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With costs rising, restaurants debate price increases

ATLANTA — It's hard out there for restaurateurs.

In what is — they hope — the tail end of the worst slump in decades, restaurant chains big and small are wrestling with higher prices for key ingredients and crops. The costs of corn, wheat, pork, beef and chicken have risen and are expected to jump more next year.

The big question: When or even whether to pass along those costs. Sure, charging more could help protect profits — but it could also startle customers already shocked by the economy.

Restaurants' choice of strategy across the country will influence where Americans eat next year, and how much they spend.

Some operators say they plan to raise prices gradually if consumers give them the go-ahead. Others want to hold prices steady and see what competitors do.

Bonnie Riggs, a restaurant analyst at the NPD Group, said the restaurant industry has suffered two years of traffic declines, the worst streak in at least 34 years. Raising prices now would drive customers away, she said.

"What has kept the industry from suffering steeper declines is restaurant operators offering really good deals," Riggs said. "They cannot pull away from that — they're going to have to wean consumers off of that gradually. If restaurant operators try to raise prices, in my view, you can't really do it right now."

Darden Restaurants Inc., the Orlando parent company of Olive Garden, Red Lobster and LongHorn Steakhouse, has raised prices about 2 percent this year. It's important to raise prices steadily and consistently instead of delaying them for years, said Andrew Madsen, Darden's president and chief operating officer. Sudden price increases can shock customers, he said.

Global factors are roiling notoriously unpredictable food markets. A drought in Russia caused wheat prices to rise, and more corn was used to make ethanol, pushing grain and corn prices up 40 and 60 percent, respectively.

Demand from China has raised the price of soybeans, a key part of animal feed. Coffee and sugar are at 13- and 30-year highs, respectively. Beef is up 19 percent this year, according to Bloomberg. Higher feed costs are also expected to push up the price of chicken.

"The market is saying it expects pretty high prices for the foreseeable future," said Darrel L. Good, a professor in the University of Illinois' department of agricultural and consumer economics.

Hedging strategies, with buyers locking in ingredient prices at set rates for a certain period, have helped some companies reduce their exposure to higher costs.

With costs rising, restaurants debate price increases 12/21/10 [Last modified: Monday, November 7, 2011 1:43pm]
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