Managing Inflationary Pressures and Menu Engineering in Canadian Restaurants

The Canadian restaurant industry is facing a perfect storm of challenges, with record-high inflation driving up costs and impacting consumer behaviour. To weather this storm, restaurant owners need to be proactive and strategic in their approach to financial management. This article explores the impact of inflation on Canadian restaurant costs, delves into menu engineering strategies to optimize profitability, and offers tips for sourcing affordable, high-quality ingredients in Canada. Finally, we’ll examine effective pricing strategies to help restaurants maintain customer satisfaction while navigating these turbulent times.

The Impact of Inflation on Canadian Restaurant Costs

Inflation has significantly impacted the cost of goods and services across all sectors, and the Canadian restaurant industry is no exception. In the second quarter of 2022, inflation in Canada reached 8%, leading to sky-high food, energy, and supply costs 1. While inflation has since begun to slow down, with rates falling to 2.9% in 2023, the impact on restaurant costs remains substantial [1].

Several factors contribute to the inflationary pressures faced by Canadian restaurants:

• Increased Food Prices: The cost of essential ingredients, such as meat, dairy, and produce, has risen dramatically. This can be attributed to global supply chain disruptions, unfavourable weather conditions, and increased demand [2]. In December 2024, prices for alcoholic beverages purchased from stores declined 1.3% year over year, while food purchased at restaurants dropped by 1.6% [3]. However, gasoline prices rose 3.5% year over year, reversing a decline seen in November 2023 [4].
• Higher Energy Costs: Restaurants are energy-intensive businesses that rely on electricity for lighting, cooking, and refrigeration. Rising energy prices directly impact their operating expenses [1].
• Supply Chain Disruptions: The COVID-19 pandemic and geopolitical events have caused significant disruptions to global supply chains, leading to shortages and delays in obtaining essential goods. This has resulted in higher prices and increased uncertainty for restaurant operators [1].
• Labour Shortages: The restaurant industry is experiencing a labour shortage, making it difficult to find and retain qualified staff. This has led to increased wages and higher labour costs [1].

These inflationary pressures have put a strain on restaurant profit margins, forcing many to raise menu prices or reduce portion sizes to stay afloat. A recent survey revealed that 51% of Canadian restaurants are operating at a loss, a significant increase from the 12% pre-pandemic figure [2].

The GST Holiday and its Impact on Inflation

The introduction of a GST holiday in December 2024 had a significant impact on food inflation in Canada. While it provided temporary relief for consumers, it also distorted inflation metrics and potentially masked the true cost trajectory of food [5]. The GST holiday, which began on December 14th, 2024, led to an unprecedented monthly decline in Canada’s food inflation rate, plummeting from 2.8% to 0.6% [5]. This decline is largely attributed to the direct impact of the tax reduction on the Consumer Price Index (CPI) [5].

The extent of the decline in restaurant inflation varied across provinces, correlating with the level of GST relief offered. Provinces with the most significant reductions, such as Nova Scotia, Newfoundland and Labrador, and Prince Edward Island (where GST was cut by 15%), experienced the steepest declines in restaurant inflation [5]. This highlights the direct influence of tax reductions on inflation data. However, it also raises concerns about the potential for “opportunity pricing,” where some restaurants may have leveraged the tax break to increase their base prices, confident that consumers would focus on lower final bills rather than subtle price hikes [5].

Varying Impact of Inflation on Restaurant Segments

It’s important to note that inflation has not affected all restaurant segments equally. While some sectors have experienced weaker growth, others are expanding. For instance, traffic at full-service restaurants (FSR) grew 4% compared to quick-service restaurants (QSR), which grew 3% over the 12 months ending May 2024 [1]. Drinking places have been particularly hard hit, as Canadians are generally going out to bars less and drinking less [1]. This highlights the need for restaurants to consider their specific segment and target market when developing strategies to manage inflationary pressures.

