Restaurants Poised to Raise Menu Prices

On November 4, 2011, in Restaurant News, by Maggie Ernst

As Americans become accustomed to paying more for food at grocery stores, restaurants are poised to raise their prices, Bloomberg reported recently. U.S. consumers paid 2.6 percent more at eateries in September than last year, while food prices at supermarkets were 6.2 percent higher, according to the Bureau of Labor Statistics’ monthly consumer-price index.

Inflation for eating at home has accelerated faster than dining out during the past year, reaching its widest gap since 1990 last month. Commodity costs account for a much larger share of expenses at supermarket than at eateries, so there has been a “delayed pass-through” as restaurants absorbed some of the increase, Dean Maki, chief  U.S. economist at Barclays Capital, said.

Restaurants have some confidence consumers can afford to pay more because of moderate growth in employment and income. Employers added 103,000 workers in September, the Labor Department reported, more than forecast.  Personal income rose at an annual rate of 4.4 percent in September, marking 21 months of yearly growth, Bureau of Economic Analysis data show.

Meanwhile, restaurants monitor the differential between food costs at grocery stores and restaurants in order not to be too aggressive with menu pricing, Jeffrey Bernstein, an analyst with Barclays Capital, said.  This gives companies “more credibility” in raising prices, particularly as commodity inflation puts pressure on margins, he said.  “If people go to the supermarket and see the core items they’re purchasing are on the rise, then they are less likely to be surprised if restaurants are raising prices as well,”  Bernstein said.

Fast-food chains may have more success because their prices are closer to food-at-home than full-service restaurants, said Sara Senatore, an analyst at Sanford C. Bernstein & Co.  Faster inflation for food at home compared with food away form home “might allow for additional pricing actions” at McDonald’s, Chief Financial Officer Peter Bensen said recently.  This would help the company offset commodity costs that rose 8 percent in the three-month period ending September 30, he said.  McDonald’s  has changed its menu prices twice so far this year–a 1-percent increase in March and a 1.4-percent bump in May, Bensen said. Domestic sales grew 4.4 percent in the third quarter, McDonald’s reported.

Price increases at Chipotle of about 3.5 percent in the quarter ending September 30 were not met with “any noticeable resistance,” Chief Financial Officer John Hartung said.  Denver-based Chipotle does not plan further changes, he said. Sales at Buffafo Wild Wings and Texas Roadhouse are up 5.7 percent and 4.4 percent at company-owned restaurants in their most recent quarters.  Strong sales should give these chains “more confidence” in making price adjustments to offset commodity-cost inflation, Bernstein of Barclays said.  System-wide sales at Panera Bread are also up and the company raised prices by about 2.5 percent and plans another increase of 3.5 percent in the fourth quarter.

Restaurants may take creative approaches to effectively raise prices, such as reducing promotions, offering higher-end specials, or emphasizing certain menu items, said Todd Hooper, a restaurant strategist.  Restaurants need to “think very deliberately” about making adjustments to avoid driving away their core base of diners, he said. “They can’t be too aggressive.”