Rising commodity costs and still-skittish consumers have put restaurant operators between a rock and a hard place as they consider raising menu prices, but the need to protect margins is leading to some creative solutions.
From abolishing buy-one-get-one-free deals to introducing new, higher-priced menu items and boosting prices in small doses, operators are finding ways to spare their bottom lines without alienating customers.
San Diego-based Garden Fresh Restaurant Corp., which operates the Souplantation and Sweet Tomatoes chains, raised lunch and dinner menu prices by 10 cents in March at both chains and also stopped offering a buy-one-get-one-free deal.
Garden Fresh chief executive Michael Mack said the deal, which required customers to purchase two beverages, helped the company’s margins and brought in more customers during the lean years beginning in 2008, but that it had lost its usefulness by October 2010.
Mack called the buy-one-get-one-free deal “a marketing tool” and noted, “Like any marketing tool, if it’s the only one you use, and you abuse it, it won’t serve you well.”
Whether through small menu price increases or putting an end to discounts, Mack’s competitors across the industry are looking for help as they try to keep the cost of ingredients from eating into their profit margins. The price of beef, for example, has soared in recent months as Korea and Japan have responded to troubles with their domestic food supplies — from hoof-and-mouth disease and a nuclear disaster, respectively — by tapping into American slaughterhouses for millions of pounds of meat.
“We believe companies will need at least 2 to 3 percent average effective menu pricing [increases]” and more customers to expand margins, said Andy Barish, an analyst with Jefferies & Co., in a note to investors earlier this month. “We think this will be difficult to achieve given the pace of the current consumer recovery.”
Other observers agree, noting that despite some positive signs suggesting economic recovery, consumer spending is still fragile. Larry Miller, an analyst at RBC Capital Markets, said consumers’ plans to spend fell in May year over year. He added in a May note to investors that the dip was the first year-over-year drop since July 2009. Miller said that, in addition, fewer consumers were planning to eat out at restaurants in the next 90 days — an ominous sign driven largely by high gas prices for the coming summer months.
Garden Fresh isn’t the only company raising menu prices despite the slow pace of the consumer recovery. Chipotle Mexican Grill Inc. boosted prices in California and its Pacific region and is considering more price increases for later this year.
Both P.F. Chang’s China Bistro Inc. and Panera Bread Co. have also increased prices by about 2 percent in recent months. And even McDonald’s Corp., which has weathered the recession extremely well with continued same-store sales increases, bumped up its menu prices by 1 percent in March.
To avoid scaring away spending-shy customers who are struggling both with the effects of the lingering recession and rising gas prices, some restaurants are changing their menu rather than raising prices. Wendy’s/Arby’s Group Inc., for example, plans to add new, higher-priced menu items in the second half of the year, including a line of premium chicken sandwiches and Dave’s Hot ‘n Juicy Cheeseburgers, which will be 40 percent larger than traditional burgers.
“We are introducing higher-quality, fresher … products, and in that regard we have the ability to price them at a level that is again slightly above what we’re pricing some of those products now,” said Wendy’s chief executive Roland Smith in a conference call with investors in late April. “Clearly, that will allow us to kind of maintain — as much as possible — our margins.”
Smith said the company is also considering raising prices for individual products in specific markets where demand for them is highest.
The threat of rising costs is the latest challenge to face the restaurant industry as the U.S. economy slow-bakes toward recovery. And gleaning more revenue from menu items is one of the last levers eateries can pull to prop up profit margins.
“We’ve all spent the past several years looking at every penny spent in our restaurants,” said Garden Fresh’s Mack. “There aren’t any big” expenses left to cut.
For some restaurant chains, it’s still too soon to back away from special offers that have grown remarkably popular among customers.
At the Ruth’s Chris Steak House chain, which is operated by Ruth’s Hospitality Group Inc., 30 percent of all customer revenue is currently tied to the restaurants’ Seasonal Classics promotion, according to chief executive Michael O’Donnell. Customers ordering that special pay $39.95 to $49.95 for a starter, entrée, side dish and dessert.
“This strategy’s supported our five consecutive quarters of traffic growth,” O’Donnell told investors in April, “and I like being the least-expensive house in a wonderful neighborhood.”
But perhaps even Seasonal Classics aren’t sacred. He said the company would reconsider the decision not to tinker with the Seasonal Classics if commodity prices rose higher than currently forecast.
