Operations | By Daniel P. Smith
For the last 28 years, Gary Cooney has run his neighborhood pizzeria in Chicago with optimism, focus, and loyalty at the top of his mind. “You don’t exist as a pizza place in Chicago for 28 years if you’re not putting out a quality product and keeping customers top of mind,” says Cooney of his Waldo Cooney’s establishment. “It’s just too competitive a market here to do otherwise.”
But, as it has with many in the restaurant industry, the economy is forcing Cooney to dwell more on the prices of his menu options. Though never eager to raise prices, Cooney has done so many times, viewing a price increase as both the natural course of a business’ evolution and, especially during today’s economic turmoil, the best decision in a list full of less-than-compelling options.
In late 2008, Cooney upped his prices 4 to 5 percent across the menu, a move aimed at stemming the tide of rising commodity and overhead costs.
“Cheese increased over $1 a pound and all of the other goods went up—salt, seasonings, flour, soda,” Cooney says. “At some point, you have to pass the rising costs of business onto the consumer. You just can’t sit there and keep eating it. You have to keep profits and revenue in line, which is the key to longevity.”
Cooney’s story is an all-too-common industry tale today. From heavyweights to local independents, few have escaped the financial burdens of doing hospitality business, a reality that has forced many to raise menu prices or to at least debate the issue.
While raising menu prices offers the quickest solution to reversing the trend of falling profits, passing the increased costs onto the consumer can either be a positive shot in the arm or a fatal shot to a business’ heart.
“Whether raising prices, particularly in today’s economic climate, is a good or bad business decision is really the $1 million question,” says Adam Jed of San Francisco–based Full Plate Restaurant Consulting. “By raising prices, restaurants can continue to maintain their margins but also risk having consumers vote with their wallets.”
In the last 18 months, the rising costs of chicken, beef, and other commodities created a wholesale cost environment unseen by the restaurant industry in decades. Add in higher labor and energy costs against the backdrop of the continually sluggish economy and menu pricing catapulted to the top of many operators’ agendas.
While operators adjusted portion sizes, product offerings, marketing expenses, and vendor relationships, many still found themselves in tight corners. Raising menu prices, many surmised, seemed the inevitable reality.
McDonald’s revamped its Dollar Menu to eke out added profit; Panera Bread upped the prices of its signature bagels 25 percent; and Chipotle Mexican Grill instituted increased prices across its menuboard in early 2009.
“In light of rising costs, you either adjust prices or cut things that negatively impact the experience,” Chipotle spokesman Chris Arnold says. “Ultimately, we chose to raise prices because there was a lack of better options.”
Arnold says Chipotle execs vigorously debated raising prices, particularly concerned with consumer reaction amid the economic downturn. Throughout 2009, the Mexican chain noted a fall in transaction numbers while same-store sales remained even or tended upward.
“We recognized raising prices might be an unpopular decision, but we didn’t feel like we had another option,” Arnold says. “There were economic forces out of our control, but the menu was one place we could adjust to gain the necessary balance. We can’t run our business and pursue our vision if we’re not making money.”
Consumer perception often stands as the most looming impediment to menu price hikes, perhaps rightfully so in today’s economic climate where tightened discretionary spending forces consumers to dine at home more often. Such a hurdle urges many quick serves to investigate how they can raise prices most effectively, efficiently, and with sensitivity for the consumer in mind.
Though Jed admits that many customers of the quick-serve segment are rather habitual—“They know how much their sandwich costs,” he says—periphery items tend to gain less attention.
“Raising the prices of sides and beverages is probably the easiest way to get margins back in line while encountering the least amount of resistance,” Jed says, adding that reformatting the menu itself remains a simple trick to veiling price increases.
While Toledo, Ohio–based Marco’s Pizza analyzes its pricing strategy every six months, it limits price increases to only one of its three menu segments at a time, choosing between pizza and toppings, sides, or beverages. In August 2008, for instance, Marco’s instituted a 3 percent increase on its pizza toppings.
“The consumer realizes less of an impact on total price [if you increase one segment] because they’re rarely looking at the individual components,” says Marco’s vice president Mike Jaynes. “We look for opportunities to raise prices while still maintaining the value perception.”
Perception, after all, is significant. In August, Starbucks announced that it would be raising prices an average of 10 to 15 cents on its “complex” beverages, a considerable chunk of its menu’s offerings. In a marketing twist, however, the Seattle-based coffee giant paired that announcement with word that it would also be lowering prices on basic beverages—the latte and plain coffee, for instance—the first time the franchise has dropped menu prices in its history. The double-edged announcement allowed Starbucks to claim value and empathy for consumers just as they shifted prices upward.
“As part of our comprehensive approach to providing value and the ‘Starbucks experience,’ while balancing our business responsibilities, we are fine-tuning pricing,” says Starbucks spokeswoman Amy Sarno of the revised prices.
Regardless of the creative ways in which a price hike appears, operators debating increased menu prices must create a final result that brings profit margins back in line and propels the business forward.
“In the end,” Chipotle’s Arnold says, “you have to make the math work.”