Thursday, January 27, 2022

The Trickle-Down Effect: Restaurant owners pivot, adapt to rising food costs, inventory and labor shortages

Pine Valley Market is one of many local businesses affected by the ongoing food price inflation and product shortages. (Port City Daily/Amy Passaretti)

NEW HANOVER COUNTY — Trying to keep up with the ever-evolving restaurant industry during the Covid-19 pandemic has presented its fair share of challenges. For over a year now, the industry has been plagued by rising food costs, inventory and labor shortages, as well as supply-chain complications.

“It’s almost like learning all over again,” said Christi Ferretti, a 20-year culinary veteran and owner of Pine Valley Market. “Every day is just a different challenge you have to overcome.”

Ferretti has opened boxes labeled “parsnips” only to find blueberries inside. The struggle to procure disposable steam pan lids – not the base, just the lids – has her paying 10 cents per item extra just to maintain inventory. In August, she was temporarily dropped from one of her food distributors due to product and labor shortages. 

Ferretti said she has never seen disruptions or inflation to this degree. And it goes deeper than the public may realize. 

“It’s not just the place that processes that one item,” Ferretti said. “It’s the trucks that get it there, the people that make it, the farmers who raise it, places that slaughter it — if you’re short-staffed, it snowballs and ends with the consumer.”

Restaurant owners are having to change their menus, offer different items and make do with what they can get their hands on, when they can get it, on top of trying to find reliable staff. Consumers are left with less to choose from, higher prices to pay, and sometimes longer wait times.

Jeff Deininger, owner of Ogden Tap Room, had to cancel his popular Monday wing nights because the price of chicken wings practically doubled on his end.

According to the USDA, poultry prices are forecast to rise another 4% to 5% this month.

“We held onto it for a while and we weren’t really making money,” Deininger said. “We were actually losing money.”

He also canceled his daily steak special. The USDA reported that beef and veal have endured the largest increases in 2021 at an average of 7.6%. Since 2010, the meats averaged 4.5% annual increases and are predicted to rise an additional 7.5% to 8.5% this month. 

A Dec. 10 news release from the U.S. Bureau of Labor Statistics reported the all-items index, a measure of the average monthly change in price of goods, rose 6.8% for the 12 months ending in November, “the largest 12-month increase since the period ending June 1982.”

Pricing is only one piece of a larger, intricate puzzle. There are times products just can’t be ordered or there isn’t enough to go around. The National Association of Restaurants — which recently sent a letter to Congress highlighting “how supply chain challenges and inflation are weighing down restaurant industry rebuilding” — reported 95% of restaurateurs have been impacted by significant product shortages and delays.

Among them is Zach Harmon, co-owner of Rooster and the Crow, which opened in 2019 in Chandlers Wharf. Harmon had to remove Rooster’s unique shrimp and alligator cheesecake and alligator bites from the menu. On top of dealing with a global supply-chain crisis, he said this year’s natural disasters — specifically, the hurricanes that hit the Gulf Coast — left farms in the region short on labor.

Both were a tough pill to swallow, since the gator items were top-sellers. 

“Sometimes you just have to ‘86’ it if you can’t be confident that it is going to be the same quality that the guests expect,” he said.

Manna owner Billy Mellon – who’s operated downtown’s upscale American restaurant for more than a decade – has addressed this issue on his menu with a note from the kitchen “explaining that quality beef, fish and other local/sustainable/organic proteins and vegetables are seeing price increases across the board.”

For manna, however, the menu changes daily, so customers are used to items shifting; pork shoulder could become pork loin or farm-raised chicken may be replaced by local duck. 

“We can update on the fly should we get any ‘sticker shock’ from some commodity that has gone up 20% or more,” Mellon said.

The shortage of inventory has led to some distributors being forced to limit its client base. One of Ferretti’s three main purveyors dropped her business from its route due to what she calls the “too-small-to-be-worth-your-time” list.

“And that really hurt,” Ferretti said.

Ferretti said she has never been in arrears with distributors, many of whom she has done business with since she took over Pine Valley Market in 2003.

Her representative from the distributor that dropped her — Ferretti declined to specify who — explained each employee was handed a list of who had to be temporarily cut. The reasoning: to service larger accounts and contracts, such as schools, nursing homes and prisons.

One of the nation’s largest distributors, Sysco, sent a letter to clients in August, signed by CEO Kevin Hourican:

“There are certain areas across the country that are more challenged by the labor shortage and our volume of orders is regularly exceeding our capacity. This has, unfortunately, led to service disruptions for some of our customers.”

Without forewarning or the option to make one last purchase to help the restaurant get by, Ferretti said she could not place an order with one of her distributors for what was supposed to be two weeks. The hiatus turned into more than a month.