Menu Engineering Strategies to Optimize Profitability

Menu engineering is a strategic process that goes beyond simply creating an attractive menu. It’s a data-driven approach to analyzing and optimizing menu offerings to maximize profitability and enhance the customer experience [6]. By understanding the cost and revenue of each item, as well as customer behaviour, menu engineering aims to increase overall sales and improve efficiency.

Here are five key steps involved in menu engineering [6]:

1. Choose a time period: Select a specific time frame to analyze, such as a quarter or a season, depending on how often you update your menu.
2. Cost your menu: Calculate the exact cost of each menu item, considering all ingredients and portion sizes.
3. Categorize menu items based on profit and popularity: Analyze sales data and categorize items into Stars, Plowhorses, Puzzles, and Dogs (more on this below).
4. Redesign your menu: Based on the categorization, adjust pricing, placement, and descriptions to highlight profitable items and promote strategic choices.
5. Measure your new menu’s impact: Track sales data and customer feedback to assess the effectiveness of your menu changes and make further adjustments as needed.

Benefits of Menu Engineering

Menu engineering offers several significant benefits to restaurants [6]:

• Maximize profitability: By identifying and promoting high-profit items, restaurants can increase revenue and improve their bottom line.
• Cost management: Analyzing food costs and identifying areas for improvement can help restaurants control expenses and reduce waste.
• Improved customer experience: Showcasing popular dishes and providing clear descriptions can make it easier for customers to make choices and enhance their dining experience.
• Reduction of food waste: Menu engineering can help restaurants plan ingredient quantities more accurately, leading to fewer unsold perishable items and minimizing waste.
• Innovation: Regular analysis of menu performance allows restaurants to experiment with new dishes and update their offerings to match changing customer preferences.

Menu Item Categorization

A crucial aspect of menu engineering is categorizing menu items based on their profitability and popularity. This helps restaurants understand which items are driving profits and which need attention. The four main categories are [7]:

Category	Profitability	Popularity	Description	Action
Stars	High	High	These are your top performers – popular and profitable.	Maintain quality, consider slight price increases, feature prominently on the menu.
Plowhorses	Low	High	These items sell well but have lower profit margins.	Raise prices, adjust recipes, consider pairing with high-profit sides.
Puzzles	High	Low	These items are profitable but don’t sell well.	Reposition on the menu, promote through specials, improve descriptions.
Dogs	Low	Low	These items are underperforming.	Remove from the menu or replace with more profitable options.

Menu Psychology and Visual Cues

Menu engineering also involves understanding how menu design and layout can influence customer choices [8]. This is where menu psychology comes into play. By using visual cues, thoughtful positioning, and strategic pricing, restaurants can subtly guide customers toward ordering certain items. For example, placing high-profit items in prominent positions, using boxes or bold fonts to draw attention, and crafting compelling descriptions can all encourage customers to make specific choices.

Tips for Sourcing Affordable, High-Quality Ingredients in Canada

Sourcing ingredients is a critical aspect of restaurant operations, especially in times of inflation. Finding affordable, high-quality ingredients can help restaurants maintain their food costs and ensure customer satisfaction.

Here are some tips for sourcing ingredients in Canada:

