3 Factors Affecting the Price of Commodities for Restaurants in 2014

With the exception of beef, the beginning of 2014 initially looked like it would be a fairly moderate year in terms of rising commodity costs. The last few months, however, have seen record highs in several staple commodities, causing many restaurant operators to have concern over additional inflation in the coming months. Although the U.S. Department of Agriculture forecasts that overall food inflation this year will be between 2.5% and 3.5%, sharp spikes in certain commodities may have restaurateurs looking for other options to offer on their menus and setting up strategies to control costs. Here is an overview of a few factors effecting the cost of commodities in 2014.

Global Demand Drives up Commodity Costs

So far in 2014, U.S. exports are rising and global demand is continuing to drive up the cost of commodities—cheeses, in particular, have hit record highs. For example, the price of Chicago Mercantile Exchange block cheddar cheeses is typically below $2 per pound, but has already soared to more than $2.40 a pound in the first quarter of 2014. Of course, as the climate changes and the world struggles to feed its swelling population, global demand will continue to be a major factor in the cost of commodities.

Drought and Disease Continue to Spike Commodity Prices

Drought and disease have already made their mark on this year’s commodity prices. An outbreak of PEDv (porcine epidemic diarrhea virus), which kills whole litters of piglets, recently drove pork prices to record highs. Since it takes pigs about six months to grow to slaughter weight, it is estimated that the disease will most affect pork inventory this upcoming June through September.

The drought in Brazil has spiked the cost of coffee, sugar and soy products. Coffee has been particularly effected. A drought condition known as Coraçao Negro (“black heart”) causes the beans, which are normally green, to become black and shriveled, and has already been found in some of the drier, northern regions of the country. The effects of the drought are unlikely to reflect in 2014 wholesale coffee prices but are showing in commodity costs. It’s possible that commodity coffee future prices could rise to over $3 per pound if the August harvest in Brazil is poor. Drought in California has further raised the price of feed, which, in turn, is pushing more beef and dairy producers to slaughter their cattle rather than pay to feed them.

Beef Prices Will Continue to Soar

Drought has been wreaking havoc with the price of cattle feed such as corn and hay for the last several years. Dams have dried up, pastures have withered away and with the impossibly high cost of feed, many ranchers have been left with no other option than to liquidate their herds. As a result, the U.S. cattle supply is currently at the lowest level that it has been since 1951. In February of this year, the retail value of “all-fresh”USDA choice-grade beef jumped to a record $5.28 per pound. This same grade of beef cost $3.97 as recently as 2008. Even though conditions in some parts of the cattle producing regions of the U.S. improved in 2013, it is unlikely that the cost of beef will go down anytime soon. Many ranchers may not be in a position to increase their herd numbers after so much liquidation, and those that can still have to wait the two years that it takes to bring a calf to slaughter weight.

Restaurant operators know that food prices are anything but predictable. When spikes in commodity prices occur, the best you can do is have management strategies in place that will help you control your costs and retain your profit margins.

Restaurants can Expect Beef Prices to Continue to Rise

According to the U.S. Department of Agriculture, beef prices have hit an all-time high – topping the record set in 2003 at more than $2.11 per pound for choice grade beef. While this is a record in dollar value, when adjusted for inflation the number isn’t quite so startling. These prices represent a long-term sustained inflation on beef and veal prices that won’t end any time soon.

Factors Influencing Rising Beef Costs

There are a number of factors that have been contributing to the rising cost of beef over the last several years. The most obvious is the unusual weather patterns that have affected the ability of farmers and ranchers to be able to provide enough feed for their herds. Sustained drought last year made the production of corn difficult. It also caused many ranchers to sell their cattle because they couldn’t come up with enough grass or water on their land to sustain the herd.

This year the opposite problem is occurring in many parts of the Corn Belt, wherein they are getting too much rain to get the crop planted. The fact that many ranchers have been forced to significantly reduce their herd numbers, or worse, sell out completely, has also contributed to the rising cost of beef, as quite simply, there is no longer as much beef on the market as there used to be.

Given that it takes about two years for a cow to be old enough to go to market, it will take ranchers some time to be able to build their numbers up again, assuming weather and economic conditions permit the ability to do so. As a result, the cost of beef is projected to continue its rise well through 2016.

What Rising Beef Costs Means for Restaurants

A major issue for restaurants is the fact that their menu prices aren’t rising in-step with the increasing cost of beef. As a result, profit margins are much thinner than they once were. This puts restaurant owners in a tough position, given the fact that increasing your establishment’s menu prices typically doesn’t go over well with your consumer base. As a result, restaurateurs are having to get creative to make up the difference in other ways.

How Restaurants are Managing Rising Beef Costs

One obvious way to deal with the rising cost of beef is to simply rely more heavily on alternative protein sources such as chicken or pork, which are typically much cheaper than beef and veal. Aggressively promoting these menu options allows a restaurant to keep menu prices fixed while still receiving a decent profit margin.

