and diverse than ever. Efficient supply chains, fast, refrigerated shipping, and free trade agreements have allowed American households to spend less of their income on food than any other developed country, according to a 2013 study.
Today, we have access to a greater variety of foods at a lower cost than past generations did. It wasn’t long ago that most Americans outside of the west coast would have never tasted an avocado, never mind kimchi, lychees, or bok choi. At the same time, even our pantry staples, like sugar and salt, come from a global trade network.
Few industries have benefited from free trade the way the food and beverage industry has, and the current tariff trade war between The United States, Mexico, China, India, EU member nations, Canada, and more will affect both our general food supply, the ingredients available for restaurants and bars, and their operational overhead.
The US Tariff Trade War: A Beginner’s Guide
Upon taking office, US President Donald Trump promised to revisit U.S participation in global trade agreements that left the country with large trade deficits. The aim of the 2018/2019 trade negotiations is to secure better positioning for the US, encourage Americans to buy homegrown products and produce over exports from China, Mexico, and India, entice major corporations to bring their operations state-side, and spur job growth for the American people.
Tariffs on imports were a major campaign promise for Trump, resonating with voters in states that watched their manufacturing jobs go overseas and demand for more expensive, American-made goods decrease. The President has claimed that various free trade agreements have been “ripping off” the American people, hitting home with regions that have attributed local economic downturns to an increasingly global supply chain dependent on imports and the outsourced production of everyday goods.
Meanwhile, economists are concerned. According to The Tax Foundation, a tax policy think tank, tariffs currently in effect are going to reduce America’s gross domestic product by $50.31 billion and eliminate 156,000 jobs. Threatened tariffs against China and Mexico would eliminate 385,000 jobs. These losses would be the result of a number of complex factors, including retributive tariffs from China and Mexico and an increase in overhead for American companies that have long relied on cheap materials from overseas.
The countries embroiled in the 2018/2019 United States initiated tariff trade war are:
In response to the tariffs, China has renegotiated trade deals in favor of the EU and other partners to deemphasize their reliance on American investment. China is also lowering duties on foods from countries that compete with America. Meanwhile, the European Union is preparing retaliatory tariffs of its own, and Mexico may use tariffs strategically to target swing states in 2020.
When it comes to food, even if the produce and ingredients customers demand were all available here, the prices American consumers are used to paying for local produce are based in part on overseas demand for the food we export.
President Trump’s tariffs have been controversial among Republicans and Democrats alike. The Washington Post speculated that the tariffs, which go against basic free market principles, could be a “red line” with Republicans.
Nevertheless, everything that gets cooked in America, from gyoza to grits, is part of an industry that is built on international trade. We import foods that either can’t be grown cheaply here or can’t be grown at all. Exports help keep domestic produce costs down.
Tariffs and the current US trade wars could change all this.
The beverage industry, for example, relies heavily on products that are branded by location. There is no American tequila industry. There’s no such thing as a California Bordeaux. Scotch is, by definition, an import. Around 5% of the beer we drink comes from Mexico. There is no “buy American” alternative to these types of imports. Customers expect Mexican beer in a Mexican restaurant and French wine in a brasserie the same way they expect Guinness in an Irish pub.
The tariff trade war & your restaurant: what to look out for
If your restaurant uses any ingredients or materials imported from China, Canada, EU Member Nations, India, Turkey, or Mexico — which is incredibly likely — you may have already seen or will see an increase in your operating costs over the next few months as negotiations continue.
Tariffs are predicted to hit independent restaurants much harder than big chains that can absorb the cost across their organization. Tariffs are also anticipated to hurt restaurants in high-rent areas already operating with tight margins.
Chipotle Mexican Grill’s CFO has said that proposed tariffs on Mexico could cost the company $15 million in 2019.
The US imports 43% of our fruit and vegetables from Mexico. In an interview with CBS News, Peter Testa, president of Chicago’s Testa Produce, described Mexico as a “fabulous trading partner.” He warned of a “snowball effect” as tariffs threaten to hike the price of foods only available from Mexico.
Besides produce, other tariffs — such as those on aluminum — will have effects that ripple through food service. MillerCoors is charging retailers higher rates to sell their beer as the cost of producing cans increases 20 to 24 cents per case. Coca-Cola has announced they must raise their prices. Chick-fil-A has experienced an increase in the price of their pressure cookers.