Harmon faced a similar situation at Rooster and the Crow when his distributor cut back to focus solely on schools, hospitals and other essential establishments. After that, Harmon had the daunting task of sourcing from multiple suppliers.

“We have been in what we call a ‘constant chase-down mode’ to find everything we need to keep the business running,” he said. “It’s not been an easy task.”

Veggie Wagon owner Max Sussman said glass jars presented an issue for his specialty gourmet grocery store. (Port City Daily/Amy Passaretti)

‘You have to be open to pivoting’

Sysco — which didn’t respond to Port City Daily’s inquiries for this story — serves 17% of the approximately $230-billion food service market in the U.S. Restaurants comprise 62% of its overall customer base across more than 650,000 locations.

Sysco noted in its annual report it’s experiencing a tight labor market, particularly in warehouses and with delivery drivers.

“This is resulting in cost pressures, as we adopt mostly temporary wage actions, such as hiring bonuses, referral bonuses, and even retention bonus programs,” according to the report. “We are working aggressively to fill open positions and improve productivity to offset cost increases.”

The company also marked volatile fuel prices directly impacting the industry, as it has more than 13,000 vehicles on the road annually. While able to lock in certain prices with diesel companies, Sysco predicts a potential increase of $7.1 million in fuel costs for fiscal 2022.

Sysco is one of the few distributors that has not implemented order minimums, unlike some of its competitors. These minimums and limited delivery days vary in accordance to the volume of each client’s operation. 

Mellon said at manna he has adapted his ordering style and, when he can, tries to help out the distributors by purposefully reducing his number of deliveries. Sometimes, he has to “get another truck squeezed in to get us groceries to last until the next delivery.” 

“It’s a real slippery slope,” Mellon said.

Ferretti has resumed ordering with the distributor that temporarily dropped Pine Valley Market. Still, she is limited to delivery once a week with a certain number of items per order and little wiggle room.

“Our volume is less because we had to change things or find other products with other companies,” she explained.

Ferretti confirmed frustration mounted to such a degree, it almost pushed her to drop the purveyor altogether. Her orders with the distributor decreased by almost 45%.

“However, I like my sales rep so much, and he came to me in person, tail between his legs,” she said. “I’ve worked closely with these guys. The relationship with me is with the rep, not the company.”

Distributors are facing similar issues up the chain, as many receive products from third-party suppliers. When suppliers can’t fulfill the needs to begin with, the trickle-down effect is inevitable. 

Sysco noted in its report it is performing better than its competitors in delivering “customer fill rate.” Yet, the company is also below its “historical performance standards.”

Its sales decreased 3% or $1.6 billion in fiscal year 2020 to 2021, but overall net earnings increased 143.3% or $308.7 million, the report indicated. Customer receivables were $3.5 billion and $2.7 billion in July 2021 and June 2020, respectively. Sysco also had to absorb $184.8 million in money it was unable to collect from customers in fiscal 2021.

“As much as [distributors] screwed a lot of us, they also tried to keep things even for everybody,” Ferretti said. “It was the best way to handle the pandemonium taking place.”

Some distributors are focusing on serving their long-standing businesses, such as with Ogden Tap Room.

Deininger said he’s been fortunate, since he only uses one main purveyor; he was never dropped from its service. But he hasn’t been immune to inflation and shortages, especially take-out related products.

According to Sysco’s report, it experienced an inflation rate of 9.6%, combined for the U.S. and Canada, during the fourth quarter of fiscal 2021, primarily in paper and disposables, poultry and meat categories.

Across the board, packaging materials have been the hardest to come by, as many businesses have incorporated a take-out option or ramped up their grab-and-go inventory as Covid-19 changed dining habits of consumers. A year ago, the National Restaurant Association reported that 53% of adults made takeout and delivery an essential way of life.

Veggie Wagon owner Max Sussman said glass jars presented an issue for his specialty gourmet grocery store. Though domestic glass plants are operating fully, there has been a glass shortage due to the 20% or 30% of bottles that are imported stateside from Europe or Asia.

Sussman decided to cut out the middle man and order directly from manufacturers. For example, instead of ordering 144 glass jars at a time for his seasonal Candy Cane Chex Mix, he had to order 2,000, the equivalent of an entire pallet. A pallet runs roughly $100 to ship. By ordering in bulk, he saved on shipping costs, which means he won’t have to pass the price to the consumer. However, having to order in larger quantities, the price savings was essentially a wash, Sussman said.

Yet, it also created another hurdle.

“Storage has become a little bit of an issue,” Sussman said. “We have plots for all our packaging stuff and now we have pallets of it because it’s the only way we can get it.”

