Restaurant chains expect to raise menu prices

A vast majority of restaurant chain operators said they expect to raise menu prices during the balance of the year, according to a new survey by SpenDifference.

Denver-based SpenDifference found that more than 90 percent of respondents said they plan to hike menu prices this year, projecting an average increase of 1.6 percent. One-third of respondents said they plan to raise menu prices 2 percent or more.

The operators’ sentiments contrast with the first quarter of 2013, when restaurant chains largely resisted raising prices. SpenDifference completed the survey the week of May 13 and found that 64 percent of respondents kept prices flat or raised them only 0.5 percent in the first quarter.

SpenDifference said respondents were evenly split among full-service and limited-service brands, and that chains represented in the study were as small as fewer than 100 units or as large as more than 800 locations. The company said just under 50 restaurant chains participated in the survey.

Chain executives polled for the supply chain consulting firm’s survey also projected an average same-store sales increase of 2.2 percent for 2013, which would mark a 25-percent increase over their collective results from SpenDifference’s survey last year. Respondents predicted that sales gains would come mostly from price increases, with stronger traffic accounting for only about 25 percent of the growth.

“From the data and discussions with our members, it appears that they believe consumers may be more willing to accept higher prices, especially with the economy strengthening,” Brad Moore, the firm’s senior vice president, said in a statement. “But even the larger price increases they are planning this year will only cover about 75 percent of expected menu inflation, which they forecast at just under 2 percent.”

Through the first-quarter earnings season, chains have addressed whether they will raise menu prices in 2013, but no real consensus has emerged for the industry as a whole.

McDonald’s disclosed during a conference call for its first-quarter earnings, in which domestic same-store sales decreased 1.2 percent, that it raised menu prices by about 0.6 percent during the first quarter, replacing about half of a 1.2-percent increase from the prior year that was rolling off.

“The reason for that is because consumers are very sensitive to price,” chief executive Don Thompson said during the call. “We don’t have the inflationary environment or the consumer sentiment environment to go out and take the same kind of price increases that historically we did. We do believe that this is not a structural kind of a change; we think that it is based upon the economy at this point.”

Buffalo Wild Wings has dealt with commodity pressures due to volatile chicken wing prices over the last several years. The company’s first-quarter same-store sales rose 1.4 percent at company locations and 2.2 percent at franchised units, despite food and labor costs driving a contraction in margins of more than 3 percent.

The Minneapolis-based chain’s biggest cost control initiative this year is the forthcoming roll-out of a new pricing system that will price wings per portion rather than by individual wings. The brand has yet to determine whether it will raise prices when the new menu goes systemwide in July. Buffalo Wild Wings’ prices were 4.7 percent higher than last year’s menu prices in the first quarter, and that level will roll off to 2 percent higher and 0.2 percent higher in the third and fourth quarters, respectively.

Denver-based Chipotle was similarly noncommittal about raising menu prices this year in its first-quarter earnings call. Higher food costs squeezed Chipotle’s margins more than 1 percent in the first quarter, chief financial officer Jack Hartung said, but commodity costs were stabilizing, and the brand is still considering whether to raise any prices — which would not happen before late summer or fall in any event.

In Krispy Kreme Doughnuts’ first quarter, the chain reported an 11.4-percent increase in same-store sales at company-owned locations. Only 3 percent of that gain came from higher menu prices, officials said.

The 6.6-percent increase in same-store sales for Ruth’s Chris Steakhouse in the first quarter included a 2-percent menu price hike that occurred during the period, officials for parent company Ruth’s Hospitality Group said. Yet they added that Ruth’s Chris would try to mitigate the need for further menu price increases in the near future.

“While we believe we have additional pricing power, we will continue to be thoughtful and prudent, with respect to future increases,” chief executive Michael O’Donnell said. “It is still our strategy to focus on growing sales primarily through traffic to maintain our value orientation.”

Ruth’s also said it had contracted 40 percent of its beef needs for the remainder of 2013, at prices that averaged 4 percent to 6 percent above last year’s prices.

Nearly three-fourths of respondents to SpenDifference’s survey said renegotiating commodities contracts was their preferred cost control strategy, while 60 percent said they would promote limited-time offers or core menu items with more favorable margins.

“To protect or improve their margins, operators need to look beyond menu price increases and contract negotiations and find other ways to save money in their supply chains,” Moore said.

Contact Mark Brandau at [email protected].
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