When gasoline prices began a nearly month-long rally in February, rising for 20 straight trading days and surpassing $4 per gallon in many markets, a sense of “here we go again” settled over consumers and operators who recalled 2008, a year dominated by a deep recession and sky-high fuel prices that took their toll on restaurant traffic and spending.


But that was then and this is now, and experts say that both consumer attitudes and the environment are likely to make this time around slightly different — although no less painful.


First, consumers are over the shock of seeing gas prices hover regularly between $3 and $3.50 — even if that price is about $1 more per gallon than they were paying a year ago. In the past few years, they have figured out for the most part how to curb their driving and not spend all their discretionary dollars at the pump.


More significantly, fuel price inflation is likely to drive a more
 severe increase in commodity costs throughout the supply chain this time, necessitating menu price hikes for many restaurant companies and increasing the cost of eating out for consumers.


Inflation by the barrel


During a conference call with analysts March 1 — as political unrest in the Middle East and North Africa was fueling a steady rise in the price of oil — Patrick Doyle, president and chief executive of Domino’s Pizza, noted that store-level profitability would be more impacted by the pressure higher fuel prices put on the supply chain than by hits to consumer spending and higher costs associated with delivery.


“You’re looking at a small number when you look at the gasoline reimbursement as a percentage of sales on the store P&L,” Doyle told securities analysts. “We would rather have lower gas costs than higher gas costs. But what we saw three to four years ago now was the way it played through in commodities, and I think we’re seeing that again, and that’s a bigger deal.”


By comparison, he said, the hike in the federal minimum wage had a bigger effect than fuel inflation on overall profitability and required the chain to change its pricing and discounting strategies. For 2011, commodity prices that are expected to increase 3 percent to 4 percent are a bigger worry than spikes in gasoline prices.


“There are ways to offset [higher gas prices],” Doyle said. “It’s pretty easy for our system to do the calculation on [where] their reimbursements need to move to make sure we are doing right by our drivers — and move that through to the consumer,” Doyle said.


Rising gas prices could have other impacts as well. In 2008 when oil prices were hitting unprecedented heights, some foodservice distributors attempted to offset the skyrocketing cost of diesel fuel by implementing surcharges of 4 percent to 7 percent on each delivery.


Those fuel surcharges proved to be unpopular with operators, many of whom simply refused to pay them, said Caroline Perkins, a New York-based consultant to the foodservice community and a contributor to Nation’s Restaurant News. So when the price of diesel fuel declined, most surcharges were discontinued.


However, Perkins said a survey in the Technomic Distributor Intelligence Report in December found that 95 percent of distributors polled said energy and fuel costs are having the most impact on their ability to make a profit. To help address that, some are once again adding fuel surcharges.


As of March 21, diesel fuel averaged $3.91 per gallon, up nearly $1 per gallon from last year at this time, according to the Energy Information Administration. 


Darren Tristano, executive vice president at Chicago-based consulting firm Technomic, said cost increases rippling through the supply chain due in part to fuel inflation would hurt operators not only from a commodity price standpoint, but also in the erosion of their ability to take price hikes to cover their margins.


“The last two to three years, chains have taken slight to moderate price increases,” Tristano said, “and with all the couponing, it has hurt what they’re able to sell in terms of price point. Lots of chains are hesitant to raise prices. Take Texas Roadhouse, which tested a 2-percent increase last year and went with a 1-percent increase this year.”


In a recent conference call with financial analysts, Luby’s Cafeterias’ president and chief executive Chris Pappas said that while commodity costs had risen 5 percent in the second quarter, the company was hesitant to pass those increases on to customers in the form of menu price increases.


“Any further price increases we might pass on to the consumer remain contingent on the health of the consumer segment, which is just beginning to feel the impact of rising gasoline prices,” he said.


Many chains are going to wait and see what competitors are going to do with pricing, Tristano said, so most are likely to take their increases in the second and third quarters.


If consumers cut back on spending, it is likely a combination of higher menu prices and rising gas prices, Tristano said.


“When they see these price points at the pump, they drive less; if they see those price points at a restaurant, they eat less,” he said.


Technomic completed a survey of 500 consumers March 1, asking respondents to identify the areas in which they planned to reduce spending because of higher gas prices. Forty-six percent said they would spend less at full-service restaurants, 42 percent said they would spend less at quick-service restaurants, and 38 percent said they would cut back at fast-casual outlets.


Traffic in a jam


Consumers are more resilient with their spending than they were when the one-two punch of recession and fuel inflation knocked them down in 2008, said David Portalatin, the industry analyst for the automotive division of Port Washington, N.Y.-based The NPD Group. But higher gas prices still will challenge restaurant operators by siphoning a portion of guests’ discretionary dollars or by reducing overall driving, meaning fewer cars in the drive-thru.


“Consumers have already shown us their tolerance for $4-per-gallon gas: There isn’t one,” Portalatin said.


NPD estimated that as of early March, Americans had shifted about $14 billion more toward payments for gasoline compared with the year earlier, and projections modeled a possible annual shift of as much as $50 billion to the national collective gas tank.


“It has to come from somewhere, and it’s coming from savings or from discretionary spending from other places or from a credit card,” Portalatin said, adding, “If they’re putting gas on their credit cards, that has longer-term implications [on their ability to spend].”


He added that in 2008, the last time the national average price of gas rose above $4 per gallon — peaking at a nationwide average of $4.11 July 17 of that year — consumers reduced their driving by 34 billion total miles. Forty-nine percent did so by canceling or consolidating shopping trips, and 29 percent canceled or modified vacation plans.


“The implications are big for quick-service restaurants and more convenience-oriented retail outlets directed for consumers on the go,” Portalatin said. “If they’re on the go less, those occasions are at risk.”

Contact Mark Brandau at mark.brandau@penton.com.