Rising food costs are a manageable challenge

April 28, 2011 | by Kim Williams

With food costs still on the rise, the challenge for operators lies in offsetting the increase while still maintaining quality and customer loyalty.

According to the National Restaurant Association, food costs are now the biggest challenge facing restaurant operators' businesses today with roughly one out of four operators saying food costs are their biggest challenge. That number is up dramatically over last year when it was just 4 percent, according to Hudson Riehle, senior vice president of the Research and Information Services Division for the NRA.

However, overall industry sales indicate growing consumer confidence, which is good news for operators.

"This [2011] is actually the best operating atmosphere overall in the past four years. This year, total industry sales are $604 billion, which is up 3.6 percent over 2010," Riehle said. "March was actually a record high sales month for the industry."

Wholesale food price inflation has been running, on a annual basis, above historical levels for the past several years. Recently spiking again, it was up 6.1 percent in March compared to 4.9 percent during the same period last year. There was a decline in 2009 as a result of the recession, but equally important is that in 2007 and 2008 the wholesale food price inflation was in the high 7 percent range.

"From a restaurant operator perspective, because on average, margins tend to be fairly modest when you have input costs that have escalated to that level, not only does it put pressure on the pre-tax profit margin, it makes operators focus on managing their internal cost structures such as labor, utilities, promotional costs, etc.," Riehle said.

The rise in energy prices, particularly the cost of diesel fuel, factors heavily into the cost equation, and in many cases, suppliers are putting transportation surcharges on deliveries to offset their costs.

Looking ahead over the next year, there is certainly no relief on the horizon, but Riehle points out that restaurants with specific menu themes are being hit harder than others because the commodity groups have substantially different inflation rates.

For example, coffee wholesale costs are currently up 20 percent over the past year, as is dairy. Butter is up 42 percent, so those food input costs can vary significantly dependent upon a restaurant's menu theme. Regardless of menu theme, however, the ability to mitigate higher food input costs through seeking out operational efficiencies is becoming much more important.

Managing the back door is key

"If we step back for a minute, the cost of food coming in the back door has always fluctuated," said chef Andrew Hunter, founder of menu ideation company Culinary Craft. "Sometimes it goes up, sometimes down, but rarely does it stay the same, so the focus is always what are the things we can do, as operators, to control costs."

Hunter currently develops retail and consumer food products for several brands, including Wolfgang Puck Worldwide, Niman Ranch, Martha Stewart and Kikkoman.
"As an operator, I almost don't care what my costs are, as long as I have an accurate understanding of what they are. It's easier managing things with no surprises," Hunter said. "So we need to understand that when we cost and price menu items, there's going to be some fluctuation over the life of that menu item."

Hunter cites accurate and realistic costing of menu items per plate as an effective way to deal with increases, as well as being mindful of rotating stock appropriately to reduce waste.

"So, for example, if cheese costs X amount per pound, but I'm only using half an ounce per plate, that's the number I'm most concerned with," Hunter said. "Be more mindful of the product on hand, and deal with your ingredients in a much more systematic way."

Hunter also uses seasonal menus as an example of a cost effective tool, pointing out that customers appreciate seasonal menus because they feel like they're getting fresh, innovative menu items.

Similarly, the importance of shopping around for vendors with the most competitive prices is of utmost importance to maintain customer loyalty and quality without cutting into profit margins, said Eric Ersher, co-founder and managing partner of Southfield, Mich.-based Zoup! Fresh Soup Co. LLC.

"We've been working directly with our manufacturers to negotiate the best prices. We do a cost analysis every six months and that helps us to manage our costs better," Ersher said. "We want to remain consistent, but we will change a particular vendor if necessary."

Zoup! has not taken any drastic steps to offset increases such as raising menu prices, with the exception of some newer markets where location and real estate drivers dictate occupancy costs.

Because Zoup!'s concept is soup-centric, Ersher said it has the ability to adjust recipes and the overall soup schedule to still hit certain benchmarks.

McDonald's, however, recently reported its first-quarter profit increase of 11 percent, while at the same time announcing that it expects to further raise menu prices this year based on unexpected increases in its most purchased items, including bread, cheese and beef. Meanwhile, Starbucks also has been raising menu prices in the United States and China to offset increases in the cost of coffee and other commodities.

Keeping the consumer in mind

In an environment where consumers may be experiencing frugality fatigue but are still cautious about how they allocate their cash on-hand, the restaurant industry provides a social oasis that consumers want to take advantage of even in tough economic times.

"We survey consumers regularly on if they use restaurants as much as they like, and the pent-up demand levels are still high," Riehle said.

Riehle believes it's up to the operators and suppliers to work together so they can get the price value equation to a point where it nudges consumers to patronize their concepts.

"Nine out of 10 Americans like to go out to eat. It's hard to find nine out of 10 Americans that can agree on anything," Riehle said.

Topics: Business Strategy and Profitability , Food & Beverage , National Restaurant Association , Operations Management

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