Raising prices is on the menu at certain brandsRaising prices is on the menu at certain brands

Sarah E. Lockyer

From quick-serve McDonald’s to high-end Ruth’s Chris Steak House, first-quarter earnings were dominated by discussions of two items — commodity costs and menu pricing. 


Chains large and small are evaluating the pricing power they hold with customers and are looking at other ways to mitigate rising costs of food. Bread and pasta, beef and produce — nearly all commodity costs are rising, forcing operators to assess their supply and demand expectations. 


Making matters more uncertain, gas prices have increased, as have grocery prices, meaning consumers may cut back on dining out, even after a few months of traffic and sales gains for most chains in the industry. The return of the one-two punch — rising costs, possible slowed sales — harkens back to 2008, when commodities spiked and consumers, in the grip of the recession, stopped spending.


There is one major difference this time around: Operators feel they can take price. 


According to research from RBC Capital Markets, restaurants that participate in a monthly survey have projected menu price increases of 1.8 percent during the next six months — the biggest jump in a year. In those same six months, restaurants are expecting their commodity costs to increase at least 3.2 percent, the research showed. 


“Operators’ sales outlook over the next six months improved for all subsegments except fast food, which fell slightly,” the research, headed by RBC securities analyst Larry Miller, showed. “The margin outlook over the next six months fell to [a] 12-month low, likely owing to food inflation expectations.”


The list of restaurants that have said they will raise menu prices this year is long: Applebee’s, McDonald’s, BJ’s Restaurants, Buffalo Wild Wings and Texas Roadhouse, among others. McDonald’s, which operates and franchises 32,000 restaurants globally, took a 1-percent increase in U.S. markets in March, and said additional small increases may be made throughout the year. BJ’s Restaurants, which operates 104 casual-dining restaurants, said it would raise prices a total of 3 percent this year. Applebee’s, a chain of 2,000 restaurants, is looking at 2 percent, Buffalo Wild Wings, with 750 units, at 2 percent as well, and Texas Roadhouse, which operates 345 locations, at 1 percent, some of which was already taken.


“Since January, the global commodity markets have experienced significant increases,” Pete Bensen, chief financial officer at Oak Brook, Ill.-based McDonald’s Corp. said during a conference call with investors April 21. “As a result, we expect additional pressure as we move throughout the year.


“We believe we have some pricing elasticity,” Bensen added. “We expect to offset some, not all of the increase, with price increases.”


In December nearly 60 percent of survey participants to the NRN a.m. Restaurant Operators Survey said they expect to raise menu prices this year. The survey goes to more than 80,000 subscribers to the NRN a.m. newsletter, and more than 100 restaurant executives participated.


In April the First Quarter NRN a.m. Restaurant Operators Survey also heard from nearly 100 restaurant executives. Forty-two percent said they had already taken increases between 1 percent and 3 percent so far in 2011, 18 percent said they took increases between 4 percent and 6 percent, and 6 percent said they took increases of more than 6 percent. About 34 percent of respondents have yet to raise menu prices.


Each restaurant concept has a unique relationship with customers as well as different mixes of food needs, from produce heavy to beef centric, making menu price increases a very brand-specific decision. 


Numerous securities analysts have pointed to Chipotle, the operator of 1,100 restaurants, as a brand with the most pricing power in the restaurant industry, especially as recent marketing campaigns have focused on the quality of its food. 


Securities analyst Jeff Bernstein at Barclays Capital said in a research note May 6 that Chipotle already took a 4-percent increase in March in its Pacific market, and will likely roll out increases through other markets in the third quarter this year. Bernstein noted that Chipotle likes to keep its menu prices lower than other fast-casual competitors like Panera and Qdoba, and prefers to keep away from core items like the burritos and take price on beverages and side items. 


At Ruth’s Hospitality, taking price increases at a time when many consumers are not yet back to enjoying premium meals is a bit tricky, executives said. 


“I like being the least-expensive house in the wonderful neighborhood,” Michael O’Donnell, chairman, chief executive and president of Heathrow, Fla.-based Ruth’s Hospitality Inc., said during an April 29 conference call. “The idea that we can keep our pricing down is something that we think has been contributing to the increase in traffic. … Having said that, … if we’re to see sort of increasing, rising commodity costs past what we think those opportunities are, then we would rethink that.”


O’Donnell said the chain holds pricing power, especially in certain markets, like New York. There, the chain already has increased certain prices, and O’Donnell said other markets would be evaluated separately. 


Contact Sarah E. Lockyer at [email protected].