Choosing less expensive cuts of beef is another option some restaurants are resorting to in order to close margins without increasing menu prices. Working with beef suppliers to ensure that the measurement specs for a cut of beef are as accurate as possible and looking for other ways to reduce cost such as eliminating packaging are methods that are also helping restaurants address the inflating cost of beef.

One positive in all of this is that the higher cost of beef is tempering its demand, which ultimately will help bring things back into balance. Until the time at which beef prices level out again, however, restaurants are going to have to keep looking for creative strategies to manage the rising cost of America’s favorite meat.

Adjusting Your Menu Prices to Reflect Rising Costs: Is There a “Sweet Spot”?

According to the National Restaurant Association, menu prices are projected to inflate this year by 2.7% across the industry due to the increasing costs of wholesale foods. Since price is by far the most important factor determining a restaurant’s traffic, this creates a challenge for restaurateurs. They have to increase their prices to cover their costs, but to do so across the board would be suicide.

Instead, restaurant owners need to be selective about their price increases and take steps to identify where the ‘sweet spot’ lies in terms of a customer’s sense of value about buying a meal at their establishments.

 So What’s the Menu Price ‘Sweet Spot’?

In an effort to determine what price points would bring consumers back to restaurants, the NPD Group recently conducted a study examining the relationship between a customer’s level of satisfaction and the amount of money they spent on their check. The measures of satisfaction were affordability, good value for the money, and intent to return to the establishment again. The results of the study were revealing, showing that there are, in fact, some ‘sweet spots’ in the price points where customers feel the most satisfied.

For the fast casual dining sector, this sweet spot sits at about $9-11 for a dinner time meal. Surprisingly, the results for regular casual dining establishments were more mixed. The study showed that while over 35% of consumers were paying more than $17 per dinner, their results showed that they would be more ‘satisfied’ with the value of the meal if it were between $10-13.

This difference between where a customer would feel satisfied with the value of their meal versus what they are actually paying may be one of the factors contributing to the struggle for some restaurants in the casual dining sector to stay afloat.

Rising Costs and a Recession have Created a Different Type of Consumer

During the course of 2011, the national inflation rate was 3.2%, bringing costs up for everyone. Consumers were hit even harder by inflation of the cost of groceries which rose by 4.8% during that same period.  Ironically, the gap between the amount of inflation in menu prices versus that of groceries actually works somewhat in the favor of the restaurant industry.  After seeing the price of things in the grocery stores, customers aren’t quite as surprised or turned off by seeing an increase in menu prices.

What’s more, people remain willing to pay for the increased value of the restaurant experience over that of a grocery store; they’re just far more sensitive to the perceived value of the service they’re getting.

One-Size-Fits All Pricing Is No Longer Viable

The take-home point here is the importance of understanding where your consumers’ mindsets lie in regards to price vs. value and to provide opportunities for your customers to hit their pricing sweet spots.  Customers are still willing to pay more for a restaurant experience, but it is now more critical than ever that they feel that they have gotten a good value for their money.

The challenge is understanding which price points resonate with your consumer base and then featuring promotions and options within that range. Work over your menu list, discount items whose price may not have increased much, and provide options such as portion sizes to help your customers manage their checks.

Focusing on finding your customer’s ‘sweet spots’ makes them feel like they are receiving a valuable service for their money and goes a long way toward ensuring their loyalty toward your establishment.

Striking a Balance Between Inflated Food Costs and Menu Prices

Wholesale food prices rose by 8% in 2011, the highest rate of increase in a very long time.  Fortunately, that rate will slow this year with a projected 4% increase.  This is still high when compared to previous numbers, forcing owners to get creative when striving to maintain profit margins.  Add to these projections the fact that customers are being squeezed financially in other areas, and it is critically important to be able to ‘justify’ your higher prices.

 

Higher Prices Accepted at Restaurants

 

It helps that inflation rates at the grocery store have been higher than those at restaurants. Customers are intimately aware of the increases at the checkout counter, and aren’t surprised to see similar changes when looking at the menu.  Furthermore, they are willing to pay more for the implied value that comes when eating out.

 

It all comes down to the perceived worth of the service provided.  As long as operators deliver good value and communicate that value to their customers, a reasonable increase in price is acceptable.  Many restaurants are addressing the rise in prices proactively by letting their audience know in advance of the changes in the menu.

 

Strategies to get Patrons to Accept the Price Adjustments

 

Restaurateurs have several strategies they can employ to help their patrons manage their checks.  Adjusting the menu so that profitable items which haven’t seen much of a price increase are promoted, offering smaller portions at a lower price point, including a prix fixe menu and stressing the experience all help the customer feel that they received value.

 

While there isn’t much an owner can do to reduce the costs of supplies, improving décor and service helps to validate a check that is slightly higher.  Dining out provides customers with more than just a meal; it is a complete experience.  Your visitors should come away with the feeling that they got what they paid for.