Consumers Shouldering Price Increases

The hospitality industry is looking for solutions to deal with changes in its supply chain that have increased input costs. Over the past year inflation, higher foreign demand and less supply ability have all contributed to the higher costs of staples such as beef, milk, and sugar. Groceries and restaurants have taken in these costs over the past couple of years in fear that passing them along to consumers will push them towards their competitors who have kept their price costs internally. Now, however, executives are looking towards alternatives to deal with this situation. Pete Bensen, chief financial officer of McDonald's, has claimed that "The question will be exactly at what point will we be able to take some of that pricing," and chief executive of Starter Bros. Jack Brown has quickly backed him up by stating that "The big challenge will be, how much can we swallow and how much can we pass along?" While many see that this could hurt their business, those with a high brand equity such as Starbucks, Domino's Pizza and Morton's Restaurant group, believe they have enough wiggle room and pricing power not to hurt the business too much. With costs expected to rise 2% in the US and 3% percent in Europe, international and local organizations will find a difficulty in transitioning.

Here is where I believe brand loyalty plays a significant part in business decisions. If a company knows that it has built a strong loyalty within its consumers it knows that they have some breathing space to deal with higher costs. Another important factor in this new approach is timing. Companies who change their prices earlier than their direct competitors could easily loose customers even though the competitor will eventually have to raise prices. BJ's Restaurants has played a slight-of-hand trick as they raised prices but also changed the decor and table settings of the restaurants. BJ's chief financial officer Greg Levin as said that they followed this trategy because "in this business, you can't just raise prices without improving the overall dining experience." Others will have to find their own ways of loading off some of their costs unless they see a true potential for long-term growth if they swallow the short term costs.

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