Business News Daily gives an example of how the price of aluminum could affect a small bakery operating with thin margins:
“While bakeries are far from other businesses in the steel or aluminum industry, products like these are essential to their operations. Odds are that companies that make pie tins or whipped cream (which comes in metal canisters) will adjust their prices to reflect the new costs, or lay off their employees. The small bakery that was already operating on razor-thin margins ends up absorbing a good portion of these new costs from its suppliers and will likely have to renegotiate standing arrangements.”
Among the worst possible outcomes of the tariff trade war for the American restaurant industry would be if a recession and/or inflation resulted in fewer Americans being able to afford to dine out.
In his interview with the Harvard Gazette, Robert Z. Lawrence said we “certainly” could see a global recession as a result of these policies. He added that we may soon experience a decline in our standard of living as we give up what we’ve gained from efficient trade deals.
The International Monetary Fund has warned that a trade war between the U.S and China could make the world “a poorer and more dangerous place.” In October 2018, the IMF downgraded their predictions of global growth due to concerns over U.S tariffs on China and Chinese revenge tariffs. The report warned that the U.S economy could take a “significant hit.”
In 2015, Russia announced a similar ban on foods from countries that had imposed sanctions on them. To drive the point home, the government publicly bulldozed banned bacon, cheese, and other imported food items. Food price inflation was already at 20% when the ban took effect, and hunger remains a problem in Russia. The ban, which was renewed last year, has drawn criticism from religious leaders, frustrated chefs, and the general public.
How to create a tariff trade war action plan for your restaurant
Here are a few ways you can prepare your restaurant to deal with the effects of international trade deal negotiations and tariffs:
Stay Informed - This is key. Keep your restaurant’s management up to date on the latest developments in the U.S.-initiated tariff trade war by subscribing to newsletters, checking media outlets, or creating a Google Alert to be notified anytime Google finds content that mentions “tariff war”. The current trade agreements negotiations are ongoing, subject to change, and will likely affect key restaurant success KPI’s like your break-even point, overhead rate, COGS, prime cost, food costs, and profits.
Talk to Your Distributors Regularly - Besides reading about foreign policy and trade agreement negotiations, another great resource for restaurateurs curious about the impact of the tariff war on their business are distributors and vendors. Having consistent conversations with your distributors will enable you to play offense and plan ahead instead of playing defense and reacting to pricing changes when it’s too late.
Be Transparent With Your Staff and Customers - It’s likely, if things keep going at the rate that they are, that you will need to re-evaluate your menu pricing in order to preserve the financial health of your restaurant. It’s understandable, but any time costs go up, so do the groans from customers and their wallets. The best thing you can do is be transparent, clue them into what’s going on, and let them know that in order to deliver the same high-quality dining experience your guests know and love you for. People appreciate honesty.
Buy Local - If, after reexamining your purchasing behavior, you find that you are buying a lot of materials and ingredients that are imported, this could be a good opportunity to test a shorter supply chain that sources from local suppliers, farms, and the like. Supporting small businesses in your community is not only great for your local economy, but it’s great for the environment by reducing the transportation distance, gas used, and CO2 emitted.
Buy in Bulk – Since the price of imported goods is subject to greater fluctuation than usual in the face of the tariff war, it could be a smart idea to buy the ingredients and materials you use the most in bulk to avoid paying more for the same goods in a few days or weeks.
Be Conscious of Product Usage & Waste – Food waste is an astronomical money pit for restaurants. Since budget is already a concern with the higher price of imported goods, don’t throw money down the drain by failing to maximize the amount of product going into menu items rather than trash cans. Make sure your prep cooks are using the right techniques that ensure you’re using as much product as possible, and try to find areas where you can use one ingredient in multiple dishes.
Close For Slow Shifts or Slow Days – Keeping the lights on is expensive. Allocating more budget to cover more expensive ingredients and materials means you need to be bringing in more money to break even. Take some time to analyze your restaurant reporting available in your point of sale system to zero in on your slowest shifts and days. If your spend outpaces your customers’, it’s worth considering shutting down on those days, opening later, or staying closed between lunch and dinner.
Be Patient – Trade agreement negotiations are unfortunately out of the public’s hands. The best you can do is stay informed, be proactive, and take the necessary steps to protect your restaurant.
Register to Vote – Not a fan of how our elected officials are handling trade agreement negotiations? Exercise your right as an American and vote in the 2020 election. Register to vote in your district here.
Recommended reading to learn more about the tariff trade war
In case you are interested in the economic theory surrounding tariffs, here are a few articles and podcasts worth checking out.
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