News

Restaurant prices might be going up

Restaurants across the nation are under intense pressure to raise menu prices as their supply costs soar - notably for chicken, the wholesale price of which has climbed more than a third in the past year, and beef, which is up 11 percent.

April 13, 2004

Wednesday, April 14, 2004- Restaurants across the nation are under intense pressure to raise menu prices as their supply costs soar - notably for chicken, the wholesale price of which has climbed more than a third in the past year, and beef, which is up 11 percent.In New York, Morton's, The Steakhouse, where food accounts for one-third of its overall costs, beef costs jumped 12 percent to 15 percent in the past year. To offset such steep rises, the Morton's Restaurant Group chain boosted its prices 5 percent across its menu in the past year."We haven't just raised [the price of] steaks, to avoid the sticker-shock syndrome," says John Bettin, Morton's president. He noted that sales trends and anecdotal reports from his restaurant managers indicate "there really has been no resistance to that price increase. Our guest base certainly understands why." In addition, the Chicago chain is steering customers to less expensive 18- to 20-ounce steaks. Its "slightly smaller steaks" have a wider profit margin than do bigger steaks. Other restaurants are taking a different approach to cope with higher food prices. Allen Bros., one of the nation's leading suppliers of beef to restaurants, says 30 percent of restaurants that once bought top-of-the-line "prime" steaks began ordering "choice" beef in recent months. But, amid customer complaints, some restaurants have returned to prime and have resorted to passing on the higher costs to their patrons instead. Some eateries responded to the higher costs by negotiating better deals with suppliers. Ruth's Chris Steakhouse saw the cost of a tenderloin steak rise to $11.26 a pound in October from $8.75 a pound in late 2000. So the closely held New Orleans chain signed a contract with a beef supplier last winter. The new price: $8.77 a pound. The steakhouse says it hasn't broadly passed rising beef costs on to customers, and that it is sticking to its formula of offering only top-quality meat. "We're a prime steakhouse. It's the cost of doing business," says Jim Cannon, Ruth's Chris' vice president of culinary purchasing. Offering a lesser grade of beef won't work, he says, adding, "If you change what you are, you're making a mistake." Besides the escalating prices for beef and chicken, restaurant chains face upward spiraling fuel costs that sharply boost their overhead for transporting food and supplies. Largely to absorb all their cost increases, many restaurants last year raised the price of the average check 2 percent, with some outlets increasing their prices for the first time in years. Andrew Barish, a restaurant analyst at Bank of America in San Francisco, says commodity costs are likely to be a big concern for restaurants this year and that those expenses probably will be alleviated in part with menu-price increases. In fact, analysts say restaurateurs are likely to raise the total of the average check by 2.7 percent this year. Fine-dining establishments may be better-positioned to raise prices, restaurant analysts say. Not so for fast-food restaurants, whose customers tend to be more frequent diners and thus are more likely to notice - and feel - the slightest menu price shift. Some big chains such as Wendy's International Inc., closely held Burger King Corp. and Jack In The Box Inc. are being pinched as they rush to add chicken-based salads, sandwiches and other items to their menus to appease increasingly health-conscious Americans. But many chains, including McDonald's Corp. and Pizza Hut, a subsidiary of Yum Brands Inc., have the advantage of being big enough to sign long- term supply contracts and have large networks that keep costs under control. For example, since McDonald's introduced chicken to its menus in the 1980s, it has cultivated an extensive network of chicken suppliers who own the farms, the poultry and the feed the animals eat. The system, says Frank Muschcetto, the Oak Brook, Ill., chain's vice president for worldwide supply, practically ensures "we're not at the whim of the marketplace. We control that which drives costs." Midprice chain Applebee's International Inc., of Overland, Ill., says it is raising its menu prices, albeit slightly, by 1.5 percent this year. Still, Applebee's says, it isn't steering customers away from pricier menu items. Ultimately, it is the small, locally owned restaurants that are among the most vulnerable to commodity price increases because they generally lack the volume to negotiate better prices.