Feet to the Fire
Food prices should settle down; it’s the cost of cooking that looks more troublesome.
By Staff -- Restaurants & Institutions, 1/1/2006
R&I’S ANNUAL FORECAST OF THE YEAR AHEAD: Finances |
The takeout trend may be a boon to Steak-Out Char-Broiled Delivery locations, but packaging T-bones and baked potatoes is costing the company more than ever.
High petroleum prices have an impact on more than gas tanks and pocketbooks. They also increase costs for plastics, made of oil resins. That means everything from plastic soufflé cups to spoons costs more.
Steak-Out serves its specialty sweet tea in a 32-ounce plastic cup. Two years ago, cups cost the company 9 cents each. Now Steak-Out pays about 14 cents, a 55% increase, says Aftan Romanczak, director of research and development and purchasing for the Norcross, Ga.-based chain.
Commodity prices—including energy as well as basic foodstuffs—can make or break a foodservice operation’s bottom line. Higher natural gas and heating-oil prices hurt many restaurants and increased the costs for their suppliers, but some relief has come from decreased expenses for some food items, including chicken and beef.
Prices on disposable plastic goods have risen 10% to 12% over the past year, says Joe Pawlak, vice president of Chicago-based researcher Technomic Inc. To account for higher gasoline costs, many suppliers also have added fuel surcharges for deliveries.
Oil prices moderated during the second half of 2005, a pattern that industry analysts hope continues in the new year, freeing up disposable income and decreasing the cost of doing business.
“As soon as gasoline prices start to moderate, a [distributor] trying to stand apart from the competition will take off its fuel charge. The others will have to follow,” Pawlak says. “But if gasoline is going to cost $2.25 a gallon or above, we’ll continue to see fuel charges.”
Rising natural-gas prices also mean an overhead hit for foodservice. The charge for keeping dining rooms warm and burners lit was predicted to jump 40% in the fourth quarter of 2005, compared with year-earlier rates, according to David Palmer, restaurant analyst for UBS in New York City.
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In the first quarter of 2006, natural gas is expected to cost $16.12 per thousand cubic feet, 47% above first quarter 2005, according to the U.S. Department of Energy. Natural-gas costs account for 2% of the average casual-dining restaurant’s sales, Palmer says.
“If you’re using linens, laundry-service prices are going up,” Pawlak says. “Not only for the gasoline for the truck, but in many cases the dryers run on natural gas.”
Electricity prices also are expected to rise across the board. Output from coal-fired power plants is predicted to climb from $1.54 per million BTUs in 2005 to $1.60 per million BTUs in 2006, according to the U.S. Energy Information Administration.
Brighter News on Food Costs
More encouraging projections concern prices for poultry and beef, which are expected to decline. Expenses for hamburger were flat in 2005, compared to 2004, UBS’ Palmer says, adding that they are expected to decrease 5% to 10% in 2006.
The U.S. Department of Agriculture (USDA) remains unsure about prices for broiler chickens, projecting that they could rise as much as 3.7% or drop as much as 3.4% this year, compared to 2005. Broiler prices fell 3.6% in 2005, according to the USDA.
Similarly, USDA projects turkey prices to rise as much as 2% or drop as much as 4.8% in 2006, after increasing 4% in 2005.
Coffee costs are expected to continue their recent rise as a result of hurricane damage to processors and ports in the Gulf region. Producer prices are expected to rise about 3.6% in 2006, after rising that much last year, according to USDA projections.
Coffee commodity costs increased 42% in 2005 compared to the previous year, Palmer says.
Seattle-based Starbucks, which in October 2004 raised prices 3%—or an average of 11 cents per cup—for the first time in five years, has indicated it doesn’t expect to increase prices in 2006.
But “if commodity inflation continues, Starbucks’ input costs could begin to rise at a faster pace,” Palmer says.
Nicole Miller, restaurant analyst for ThinkEquity Partners in Minneapolis, says coffeehouses may be hit hard by rising bean costs. “Restaurants can easily increase their menu prices at the rate of inflation, but if the coffee guys did that we’d be paying $10 for a cup of coffee,” she says.
Takeout Tendencies
Even a return to $3-a-gallon gasoline prices is unlikely to derail consumers’ growing reliance on takeout service, industry analysts say. The desire for convenience trumps the cost of getting to a drive-thru or casual-dining pickup counter.
“Takeout is going to continue to be strong. One reason is to get away from the tipping,” says Joe Pawlak, vice president at Chicago-based researcher Technomic Inc. “And many times customers want to have a nice meal—or they really have the taste for wings—but they just don’t have the time.”
Expanded takeout services have become necessities for many casual-dining concepts. The Cheesecake Factory has added curbside takeout service to all of its locations, after seeing an increase in demand last year, says Howard Gordon, senior vice president of business development and marketing for the Calabasas Hills, Calif.-based chain.
Eden Prairie, Minn.-based Famous Dave’s Legendary Pit Bar-B-Que has seen its off-premise sales rise to 31% of business, up from 23% less than three years ago, says Lane Schmiesing, Vice President of Marketing.
A Technomic survey finds that 51% of heavy restaurant users and 36% of all consumers say they want more full-service restaurants to offer takeout and delivery.
The Price of Freshness
Fresh produce likely will continue to be high on consumers’ lists of menu demands this year, but cost also is likely to rise.
Prices for fresh fruits are projected to grow 3.5% in 2006, according to the U.S. Department of Agriculture. That’s on top of what USDA says was a 3.6% increase in 2005. Fresh vegetable prices are expected to rise 3.6% in 2006, matching last year’s increase.
One in four adults surveyed for R&I’s 2005 New American Diner Study said that greater availability of healthful menu choices would lead them to dine away from home more often. However, Dublin, Ohio-based Wendy’s International’s decision in November to drop the fresh-fruit cup menu option it added 10 months earlier hints that consumers may not always be true to their nutrition goals.
It isn’t expected that foodservice will renege on plans to increase fresh and healthful menu choices. Orlando-based Darden Restaurants recently opened its fifth Seasons 52 location, a concept based on fresh, seasonal foods and entrées with 475 calories or less. Schools, colleges, hospitals and corporate-feeding operations have revamped menus and vending selections to include lower-calorie and reduced-sugar options. And salads show no sign of declining as diner favorites from quick-service to white-tablecloth venues.
The New American Diner Study finds that 56% of adults say they are “making a sustained effort to eat healthy at restaurants,” and 35% say nutrition considerations influenced their meal selection during their most recent restaurant visit.
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