Also affecting his business: food labels and tags — items the average consumer does not take into consideration.

The Veggie Wagon includes legally required food labels for its homemade products, all produced in-house. Sussman purchases rolls of roughly 1,200 blank labels at a time. Three months ago, he got a call from his label maker that the company was almost out of glue, an important element to the labels.

“We built an order for six months, to stay ahead of the curve ball,” Sussman said.

He did the same thing when one of his purveyors gave him a head’s up that cream cheese was about to become a rare item. A decade-long relationship with four of the country’s largest purveyors helped Sussman stock enough cream cheese through January. 

“Luckily for us, our business model is based off metrics,” he said. “We have analyzed data pre-Covid, during and now. We’re seeing the supply chain shortage and able to fine tune it a little more to forecast our needs. It’s a game, no doubt.”

Sussman now has a dedicated employee who is researching the numbers, predicting future needs and comparison shopping.

“You have to be open to pivoting,” he said.

For the most part, though, Sussman sources from local, small-batch farmers and vendors — such as Ashe County Cheese in western N.C., Heritage Farms from Seven Springs, Cape Fear Rum Cakes from Wilmington, and Island Roast Coffee in Carolina Beach. This has helped keep his food costs in check. 

“If it’s a raw ingredient that we’re sourcing locally, price increases haven’t been that drastic,” Sussman confirmed. “If it’s a prepared local item, using raw ingredients and there’s manufacturing and labor involved, that’s different.”

During the holidays, Ferretti is limiting her in-store lunch menu to soup and grilled cheeses only so her focus could be on catering clients. (Port City Daily/Amy Passaretti)

Staying afloat 

In this day and age, pandemic-spurred inflation affects almost every part of supply and demand — from toilet paper to hand sanitizer, vehicles to homes, to food and beverages. It rose to 6.2% in October, the highest in three decades, according to the Consumer Price Index. Many restaurateurs said customers have grown accustomed to the unpredictability and rise and fall of prices over the last 21 months.

Harmon increased the Rooster and the Crow prices roughly 10% across the menu earlier in the fall. It still doesn’t cover what the restaurant pays out, he said. Some items have risen by 20% to 25% in price. 

Deininger said he held out as long as he could from increasing prices at Ogden Tap Room, too, in hopes the market would level out. Passing the buck to the customer is always the last resort, he noted. 

“Everyone was having a hard time with Covid, and I didn’t want to raise prices with a lot of people struggling financially,” Deininger said. “But it got to the point we were just spinning our wheels, making some money on the bar, but our food costs were outrageous.”

He had to bite the bullet four months ago — and again just recently. Menu prices increased roughly 20%, Deininger said.

On top of that, with labor shortages, Deininger had to increase employee pay to recruit additional bodies. Essentially, it added to a “perfect storm in the restaurant business,” he said.

As of August, the National Restaurant Association reported restaurants are still 8% below pre-pandemic employee levels. It also noted 75% of restaurants pointed to staff recruitment as a top challenge in the first half of 2021.

“I finally gave up on hiring,” Ferretti said. “I gathered my team and said, ‘This is us. We’re gonna do this and I’m not gonna take on more than our team can handle.’”

RELATED: Wilmington restaurants up wages, benefits to attract job candidates. Is it working?

To compensate, Ferretti has had to reprioritize Pine Valley Market’s multi-platform business — a cafe, gourmet market and butcher shop, and catering operation. During the holidays, she limited her in-store lunch menu to soup and grilled cheeses only so her focus could be on catering clients.

“Everyone’s really trying to make the most sense out of everything for themselves so that they can still be around. If I have to cut things off my menu, it’s in an effort to stay in business. It’s not to piss people off or because I’m lazy,” Ferretti said.

Harmon praised his staff at Rooster and the Crow, who have stepped up during these trying times, working extra hours despite being exhausted. For the wellness of his employees, Harmon decided to drop Sunday dinner service for an extra afternoon off.

At manna, Mellon also cut operating hours. Dinner service ends nightly at 9 p.m. and the restaurant closes on Sunday. “[It] allows us a break from the mind game of ordering consistently and meal planning and meal preparation,” he said.

“It’s not about making a dollar,” Ferretti added. “It’s about everybody still having a life and keeping the quality and attention to detail we pride ourselves in. 

Mellon echoed the sentiment. He said the main goal is to look after his business and his staff.

“Our plan is to stick to the plan,” Mellon said. “That plan is staying open by charging what we have to charge to profit enough to pay our team a fair wage that allows them to live and to, hopefully, save some money. Hopefully, our brains don’t explode trying to think of new ways to stay innovative and stay ahead of this crazy, crazy, Covid world.”


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