Finance & Operationsby
If you’ve been following the news over the last few weeks, you’ve likely read the words “trade war” in reference to import tariffs for the United States, Canada, the European Union, and China.
If you’re a restaurateur in the United States or Canada, you probably want to know how changes to import tariffs will affect your restaurant, if at all. Here we’ll answer that question for you – while leaving the politics to CNN.
Import tariffs are taxes on goods coming into your country from other countries.
Tariffs are created by governments for a wide variety of reasons, and they affect a wide variety of products, from natural resources to food products. The purchaser of the foreign product pays the tariff to import the product into his or her country.
As per NAFTA, the North American Free Trade Agreement, the United States, Canada, and Mexico have a certain level of free trade between them. NAFTA, however, is currently in the process of re-negotiation between the three countries – but new tariffs have since been imposed from several sides.
The United States government recently placed a 25% tariff on steel imports and 10% tariff on aluminum imports from Mexico, Canada, the European Union, and China.
In response to new U.S. tariffs on steel and aluminum, Canada has proposed import tariffs on American goods coming in to Canada, effective July 1, 2018. According to the Canadian government, these tariffs will remain in effect until the United States removes the tariffs.
A few days after Canada announced it would be placing import tariffs on American products, the European Union announced that it would follow suit, with the new tariffs taking effect June 22, 2018.
China has responded by placing its own 15% and 25% tariffs on many products to the U.S., including wine, pork, and fruit. The wine tariff is anticipated to affect the California wine region, while the pork tariff is expected to have adverse effects on farming communities across the United States.
So what does all of this have to do with the food and beverage industry?
Tariffs affect farmers, and what affects farmers affects you as a restaurant owner. We’ll get to how import tariffs affect farmers in a moment, but first – which food and beverage items are affected by import tariffs?
Effective July 1, 2018, the following American food items are subject to a 10% import tariff in Canada:
As of June 22, 2018, the following American food items are subject to a 25% import tariff in the European Union:
The European Union has also placed a 10% tariff on these American food imports:
While Canadian restaurateurs have fewer tariffs to worry about, the import tariffs levied by the United States will likely have an impact on the restaurant industry.
The following Canadian products will be subject to import tariffs from the United States:
From canned foods and beverages to beer kegs, the restaurant industry relies on these metals for the packaging, shipment, and storage of many food items. The effects of American import tariffs on Canadian metals will trickle down to the restaurant industry.
Now to answer your most burning question… how will these new tariffs affect me and my restaurant? To answer that we must first address how tariffs affect the source of your food – farmers.
Unless your restaurant grows all of its own food, you’ll likely be affected by that which affects farmers.
In theory, countries import foreign goods for two reasons: the product is not available domestically or it’s cheaper to import the product than to buy it domestically.
If import tariffs make foreign goods more expensive, domestic goods may become more competitively priced – which should mean that businesses will purchase more domestic goods. If this happens, it should follow that farmers can expect more domestic sales.
But – 40% of foods grown by American farmers are sold overseas. So if foreign businesses are discouraged from buying these products due to tariffs, American farmers will need to find many new domestic customers to fill the gap.
If farmers are unable to replace their foreign buyers, they will likely have to increase prices for domestic customers to make up for the lost profits – which is how this story becomes about you, the restaurant owner.
Here are some ways that import tariffs can affect restaurants in the United States and Canada.
Any lost revenue associated with import tariffs may be passed down from your food supplier to you, the restaurateur, through higher prices.
So here is your potential dilemma: If you pay more for your food and keep your prices the same, your profit margins may suffer. On the other hand, if you raise prices, you may lose some customers.
So take a look at your last few inventory orders and compare them to the list of products affected by tariffs: do you order a lot of products currently on that list?
If so, it may be time to tweak your menu a little to curb future costs. While this is not a perfect method for dealing with rising inventory costs due to tariffs – farmers may increase the price of other items to make up the difference – it’s a great place to start.
Due to differences in bulk ordering, independent restaurants will likely feel more pain than large restaurant chains.
If food suppliers pass costs down to restaurateurs, restaurant chains may be able to absorb the increase in food costs without changing their menu prices. Chains rely on sales from several national – and sometimes international – locations, and therefore may have a larger capacity to absorb higher costs overall. Independent restaurants, however, may need to raise menu prices to offset costs.
“Locavore” restaurants that specialize in sourcing food from local farms or producers may gain popularity as a result of import tariffs.
Farm-to-table restaurants promote community involvement, seasonal eating, and environmental sustainability – but within the context of import tariffs, those messages are strengthened as they also promote supporting local farmers and only eating what they grow.
So those restaurants that already specialize in sourcing local ingredients may thrive because of the growing awareness of the importance of eating local.
To piggyback on the possible growing trend of locavore restaurants, consumers may feel a patriotic urge to dine “locally” and avoid foreign products.
In Quebec, Canada, for example, the owners of Lala Bistro have removed American products like Heinz ketchup and California wines from their menu as a response to American tariffs.
Restaurants in the U.S., Canada, and the European Union may also follow suit and spark a nationalist food revolution, whereby restaurants that serve only domestic foods will benefit.
So we know that cost prohibitive tariffs may make it more difficult to get ingredients from abroad if domestic supplies are limited. That means if a product is not in season in the U.S., for instance, it may be more difficult to get that same product for a reasonable price.
This is when you may need to consider seasonal menu changes. Some restaurants, especially farm-to-table restaurants, may already be accustomed to changing their menus on a seasonal basis.
Take a look at your sales and inventory reports in your POS here – what are your reports telling you about the past performance of your seasonal dishes? Which ingredients do your bestselling items and worst selling items contain, and how much do they cost? Looking at historical data can help you make decisions that will boost seasonal sales and save you on costs in the long run.
Other restaurants, however, don’t modify their menu as much to reflect products that are in season. If you’re one of these restaurants, you may want to consider reviewing your inventory costs through a seasonal lens and changing your menu accordingly.
No industry is immune to politics, and import tariffs do have the potential to greatly affect American and Canadian restaurants – at least in the short term while farmers adjust to changing circumstances. As with every aspect of your business, you’ll need to remain creative and flexible to help offset the effects of increased costs.