We’ve been talking a lot about the recent good news from the National Restaurant Association for the upcoming year. With this good news comes some challenges for the restaurant industry. Commodity costs have been increasing pretty drastically over the last 5 years, which “they” are saying should slow down, but with the implementation of the affordable care act and the proposed increase in minimum wage it’s pretty much unavoidable that a higher than normal price increase is due for customers.
I read an article today that Walmart is planning on increasing it’s wages over the next couple of years. Being that they are the largest single employer in the US that puts pressure on everyone else. As the labor market tightens up it gets more difficult to hold on to good talent. Also seeing more an more press about getting rid of tips which will also cause a significant increase.
What are you doing at your operation to keep costs down? Are you looking at other ways to preserve margins with all these other margin killers coming down the path? Let us know what you are doing.
I have copied an article below from Daily Finance below that quotes some of the larger national chains about their price increase plans.
The restaurant industry is starting to bounce back, but escalating costs across a variety of line items are forcing some chains to consider larger than usual price hikes later this year.
One of the meatier morsels in Cheesecake Factory’s (CAKE) quarterly report last week was that it was considering a larger menu price increase than its historical average of 2 percent.
“Looking forward to the second half of the year, while we’re always trying to balance capturing guest traffic and offsetting cost pressures, protecting our margins is certainly a priority and we would consider taking more pricing than normal or more than what we have done historically later in the year in light of the cost headwinds, particularly labor wage rates,” Cheesecake Factory CFO Doug Benn said during its earnings call.
Higher group medical claims find health insurance expenses moving higher at Cheesecake Factory, but the chain is bracing the market to see it as the new normal.
“We see other restaurant operators that look like they are willing to take a little more price than what they normally have,” Benn conceded. “We believe restaurant companies including us will have to consider more pricing in this cost environment as the pace of the economy accelerates.”
Restaurants Are Doing Well, Thank You
This is shaping up to be a great year for the restaurant industry. The country’s improving employment rate finds more people with less time to cook meals at home as well as more of the means to eat out. The drop in gasoline prices is also putting more disposable income in folks’ pockets, so they can now afford to hit eateries more often.
The National Restaurant Association sees a record $709.2 billion in industry sales this year, up 3.8 percent from 2014. There will be a total of 14 million jobs in the industry this year, up 3.2 percent from a year earlier. That’s the good news. The bad news is that the association also sees costs moving higher this year. Between costs related to the rollout of the Affordable Care Act and the potential increase of minimum wages, labor costs are on the rise. Somebody has to pay for these developments, and they were just seated in a booth by the window.
Some companies didn’t wait until 2015. Chipotle Mexican Grill (CMG) kicked in with its first substantial menu price increase in three years in May of last year. Its move was in response to a sharp uptick in costs.
There could be some relief on that front this year. Wholesale food prices may have climbed 25 percent over the past five years, but the association sees pork and dairy prices stabilizing in 2015.
Chili’s, Ruby Tuesday See the Same Thing
Chili’s parent Brinker International (EAT) saw commodity prices spike in its latest quarter, fueled by larger-than-anticipated upticks in the prices of burger meat, avocados and cheese. Even an industry laggard — Ruby Tuesday (RT) — finds itself having to pass on the growing costs of doing business to its consumers.
Ruby Tuesday recently updated its guidance on food inflation. It sees food costs climbing 2 percent to 2.5 percent, up from an earlier outlook that was slightly lower.
“We want to make sure that we maintain our value and propositions,” Ruby Tuesday CFO Jill Golder said in its most recent earnings call. “We don’t expect to price at the same level that you’ve probably seen some of the competitors [pricing at], but perhaps some incremental pricing in the 1 percent range.”
In other words, Ruby Tuesday sees the competition jacking up their prices. It’s going for a more modest uptick, but it’s still an increase. So, yes, don’t be surprised if your tab at the end of the meal is larger than you remembered. You’re not alone. Everyone will be paying more.