He Said, She Said: Food Costs

Vin McCann

Dealing with a still-weak economy and rising commodity prices, restaurants in all segments are currently stuck between a rock and a hard place. Climate change and violent weather have caused production problems around the globe, while worldwide demand is being driven by emerging markets and keeps the need on the rise. Food commodity prices are at a 30-month high. The Consumer Price Index for food rose 2.7% last year and is expected to climb 4% or more this year. Wholesale prices for coffee, beef, pork, and produce are all expected to jump — beef as much as 12%, on top of 10% last year. No product category is stable, and all this before the May flooding. How can restaurants preserve their value formulations in light of these pressures? Surely they can’t eat the increases, but can they raise prices in such a tentative economy? Are we entering the age of the $5.00 cup a joe?

Julia Heyer

It feels like there has been a squeeze since the economy fell of a cliff in 2008. Then again, have you been to Starbucks, Stumptown, or any of the local coffee specialists lately? The $3.50 coffee and $4.75 latte are a reality today. I am sitting in my mobile office (today located in a Berlin street café) and pondering ordering the “Fresh Morning Breakfast” that includes a bread and pastry basket, two types of cheese, cold cuts, smoked salmon, herbed quark (a German dairy delight, not the sub-atomic particle kind), a boiled egg, and jams for the seemingly ridiculously cheap €5.50 ($7.75). I can barely get a coffee and a muffin for that in NYC! This example makes it easy to ignore that the pinch is real, especially considering my country folk in general and the famously grumpy Berliners in particular aren’t the type of people that operate restaurants to lose money. Must be ‘German engineering’ — the proverbial superior efficiency skills.

Vin’s Response

Have you been to the grocery store lately, assuming you can afford the gas to get you there? Organic green beans at $5.99 a pound. Food inflation is real; at least all the experts believe it is, which parenthetically makes me want to reconsider my outlook. Do the Germans know something we don’t? Seriously, what does a typical independent operator (one without the aptitude or skills to engineer an S-class Mercedes-Benz) do? Raise prices, cut portions, change product specifications, change the menu, all of the above? It’s a minefield and the wrong step or combination can strangle a restaurant’s sales and decimate its earnings.

Julia’s Response

In New York, I can’t even afford a car, so I need these green beans to help me power my bike to take me to the grocery store. Yes, costs are up. In my eyes it goes back to what we spoke about last time in the discounting & marketing realm: creating guest loyalty and value not by driving prices down, but the quality of a restaurant’s offering and experience up. Definitely MUCH easier said then done. The upside is that from the grocery stores (whether we take a car, bike, or walk there) our guests know that prices rise and will hopefully not think restaurateurs are looking to gouge them with price increases, especially if operators tell the right story to appeal to their guests: “healthy” (those beans you mention are organic after all); “local”, other specialized niches.

Vin’s Final Word

I believe you are right on the mark, but the only upside I can see in this trend is that the high-end operators may be insulated from what well may be another potential industry sales dip.

Julia’s Final Word

I can envision that. With only so much income to go around there may be a decrease in the visits to restaurants, since more costs for food overall, be it grocery, restaurants, take-out or home-meal-replacement, need to be covered with limited discretionary income. Will we see more price wars (especially in the fast-food realm) to drive guest traffic, at the expense of the smaller and independent operators across the country? Sadly, this is more of a rhetorical than actual question…

Vin’s Final Final Word

Is it?