• Connect with Local Suppliers: Building relationships with local farmers and producers can provide access to fresh, seasonal ingredients at competitive prices. Visit farmers’ markets, participate in community agriculture programs, and connect with nearby farms to explore sourcing options [9]. Local sourcing offers several benefits, including better taste, peak nutrition from recently harvested produce, and the opportunity to support sustainable farming practices [9].
• Consider National Distributors: National distributors offer a wide range of products, consistent supply, and often better pricing due to bulk purchasing. Explore options like Flanagan Foodservice [20] or Gordon Food Service [20] for your restaurant’s needs.
• Explore Online Wholesale Platforms: Online platforms like Bulk Mart [21] cater to bulk buyers and offer competitive prices on a variety of ingredients.
• Prioritize Key Ingredients: Invest in high-quality proteins and produce that are essential to your menu, while using cost-effective options for bulk staples like grains and spices [10].
• Buy in Bulk: Purchase non-perishable items, dry goods, and frozen ingredients in bulk to take advantage of lower prices [10].
• Negotiate with Suppliers: Build long-term relationships with suppliers and negotiate contracts to secure better pricing and favourable terms [10].
• Embrace Seasonal Ingredients: Utilize seasonal produce, which is often fresher, more abundant, and less expensive [11].
• Optimize Portion Control: Standardize portion sizes to minimize food waste and maintain consistency while ensuring customer satisfaction [11].
• Consider Food Ingredient Brokers: Food ingredient brokers can be a valuable resource for restaurants looking to lower their ingredient costs. They have near-source relationships and access to high-quality ingredients at competitive bulk prices [12]. They can also help secure specific types of ingredients, such as non-GMO, organic, kosher, or halal, and negotiate favourable contract pricing to protect your margins [12]. Consider Canadian companies like Powell May International [22] or Magnum Food Brokers [23].

Balancing Local and National Sourcing

While local suppliers offer the advantages of freshness and direct relationships, national distributors provide scalability and consistency, which can be crucial for restaurants with high-volume needs or those seeking a reliable supply of specific ingredients [10]. Restaurants may need to utilize a combination of sourcing strategies to balance these factors and optimize their ingredient procurement.

Implementing Effective Pricing Strategies

Pricing is a delicate balancing act for restaurants. Menu prices need to be high enough to cover costs and generate profit, but not so high that they alienate customers. In times of inflation, finding the right pricing strategy is even more critical.

Here are some effective pricing strategies for Canadian restaurants:

• Cost-Plus Pricing: This is a common pricing strategy where you calculate the cost of each dish and add a markup to determine the selling price. This ensures that you cover your costs and achieve your desired profit margin [13]. To accurately calculate costs, it’s essential to consider not only the cost of ingredients but also overhead costs such as labour, utilities, and rent [14].
• Value-Based Pricing: Set prices based on the perceived value of your dishes. Consider factors like the quality of ingredients, presentation, and overall dining experience [15]. This approach focuses on what customers are willing to pay for the overall value you offer.
• Competition-Based Pricing: Analyze the prices of your competitors and position your prices accordingly. You may choose to price your menu items slightly lower, higher, or in line with your competitors, depending on your target market and value proposition [15].
• Dynamic Pricing: Adjust prices in real-time based on demand, competition, and other factors. This can help maximize revenue during peak hours and attract customers during slower periods [16]. However, it’s crucial to implement dynamic pricing transparently and communicate any price changes clearly to avoid customer backlash.
• Combo Pricing: Offer combination meals or prix fixe menus that bundle multiple items at a fixed price. This can encourage customers to spend more and increase your average check size [13]. This strategy is particularly effective when you can pair high-profit, low-cost items with higher-cost items to drive sales and improve profit margins.
• Communicate Price Changes Transparently: If you need to raise prices, be transparent with your customers. Explain the reasons for the increase, emphasizing the value you offer and the quality of your ingredients [11]. This can help maintain customer trust and loyalty during challenging times.

Understanding Food Cost Percentage and Maximum Allowable Food Cost

Managing food costs is crucial for restaurant profitability, especially in the context of inflation. Food cost percentage is a key metric that helps restaurants track their spending and ensure they are making a profit [15]. It is calculated by dividing the cost of goods sold (COGS) by total food sales [17]. Most restaurants aim to keep their food cost percentage between 25% and 40% [17].

Another important concept is the maximum allowable food cost percentage (MFC). This is the highest food cost percentage a restaurant can afford while remaining profitable [14]. It is calculated by subtracting the sum of labour costs, monthly overheads, and profit goal from 100, and then dividing the result by total sales [14].

