Food-cost inflation is inevitable year to year, but it doesn’t necessarily have to eat into the profit margins of full-service restaurant operators. The key is to understand all the components that affect food costs and the available options for controlling them through strategic purchasing programs.
The costs of products include more than the price of raw materials. Supply and demand are the key elements of price inflation; however, shrink, labor, packaging, overhead, and freight also determine how finished goods are priced. Knowing what products to buy and when to buy them, and adding some flexibility to menu offerings, can negate a large percentage of the cost increases caused by inflationary factors.
During the last five years, food costs have risen a total of 7 percent. For 2014, we are forecasting that prices will increase 2 percent, slightly better than the 2.6 percent increase in 2013. While some products will fall in cost, others will rise. With the proper buying and menu strategies in place, however, restaurants can adapt easily and maintain profit margins without raising prices and driving customers away. Here’s how the New Year is shaping up.
Corn will decrease in price by 20 percent—welcome news for every restaurant operator. Always remember that “corn is king,” because it’s the main ingredient in animal feed and a key driver to inflation, affecting other commodity prices. We experienced an unprecedented drought in 2012 that hurt crop conditions and supply. Coupled with new government mandates on ethanol, this drove corn prices to a record high. But now, with the cost falling dramatically, we’ll see decreases in the cost of poultry—except for wings, always in high demand. The cost of chicken-breast meat will drop between 5 and 9 percent, while wings will rise in price by 2 to 3 percent. Beef, on the other hand, will actually increase 2 percent in cost due to its recovery cycle of two years or more.
Cheese prices will come down 3.2 percent, except for the usual seasonal increase late in the year. Pork prices also will decrease. One commodity to pay close attention to is shrimp, which is rising in cost. Shrimp farms in Southeast Asia and India were severely hurt by disease in 2013. Supply continues to be very tight, and will remain tight at least through the first half of 2014.
Our analysis of food-cost inflation illustrates that a good “menu mix” is the critical element in controlling costs. Whether restaurants belong to a chain or are independently owned, they'll be able to take advantage of the lower costs of chicken and pork—if they can be flexible in their menu items. This is a particularly smart move for restaurants that are heavy users of beef, which will not see any cost relief until mid-2015 at the earliest.
Consider these options:
Add more chicken entrees. With the cost of breast meat falling, it makes sense to expand chicken items in lieu of higher-priced beef. Also consider portion size. If you’re currently offering a six-ounce boneless chicken breast in entrées, ask yourself whether moving to five ounces would hurt sales. If it doesn’t, you’ll also reduce your costs.
Increase pork offerings. The cost of pork bellies, which achieved a record high in 2013, will fall by 13 percent in 2014. Prices of other pork items will decrease by about 4 percent compared to 2013. Now is a good time to add pork entrées, or to expand your pork offerings if it's already on the menu.
Try LTOs that utilize lower-cost products. Introduce limited-time offerings on chicken breast and pork entrées to take some pressure off the higher-cost center-of-plate categories like beef and shrimp.
On the purchasing side, operators have additional options:
Look at where you can save money on the bread products you buy. The cost of wheat is expected to drop 10 percent in 2014, offering another way to reduce costs.
With both canola and soy oil expected to go up in 2014, take coverage at today’s levels to add price protection and take volatility out of play.
Protect your budget from late-year seasonal cheese increases by locking in prices during the first half of the year.
Explore raw-material options and analyze what will work for you. If you are currently on a program of buying fresh products, consider frozen products as an alternative. This enables processors to step into the market at optimal buying times and helps operators avoid the volatilities of the market.
Overall, food costs are stabilizing, but every year is a challenge for restaurant operators. Changes in the factors that affect commodity prices can arise suddenly and disrupt purchasing programs. Supply chain management strategies that look 12 or even 24 months out will continue to be extremely important.
The opinions of contributors are their own. Publication of their writing does not imply endorsement by FSR magazine or Journalistic Inc.