Newsletter September 2012 - Thornhill Training

By Thornhill Training

Drought may have long-term impact on wholesale food, menu prices

Posted by Rachel Salabes on August 13, 2012 1:20 PM

The ongoing drought that is affecting crops in more than half of the United States will likely accelerate wholesale food price inflation, the National Restaurant Association says.

According to Hudson Riehle, senior vice president of the National Restaurant Association’s Research & Knowledge Group, one-third of a restaurant’s sales typically go toward food purchases, so wholesale food costs are a big concern for many operators. In fact, he noted, restaurateurs rank food costs as the second biggest business challenge.

Riehle said NRA research found wholesale food prices in June stood 2.2 percent above their year-ago levels, and have remained elevated because of continuing gains over the last two years. In 2011, wholesale food prices were up 8.1 percent, the highest annual growth rate in more than 30 years, on top of a 4.9-percent gain in 2010. This year’s drought, he stated, will only put additional cost pressures on food.

“With food costs rising, restaurant owners are adjusting their cost management strategies while managing consumer expectations of value at the same time,” he said. “With a typical restaurant averaging pretax profit margins of 3 percent to 5 percent, operators will have to manage their escalating input costs to ensure those margins remain viable.”

He added that the $632 billion a year restaurant industry is made up of more than 70 unique segments, which results in food costs affecting restaurants in each of those segments differently. For example, a steakhouse would feel the impact of higher beef prices more than an ice-cream shop would, and a pizzeria would be more sensitive to the cost of flour and cheese than a seafood grill-type concept would.

While the overall economy is improving, it is not yet back to prerecession strength, Riehle said. U.S. employment growth remains modest, which also is hampering growth in consumers’ personal disposable income – always a strong correlation to restaurant sales. As a result, consumers remain extremely value-conscious.

Because of consumers’ tentative spending habits right now, restaurateurs are not necessarily anxious to raise their menu prices.

“Raising menu prices in this moderate economic climate is always given careful consideration by restaurant operators, especially when consumers’ cash-on-hand growth remains constrained and the operating environment is so competitive,” Riehle said.

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