Food prices blamed for decline in restaurant profit margins
Tuesday, September 22, 2015
by SUSAN MANN
Higher food costs are eating into restaurants’ profit margins, according to a new report by Restaurants Canada.
“Food imports are about 30 per cent higher and that’s mainly because of the decline in the Canadian dollar,” says Jamie Rilett, Restaurants Canada vice president, Ontario. For domestic food, “it’s mainly beef . . . that’s gone up in price.”
In a Sept. 16 press release, Restaurants Canada president and CEO Donna Dooher says restaurants’ average pre-tax profit margin is just 4.2 per cent, down from 5.8 per cent in 2001. Surging labour and food costs are eating up increasingly large slices of restaurant revenue.
She made the comments with the release of Restaurants Canada’s report on the industry’s projected growth for 2016. Restaurants Canada represents 30,000 foodservice businesses, including restaurants, bars, caterers, institutions and suppliers across the country.
Chris Elliott, senior economist with Restaurants Canada, says of the two factors affecting revenue, “food costs are a huge issue.” Food costs are the largest portion of restaurant operators’ expenses.
The Canadian dollar’s decline is resulting in higher prices for imported foods, mainly fresh fruits and vegetables, he says.
The challenge for restaurants is how much of the higher food and labour costs they can absorb and how much they pass on to customers, Elliott notes. “For Ontario, the average profit margin for a restaurant is 2.8 per cent, which is extremely low. There is little room to absorb those costs in terms of their profits. The alternative is to pass higher costs on to consumers but that’s always a last resort for operators” as they are competing with other restaurants along with grocery stores for consumers’ spending on food.
Elliott says currently there is a lot of uncertainty and volatility in the marketplace. People are still eating out at restaurants “but we have seen a dramatic decline in consumer confidence since the start of the year.”
He adds that Canada’s economic recession for the first two quarters of this year hasn’t had as much of an impact on restaurant sales “as I thought it might have.”
Elliott says Ontario’s projected growth in restaurant sales next year is about 3.9 per cent, similar to the national average. Restaurant sales across Canada are slated to grow by 3.8 per cent to $62 billion next year. When non-restaurant foodservice operators are added in, such as hospitals and hotels, sales in 2016 will add up to more than $77 billion.
It’s the 25th year of consecutive growth in the restaurant industry.
Elliott says Ontario “enjoyed some fairly strong growth over the last couple of years” because of its growing population, rising disposable incomes and the wealth effect of increasing real estate prices. In 2014, Ontario saw growth of 6.6 per cent in the restaurant industry, while this year’s growth was projected at 5.4 per cent.
Since growth has been so strong in Ontario in the last couple of years, it will “moderate to a more sustainable pace in 2016,” he says.
Manitoba and British Columbia are the provinces with the highest projected growth rate for 2016, with each projecting a rate of 4.3 per cent. At the other end of the scale is Newfoundland and Labrador with estimated growth in restaurant sales of only 1.8 per cent. BF