The Fear of an Empty Room
The single biggest reason restaurants are hesitant to hike prices is the fear of scaring away customers. Dining out is a discretionary expense, and in a market where consumers are already feeling the pinch of inflation, a price increase can be the deciding
factor that keeps them at home. Restaurant owners understand that customer loyalty is fragile. Rahul Singh, founder of The Beer Cafe, noted that you cannot keep passing every cost increase to the consumer because, at some point, they push back. This price sensitivity is the core of the dilemma: raise prices to protect margins and risk losing business, or hold prices to preserve footfall and accept a thinner profit on each order. For many, especially in the hyper-competitive casual dining sector, maintaining a steady flow of customers is prioritised over short-term profitability.
The Secrets of Menu Engineering
Instead of across-the-board price hikes, many restaurants are turning to a practice called 'menu engineering'. This is a strategic, data-driven approach to designing a menu that guides customers toward more profitable items. Techniques include using visual cues like boxes or bold fonts to highlight high-margin dishes, writing more enticing descriptions for them, and strategically placing them where a diner's eye is likely to land first. By analysing sales data, restaurants can identify their 'Stars' (popular and profitable) and 'Puzzles' (profitable but not popular), then adjust the menu layout to boost the sales of these items. This allows them to absorb costs on certain popular but low-margin dishes while making up the difference on others, effectively hiding the inflation from the customer.
Shrinking Portions and Clever Swaps
If the price on the menu looks the same, check the portion on your plate. 'Shrinkflation'—reducing the size or quantity of a product while keeping the price constant—is another common strategy. This can be subtle, like a slightly smaller serving of curry with the same amount of sauce, or fewer pieces of chicken in a biryani. Beyond shrinking portions, restaurants are also getting creative with their supply chains and recipes. This could involve negotiating long-term deals with suppliers to lock in prices, sourcing more seasonal produce locally to cut costs, or slightly reformulating a dish with a less expensive but still high-quality ingredient. These changes allow them to manage costs without altering the price, though savvy customers might notice the difference over time.
Playing the Long Game of Loyalty
For many established restaurants, absorbing costs is an investment in their long-term survival. In an industry with notoriously high failure rates, customer loyalty is a powerful asset. By holding prices steady during tough economic times, a restaurant sends a message of value and reliability to its patrons. This can build goodwill that pays off when the economy recovers and consumers have more disposable income. They are betting that the customers they retain now will become the regulars who sustain their business for years to come. This is particularly true for premium and organised chains that see dining out as an 'experience-led discretionary spend' and rely on a resilient customer base. They are willing to weather the storm of rising costs, including everything from ingredients to new UPI charges, to maintain their market position.
The Inevitable Breaking Point
While many are holding the line, this strategy is not sustainable forever. The restaurant industry operates on notoriously thin margins, often just 15% or less. Operators are juggling rising costs for commercial LPG, manpower, rent, and raw materials like meat and eggs. Some have already been forced to make small, strategic price increases of around 5% after holding off for years. The introduction of new operational costs, like the proposed Merchant Discount Rate (MDR) on certain UPI transactions, adds yet another pressure point that may be difficult to absorb. If cost pressures continue to mount without relief, more restaurants will be forced to choose between raising prices or shutting down, shifting the burden, however reluctantly, back to the consumer.
