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Sunday, March 06, 2011

Economy Showing Positive Signs

The weather in many regions was tough in February but the economy showed an advance over last year. Grain prices have risen tremendously and many operators are wondering whether to pass the higher costs along to guests. This is a difficult call to make nationally since competition varies by region, city and even by neighborhood.

If you decide to pass along the higher costs by raising your menu prices, there are 3 ways to cover the increase:

1) Increase the price of major entrees by an amount which will cover just the additional cost.

2) Increase the price of all menu items across the board to cover just the additional cost.

3) Strategically increase prices over several quarters to cover costs and produce a profit large enough to cover the risk of further price volatility.

Many operators wonder whether they should lower the prices when the commodity markets retreat. I wouldn't let the commodity markets dictate pricing policy in the long term. As the economy heats up, energy consumption increases will produce additional volatility. Constantly changing menu prices up and then down with each shift is a mistake.

If you decide to establish a policy of steady and more gradual price increases over several quarters, your guests won't see you twisting in the wind. Competition will guide you in determining how much of an increase the market will allow.

Many restaurants have been offering reduced entree prices of $9.95 and below. Should you go over $10 if your menu fits this profile? I'd recommend a move now above $10. With the press reporting the big run up in grain prices, many people have been conditioned to expect price increases.

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