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Restaurants Battle Rising Food Costs
Weathering food price storms might mean restaurant operators need to change their distribution and purchasing habits.
Commodity prices affect costs on restaurant menus.

The patrons who waited to place orders at Paisano’s Pizza in Leominster, Massachusetts, didn’t seem to mind paying an extra 75 cents for certain menu items.

The management of the central Massachusetts pizzeria, which also sells homemade pasta and fresh cheeses, recently posted a sign thanking customers for their business while apologetically explaining increases were due to soaring commodity costs.

Quick-serves, like Paisano’s, are often forced either to raise prices or shave profits from already slim bottom lines, but what worsens the struggle is striking a balance between maintaining sales and offsetting rising food costs.

“It’s a constant battle,” says Craig Moore, president of CiCi’s Pizza, based in Coppell, Texas. “To raise prices is to carve out guests, and you can’t cut back. You have to think about sales and the fact that the consumer can’t absorb any more increases.”

Intensified by high fuel prices, growing demands in developing countries, the weak dollar, and the diverting of grain to biofuel production, wholesale food prices increased 7.6 percent in 2007, the greatest single-year food price increase in 27 years, according to a National Restaurant Association (NRA) analysis of Bureau of Labor Statistics data.

The data shows that food commodities central to a quick-serve’s mission have increased dramatically between February 2006 and February 2008. For example, the price of eggs has jumped about 187 percent, averaging $2.20 a dozen, while flour is nearly 108 percent more, or about $30 for a 50-pound bag. Other increases include fat and oil, 63.1 percent; fresh fruit, 42.1 percent; confectionary materials, 30.5 percent; cheese, 30.4 percent; milk, 25.3 percent; fresh vegetables, 15.9 percent.

With food prices being one of the most significant line items for restaurants, accounting for about 33 cents on every sales dollar, the NRA indicates that these costs can heavily impact bottom lines, which average 4 to 6 percent

“If I was out there running a pizza place on my own, I’d be petrified,” Moore says. “It’s pretty bleak, and the smaller mom-and-pop restaurants might not survive this because their margins are much smaller.”

CiCi’s, he says, has managed to absorb the bulk of food price increases, thanks to the benefit of distributing to its own stores. “We are not competing with other restaurants for our food products, and we are constantly banging on our food providers’ doors to give us a better deal,” Moore adds.

Food commodity prices will continue to rise, but price hiking and minimizing profits can be avoided if restaurateurs are willing to modify purchasing and distribution habits, says Eric Arthur, president of Marketplace Management Group LLC, a Collierville, Tennessee–based consulting firm offering promotion planning, distribution, and contract and logistics management.

It’s pretty bleak out there, and the smaller mom-and-pop restaurants may not survive this,” says CiCi’s Moore.

“The saying that if you keep doing the same thing you’ve always done, you’re going to get the same results, is true—except for one factor,” he says. “If you keep doing the same thing in purchasing and distribution, you’re going to get increasingly worse results because the market is stacked against you.”

Arthur also cautions that the days of the supplier being the source of industry information are over. As markets continue to escalate, he says restaurateurs will be forced to ask questions about what they are doing and why, or else risk going out of business.

“I have clients who have experienced dramatic increases in food costs, from 32 to 38 percent,” he says. “That’s a big bite out of your bottom line. But many clients are allergic to change, and they do not like to ask questions. They have been too dependent on the supplier.”

One client of Arthur’s that operates a chain of barbecue restaurants learned their supplier was charging them 20 percent more for polystyrene drink cups. With that knowledge, the chain was able to renegotiate the price and save.

It’s all a matter of asking the right questions.

“Ask yourself why you’re using this brand of chicken breast or that kind of bread,” Arthur says. “Are there other alternatives that won’t affect the quality and portion? If you’ve always used brand X turkey and have never used another brand of the same quality, you could have saved big money, sometimes as much as 30 to 40 percent. There is wiggle room in the doom and gloom.”