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Friday, April 04, 2014

How to Cover the Higher Cost of Food Items

We are in a difficult year for protein purchases.  The bad weather, diseases and continued use of grains in fuel for autos will make 2014 a challenging year for purchasing managers.  If you missed the chance to sign a long term contract before all the bad news, your company will see a significant food cost increase this year.

How should you react to this year's higher cost of food?  The higher prices are not restricted to restaurant operations.  Grocery stores are charging higher prices for many protein items.  Your customers are paying these higher prices along with you.  There is an expectation of higher menu prices.  Major weather events and the porcine epidemic diarrhea virus were front page stories.

The question is not whether to raise your menu prices.  A better question to ask is "How high should I raise my menu prices?"

The answer to this question will depend on your specific market conditions.  Highly competitive restaurant markets offer value menu customers very low prices on many popular menu items.  If you operate in a price sensitive market, you need to be careful with price increases on your high volume items.

One strategy involves a small increase in a beverage ordered by a high percentage of patrons. 

We'll use an example to illustrate.  Our top menu selections include a protein item with a $2 per portion cost.  We expect the cost per portion to increase 10% to $2.20.  Our annual sales of these menu items equals one million portions.  This is a $200,000 increase in our costs.  Our customers purchase two million portions of fountain beverages each year.  If we increased the selling price of fountain beverages by ten cents, we would cover the increase in the protein portions.

If the most popular menu item currently has a selling price of $6, we could raise the price to $6.20 to cover the increased cost of sales in our example.  This price increase will generally have higher visibility than the increase in fountain beverages.  If you sell a high percentage of value meals, I'd recommend leaving the price of the sandwich at $6 and increasing the value meal price by twenty cents.

All of your food and beverage menu items need to be adjusted on a routine basis (either quarterly, semi-annually or annually).  You may operate in a seasonal market.  Timing of the menu price increases should be in sync with these routine adjustments.  Your customers may balk if you increase prices too frequently.

Some restaurant owners and managers fear a major business loss from setting menu prices too high.  I have seen prices freeze near many popular price points including $0.99, $1.99, $4.99 and $9.99.  If you can demonstrate a quality advantage to your customers, they will be willing to pay the new price.  Once you break through these barrier price levels, I think you will find it easier to adjust prices in the future.

Hopefully, we will see better crop conditions this year.  If protein prices take a drop later in 2014, you can put the profits in the bank to cushion you from the next upturn. 

If you are confident in your knowledge of the market, you could find an opportunity to lock in lower prices later this year.  A significant price decline could offer you an opportunity.  Most major distributors and manufacturers can help their customers with these issues.

One mistake to avoid is going long when prices are already high.  This locks the higher prices in for a longer time period.  Be patient and pay the market prices until you see a significant drop.  Pretend you have a huge freezer behind your restaurant.  When would you want to fill the freezer with product purchased on sale?  This is a good way to decide when to go long.

Restaurant Data Pros

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