Smaller Portions or Higher Prices?

By Kym Klass, Montgomery Advertiser, Ala.

Jun. 23–Faced with higher and higher food and beverage costs, restaurants in the River Region are struggling to keep menu prices reasonable and still stay in business.

Food and beverage costs account for about a third of restaurants’ expenses, according to the National Restaurant Association. Since restaurants only average a profit of 4 percent to 6 percent, when food prices go up, the impact on the bottom line is dramatic.

Tough choices must be made to protect those profit margins: raise prices, serve smaller portions, or get creative with their menus.

The least palatable of those options is higher prices, although menu prices are beginning to creep upward at some eateries. But area diners aren’t getting short-changed when it comes to heaping helpings of their favorite dishes.

“I would personally say the restaurants are eating up the excess cost,” said Layne Lunn of the Alabama Restaurant Association. “How long term is that going to be? You can’t say.”

Think globally You have to think globally to untangle the reasons behind rising food costs. From flour and rice to milk and beef, world food supplies are decreasing at the same time demand is climbing. And don’t forget to factor in soaring energy costs and the expanding emphasis on ethanol production. The surging bio-fuel industry gobbled up 27 percent of the nation’s 2007 corn crop and will use up 30 percent of the corn crop by 2012, according to the government.

Food prices in the U.S. have gone up almost 5 percent during the past year, the highest annual increase in almost 20 years, according to the Labor Department. Dairy and egg prices have seen double-digit price increases.

For 2008, the consumer price index for all food is projected to increase 4 percent to 5 percent — almost twice the inflation rate of about 2.6 percent, according to the Labor Department.

Pass it on With no immediate end in sight, many restaurant owners have simply passed the higher costs on to customers.

At the Texas Roadhouse on Eastchase Parkway, customers have seen a small 1 percent hike in prices, but no change in portion sizes or service.

“Our stores are not cutting back on portion sizes or scaling back on labor,” Travis Doster said. “Our mission is legendary food, legendary service, and we don’t want to cut back.”

Adding half a percent to both the cost of food and beverages doesn’t come close to covering the restaurant’s higher expenses.

“I don’t know anyone who would be able to do that,” Doster said. “You’d be changing (the prices) almost daily.”

At Shashy’s Bakery and Fine Foods on Mulberry Street in Montgomery, owner Jimmy Shashy is doing just that. Shashy raised prices about 5 percent. But for his daily specials, he’s using a flexible plan that uses the price of food that week to set a price for the dish.

His customers have understood.

“We have not seen a drop off in customers,” said Shashy.

Sharron Cobb raised prices at her business, Rocky Mount Bed and Breakfast in Prattville, last winter when gasoline prices began to climb. Since then she’s seen a 10 percent drop in business.

“I think some of all that is that people are just watching their money,” Cobb said. “We are a luxury, and I think people are staying home more.”

At Capitol Inn in downtown Montgomery, the price of a lunch buffet went up just last week — from $7.50 to $7.99. And a glass of tea now costs $1.25 — a quarter more.

General manager Jim Bohannon said he held off raising prices for months — a luxury his business was not afforded by suppliers.

About eight or nine months ago, drivers making deliveries to the Capitol Inn started charging the restaurant a surcharge, forcing Bohannon to reorganize his storage room and reduce the number of deliveries.

“Vegetables, milk, all of those things have gone up,” Bohannon said. “Fuel is not the only thing, but certainly does drive the increase in cost of the food and so forth.”

No action — for now Some eateries are still trying to ride out the trend by using a variety of strategies that may or may not be evident to their customers. They buy more local fresh fruit and vegetables, remove some of the more expensive items from their menus, or use economies of scale to lessen the impact of commodity price swings.

Restaurants like the Olive Garden and Red Lobster have an advantage over their smaller competitors. Their parent organization, Darden Restaurants, makes large-scale purchases of commodities, which helps the company manage and control food costs so the individual restaurants don’t have to pass on every price increase on to their customers.

“With our supply chain, we can leverage our scale and help keep our costs down,” said Darden spokeswoman Phyllis Hammonds. “Guests just don’t want to be experimenting these days when every dollar counts.”

The parent company of Texas Roadhouse bought earlier this year at livestock markets about 25 percent of the beef it estimated it would need this year. The company also cuts all its meat, which helps it control yield and waste.

Those strategies have helped the chain avoid the wildly fluctuating beef prices of recent months. But officials do recognize that if the trend continues, that could change.

“We’re buying it and cutting it — it’s not coming from another manufacturer who is not passing on the price to us,” spokesman Doster said. “We are being more efficient because we are using all of the beef.

“This is … really the worst economic time in casual dining in 25 years,” he said. “We’re very cognizant of rising prices. We will come out of this.”

Phyllis Tampling, an owner at Jim’s Restaurant on Memorial Drive in Prattville, would rather absorb the higher costs than pass them along to her customers.

“Naturally, with the food prices going up, we’re not taking as much profit as we did,” Tampling said. “We should raise the prices, but we’re not going to. It’s not to say that we’re not going to at some point, but we are holding off as long as we can.”

The restaurant is known for its home-style cooking and its customers are used to getting lots of food for their hard-earned bucks. That won’t change, Tampling said.

Lunn of the Alabama Restaurant Association calls that smart business, especially when the industry is worried about a worsening economy.

“It is slowing, but it was such a fast-pace growth that I don’t know if you should call it a slow-down or a correction in the economy,” she said.

But state officials hope that fast pace of living will continue to pull customers into restaurants big and small.

“It’s our lifestyle — we’re all working mothers, fathers, and there’s not the time — people don’t take the time to cook,” Lunn said.

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