Article

Menu prices and the economic recovery

How will consumers' need for value intersect with the segment's need to cover cost of goods sold?

January 13, 2010 by Valerie Killifer — senior editor, NetWorld Alliance

In Panera Bread's third quarter 2009 earnings report, the company says it will take modest price increases during fiscal 2010 to cover inflation in costs below gross margin.

While Panera Bread was hesitant to formally outline 2010 sales targets – mainly due to economic volatility – it did say many of the cost inputs for FY 2010 are "fixed and clearly understood."

The recession last year no doubt created pricing pressure for businesses across the restaurant industry. In fact, the pricing power was so weak that the Federal Reserve in 2009 predicted the nation will experience a bout of deflation through mid-2010, and perhaps longer.

With the nation's restaurant industry hoping for some kind of sales recovery, a deflation through mid-2010 would put more pressure on operators to balance food costs, especially for those who rely on wheat and sugar.

"For the bakers, pizzerias, Corner Bakery, etc., sugar and flour have been pretty volatile lately on the food cost side, and these guys have been experiencing much higher cost of goods sold than what they're used to," Joe Dunbar, president of Dunbar Associates said. "If you're not greedy and you pick your timing correctly, I think (brands) could be successful (raising prices). But you definitely have to communicate quality and I think Panera does."

Consumers are no doubt still feeling the economic pinch and it's unknown how they will decide to spend their foodservice dollars moving forward. Coupons, value meals and other discounted menu options also have taken a toll on their mentality in relation to what they're willing to spend for a meal.

"Customers appear more concerned than ever with purchasing lower price-point items and have a strong desire for coupons," Craig Dunaway, president of Penn Station East Coast Subs, said. "I've had a few customers tell me they'd rather get more quantity than worry about the quality. I don't see how some of the major sub brands that have significantly lowered their price points, or offered low margin products at a greatly reduced price, can ever charge the higher price for those same products in the future. What started out as temporary to these brands now appears to be a permanent discount."

While no official forecast about 2010 menu-pricing trends has been launched by the National Restaurant Association, the industry organization did say they were expecting brands to moderately increase menu prices this year.

"Restaurants are under pressure to closely balance menu prices between their operating costs and what consumers are willing to pay. Diners have been extra sensitive to the cost-value relationship since 2007, and are likely to continue this trend in 2010," Annika Stensson, an NRA spokeswoman, said. "Raising menu prices may be a necessity for some this year, but restaurants are reducing costs in other areas of their operations and increasing their productivity to keep any menu price hikes as low as possible."

For brands looking to raise prices, the third quarter could be a good time, especially around the end of August. Dunbar said late in the summer consumers are returning from vacations in which they likely spent more than usual for items such as food.

"If you raise prices in August, they've been subjected to higher prices anyway," he said. "Panera definitely wants to monitor their strategy as they execute it very carefully. And there will be some regions where they're going to have trouble. I know in the Washington, D.C., metro area there's a new focus on being frugal where a couple of years ago, people were bragging about spending money. Now they're bragging about saving money."