Many restaurants expecting to raise prices

april 20,2011

Stacy Finz, Chronicle Staff Writer

The cost of beef has gone through the roof, coffee prices are at a 13-year high, and even produce grown right here in California is more expensive than usual.
Grocery prices rose by more than 1 1/2 times the overall rate of inflation in 2010, according to government statistics, and economists predict that it will be even worse this year. For months consumers have grappled with higher prices at the supermarket, while restaurateurs pulled out every kitchen trick they could to absorb food inflation costs.
Well, the party is over. Experts say restaurant-goers can expect to see as much as an 8 percent increase in their checks.
And that may not be enough to keep the big chains alive, let alone the small independent eating places. Already suffering from flagging sales and low profit margins, record-high food prices – brought on by low supplies of corn, soybeans and wheat – could be the coup de grace for many restaurateurs. A number of chains, including the Texas parent company of Fuddruckers and Koo Koo Roo Chicken, filed bankruptcy last year; Sbarro Inc. is expected to file for bankruptcy protection as soon as this week. Meanwhile, El Pollo Loco Inc. and Perkins & Marie Callender’s Inc. have been struggling with debt problems.
S.F.’s higher costs
But nowhere in the nation have restaurants been harder hit than in San Francisco, said Frank Klein, a national restaurant consultant in Palo Alto. Besides the problems plaguing the industry during a recession, restaurateurs here are further burdened with the city’s payroll tax, mandatory healthcare subsidies, sick-leave pay and a higher minimum wage, which must be paid to workers in addition to their tips – not always the case in other cities.
“Now add in the spiking cost of food,” Klein said. “They have nowhere else to turn but to raise prices, especially if they want to continue on these slim profit margins.”
On average, independent restaurants on the West Coast made a profit last year of 5.87 percent, according to Sageworks Inc., a North Carolina financial analysis firm that collects data for privately held companies. Typically it should be 8 to 12 percent, Klein said.
If restaurateurs keep facing rising food costs, they’ll have to pass it on to consumers, he said, predicting that diners will see a 5 to 8 percent increase in their tabs in the upcoming months.
Will Boland, a senior analyst at Sageworks, agreed that it’s inevitable, especially for the Bay Area’s predominantly small, independent restaurants.
“They’re going to be reluctant to do it because they still want to get customers in the door,” he said. “When you have a triple whammy like the unemployment rate, gas prices and grocery prices, eating out is certainly a luxury. But what other choice do restaurants have?”
Peter Osbourne, owner of three San Francisco restaurants near AT&T Park, said he held out for three years but had to make changes, including a price increase, to keep up at MoMo’s. The wholesale cost of mahi mahi rose from $5.50 to $10 per pound, he said, and he can’t even consider putting halibut, which has jumped to $15 per pound, on the menu. So he’s raised prices of his seafood dishes 10 percent.
“There’s only so much you can manipulate portion size and abandon premium items,” he said.
With beef prices skyrocketing – more than $4 a pound in the grocery store – he’s had to do away with his “recession buster,” a three-course prime New York steak dinner for $29. And don’t get him started on the price of produce.
“A case of fennel went from $25 last spring to $50,” he said. “Eggplant is up from $30 a case to $51.”
Greg Eng, co-owner of Trueburger, a small burger joint in Oakland modeled after New York’s Shake Shack, said he’s holding firm even though his beef prices are 20 percent higher than when he opened in January 2010.
“If we raise our prices even 10 cents, our customers will notice,” he said. “Our concept is quality burgers for a good value. If we veer from that concept, it will hurt us.”
He says his profit margin has slumped somewhat, but he’s trying to offset it with volume, staying open longer to make more sales.
But others, even fast-food restaurants that are able to negotiate better beef prices because they buy in bulk, are seeing a 15 percent increase in their wholesale cost of meat and may not be able to hold back from upping consumer prices.

Corn more scarce
Because corn is also used for ethanol, demand has grown so great that feed costs for farmers and ranchers are being passed on in both the wholesale and retail markets. Last year’s soybean crop fell short of government projections and wheat prices went up 20 percent after Russia’s crop was destroyed by drought and fire, causing the top-producing country to ban exports of the grain.
Those three commodities, plus soaring energy costs, are wreaking havoc on the food supply.
Douglas Keane, chef and co-owner of three Healdsburg restaurants, said it would be tough to raise prices at his four-star Cyrus given that the average check runs about $130 a person without alcohol. But he’s definitely made concessions, adding more inexpensive meat cuts to the menu.
“You’d be surprised how many people go for the pork cheeks instead of the tenderloin, when it’s cooked really well,” he said.
He’s also gotten creative. For years the restaurant has given its diners an “over-the-top” gift-wrapped brownie as a parting gift. The brownies were costing the restaurant 90 cents apiece, Keane said.
“We cut the brownie in half and no one even noticed the difference,” he said. “We, on the other hand, save $8,000 a year.”
He’s also cut the portions of cow and goat butters he puts on the table. If the staff sees the butter dishes dipping low on diners’ tables, they’ll immediately replace them. But avoiding the waste has saved an additional $6,000 a year.
Cafes and coffeehouses are also trying to weather the storm. Peet’s Coffee & Tea, a publicly held Bay Area company, has already raised the price of most of its coffee drinks 10 cents in response to a 35 percent rise in the cost of green arabica beans. There’s more demand than supply. But consultant Klein warned that raising prices is tricky.
Risky increases
“Consumers have psychological benchmarks,” Klein said. “They won’t pay more than $1.75 or $2 for a small cup and no more than $2.75 for a large. If you charge more than that you won’t get them in the door. If you don’t get them in the door, you can’t sell your muffins and ham and cheese croissants. It’s a real problem.”
Mitch Rosenthal, one of the owners of San Francisco’s Town Hall and Anchor and Hope restaurants, agreed that upping prices is risky.
“We generally don’t knee-jerk this quickly,” he said. “I’m not saying we’re never going to raise them. If the food prices we’re seeing are sustained for any length of time, of course restaurant prices will have to go up. But for right now we’re hanging tight.”

Source: http://www.sfgate.com/cgi-bin/article.cgi?f=/c/a/2011/04/02/BU861IMH4C.DTL&tsp=1

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