Determining Menu Item Selling Price

There are two primary methods for determining the selling price of a menu item: food cost and gross profit margin [18]. The food cost method involves setting a target food cost percentage and calculating the price that will achieve that target [18]. The gross profit margin method involves setting a target profit margin and working backward to determine the price that will achieve that margin [18].

Adapting to Changing Consumer Behaviour

It’s important to recognize that Canadian consumers are becoming more price-sensitive and selective in their restaurant choices due to inflation [19]. They are increasingly seeking affordable dining options, discounts, and loyalty programs [19]. This highlights the importance of offering value-for-money propositions and adapting pricing strategies to meet evolving customer expectations.

Conclusion

Navigating inflationary pressures requires a multifaceted approach. To maintain profitability and customer satisfaction, Canadian restaurants need to combine menu engineering strategies, smart ingredient sourcing, and effective pricing strategies. Menu engineering helps optimize menu offerings, control costs, and enhance the customer experience. Sourcing affordable, high-quality ingredients involves building relationships with local suppliers, considering national distributors, and exploring online wholesale platforms. Effective pricing strategies include cost-plus pricing, value-based pricing, competition-based pricing, and dynamic pricing, all while maintaining transparency with customers.

By understanding and implementing these strategies, restaurants can create a comprehensive approach to financial management that will help them thrive in any economic climate.

Accountific provides specialized bookkeeping services for food business owners in Canada. We understand the unique challenges faced by restaurants and offer proactive financial management solutions to help you gain control of your finances. Our services include weekly bookkeeping, payroll, and tax compliance, ensuring your financial data is always up-to-date and accurate. Contact Accountific today to learn how we can help your restaurant thrive in any economic climate.

Works Cited

1. The global economy is having profound effects on Canadian restaurants – Foodservice And Hospitality
2. Boosting Restaurant Profits: Menu Engineering Strategies – Restaurant365
3. Canada’s annual inflation rate drops to 1.8% in December on sales tax relief – Yahoo Finance
4. Canada’s Inflation Slows to 1.8% in Dec Amid Food Price Decline – Action Forex
5. How the GST holiday distorted Canada’s food inflation story – Writer’s Bloc – Castanet.net
6. Menu Engineering: How to Make a Profitable Restaurant Menu – Lightspeed
7. Menu Engineering – Restaurant365
8. Practical Menu Engineering Tips to Drive Restaurant Profits | DoorDash for Merchants
9. How to Source Local Ingredients: A Smart Guide for Chefs – Plastic Container City
10. The Ultimate Guide to Sourcing High-Quality Ingredients for Your Restaurant – Push Operations
11. Menu Engineering Strategies to Maintain Profitability Amid Rising Costs – Valley View Produce
12. Sourcing & Manufacturing – The Greater Goods
13. Menu Pricing Strategies: How to Price Food to Sell – The Restaurant HQ
14. Restaurant Menu Pricing Strategy: How to Price Restaurant Menu Items (2025) – Toast
15. Restaurant Pricing: Proven Strategies To Set Your Prices – Epos Now
16. Dynamic Pricing for Restaurants: Benefits and Challenges you Must Know – Deliverect
17. Menu Pricing: How to Calculate Food Cost Percentage – TouchBistro
18. How to Price A Menu: Price Formula for Bars and Restaurants – BinWise
19. Canadian Restaurant Industry in Crisis with Consumers Unhappy as Prices Escalate Op-Ed – Retail Insider
20. Top Canadian Food & Beverage Distributors | Crew
21. BulkMart -Canada’s Top Wholesale Supplier for Foodservice & Packaging — Bulk Mart
22. Powell May International – Providing Quality Ingredients Since 1945
23. Magnum Food Brokers

David Monteith, founder of Accountific, is a seasoned digital entrepreneur and a Xero Silver Partner Advisor. Leveraging over three decades of business management and financial expertise, David specializes in providing tailored Xero solutions for food and beverage businesses. His deep understanding of this industry, combined with his proficiency in Xero, allows him to streamline accounting processes, deliver valuable financial insights, and drive greater success for his clients.