Inflation is Straining Restaurant Operations

In the last 5 years, food and labor costs for the average restaurant have each gone up 35%. The other expenses for running a restaurant – the building, supplies, credit card processing fees – are also going up quickly. Restaurant owners generally try to keep menu prices as low as possible – making an average of 3-5% pre-tax margin. Overall, customer traffic at restaurants is still down from pre-pandemic levels. That means the only way most restaurant operators can cover their higher input costs is to increase menu prices. Average menu prices increased 31% between February 2020 and April 2025, according to data from the Bureau of Labor Statistics, which is on par with the increase needed to maintain the average 5% profit margin.

Below are three scenarios for what would happen to your favorite local restaurant covering:

  1. If they didn’t raise their prices
  2. If they raised them just a little without regard for maintaining their small margins 
  3. How much prices would go up to maintain their tight 5% pre-tax margin.

What You Need to Know 

The average restaurant runs on very low profit margins. As we look at the different scenarios keep in mind:

  • Food and labor costs are the two most significant line items for a restaurant, each accounting for approximately 33 cents of every dollar in sales.
  • Other expenses – such as utilities, occupancy, supplies, general/administrative, repairs/maintenance and credit card processing fees – combine to represent about 29% of sales.
  • This leaves a pre-tax profit margin of roughly 5% for a typical restaurant, which means significant cost increases are not sustainable for most restaurants.

Scenario #1 - Without raising prices: significant loss

With across-the-board rising input costs, if the average restaurant operator hadn’t raised their prices in the last 5 years, their margin would have gone from 5% of sales pre-2020, to a pre-tax loss of nearly 24% today.


Scenario #2 - Increasing prices: breaking even

With overall customer traffic still dampened compared to 2019 levels, to cover the higher input costs the average restaurant would need to increase prices 23.8%, as shown in the chart below. However, that would only mean breaking even, with no profitability.   


Scenario #3 - Increasing prices: Maintaining 5% profit margin

Most restaurants can’t simply break even, as debt burdens in the industry are still elevated. As of November 2024, 53% of operators said their restaurant was still carrying debt that it accumulated since the beginning of the pandemic. To pay off this debt, restaurants need to make a profit.

To cover the higher input costs and maintain its 5% pre-pandemic profit margin, the average restaurant would have to increase prices 30.3%, as shown in the chart below.