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Sunday, January 30, 2011

Managing the Coming Increase in Food Costs

As the recovery starts to filter down to more discretionary spending at restaurants, we are facing a major shift higher in many key commodities. Oil will most likely go well North of $100 a barrel in 2011. We can expect grain prices to trend higher as the demand for ethanol increases. Grain feeds livestock. Flour, corn, beef, pork, chicken and other key items will be increasing in price.

The upscale dining segment has really had a tough time during the recession. Demand for prime beef has declined. Demand for expensive wine has declined. Demand for 50 year old cognac has declined. Restocking the shelves may not make sense for this segment. As the number of these restaurants has declined, the market may find an equilibrium sometime this year. The survivors will see the 20% plus sales declines end. In fact, sometime this year the upscale market will hit bottom.

How much of a bounce can we expect at the bottom of this curve?

I work with some operators who have seen 4 or 5 of these down cycles. They all say this is the longest and deepest for them ever. These operators are not raising menu prices. Too much competition from the next rung down on the dining ladder. With higher food cost prices, they have decided to rely on higher guest counts to make their budget work.

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