Industry acts to blunt effect of fuel surcharges

Industry acts to blunt effect of fuel surcharges

Already feeling the pain of escalating food, labor and other costs, operators now are struggling with how best to address the fuel surcharges increasingly tacked onto deliveries as diesel prices shoot skyward.

Surcharges of 4 percent to 7 percent have become common on restaurant deliveries, forcing operators to rethink their purchasing practices and delivery schedules, join co-ops, and streamline operations as they seek ways to defray the extra costs. But while operators say they understand that surging oil prices are taking a toll on everyone, some operators see the ubiquitous fuel surcharges as opportunistic.

“If you take a look at what it takes to run a vehicle, versus what the scale jumps to, I think there is a little bit of income there,” said Wayne Hoeye, director of supply management for Tampa, Fla.-based Family Sports Concepts Inc., parent of the 250-unit Beef ‘O’ Brady’s chain. Officials estimated that all of Beef ‘O’ Brady’s freight bills have a 4-percent-to-6-percent fuel surcharge.

“It is a convenient excuse for a lot of shippers,” he said. “The excuse is always fuel, but some of the raises seem disproportionate. It is one of the most abused things out there.”

Mirroring leaps and bounds in the cost of gasoline, diesel fuel now averages about $4.40 per gallon, up from an average of $2.49 per gallon in 2006, said the Energy Information Administration.

“The gasoline price situation has a double-whammy on the operator because of the impact it has on the consumer,” Hudson Riehle, senior vice president of research for the National Restaurant Association [3], recently told Nation’s Restaurant News.

“You look at an operator’s internal cost structure, with fuel surcharges coming on every delivery, and you look at the consumer perception or perspective on what they consider value, and then you think about all of that in relation to your core customer or demographic base,” he said. “Well, your core customer is facing pressures just getting to your restaurant because of higher gasoline prices, and you are contemplating raising menu prices to preserve margin. So how do you do that?”

Most operators are trying to find ways to defray the cost of the fuel surcharges without passing costs onto customers.

Todd Kennedy, operator of two Golden Corrals as well as a casual steakhouse, all in Illinois, said he is doing everything he can to absorb the fuel surcharges because he believes they are becoming a permanent fixture of doing business. Kennedy said he has made cuts to labor, found ways to increase the yields on food and shuts off ovens whenever possible. He also switched from incandescent to fluorescent bulbs, reinsulated his existing restaurants and added more efficient water heaters and tinted windows.

“It is sad—I actually pick up pennies when I see them,” he said. “I used to walk right by them. We now sharpen the pencil on things we can control, and we do things we wouldn’t have done before just to keep from passing on the costs.”

Kennedy noted that he couldn’t help but feel abused by the fuel surcharge.

“We get a delivery charge and then the fuel surcharge, and even if they’ve delivered just down the road, they still charge that extra $10 or so,” he said. “I am willing to pay my share, but stuff like that is rampant and ridiculous.”

He pointed to a regular helium delivery from a vendor located six blocks away. “He charges me $10 for the delivery and a $10 fuel charge to drive six blocks,” he said. “That is just a way of gaining a profit off of me. Does it really require that much extra gas for the truck to travel the six blocks?”

In April, Kennedy paid $4,318 in fuel surcharges at his two Golden Corral locations, he said. Even the company that owns the toy crane machines in his stores charges Kennedy to pick up its monthly take from the machines. “I earn 40 percent of the proceeds, and the owner gets the balance, but now he charges me another $9 so he can pick up his money. Go figure,” he said, laughing.

David Abes, director of operations for eight-unit Here to Serve [4] Restaurants in Atlanta, agrees that fuel surcharges are getting out of hand.

“It is ridiculous,” he said. “Everyone is jumping on board. We are seeing flat fees of $3 to $6. We’ve had people mess up a delivery – their fault – and then come back on the second delivery and try to put in the fuel surcharge.”

The company has not passed on the cost of the fuel surcharges, but instead is trying to run a tighter ship and cutting down on deliveries, though that can cause storage issues, he said

“We are keeping things as is,” Abes said. “If you keep doing the right thing, guests will remember you didn’t try to screw [them] when times were tough.”

Cliff Bramble, co-owner of Rathbun’s and two adjacent restaurants, also in Atlanta, estimates delivery charges and fuel surcharges are pushing up the cost of just about everything that comes in the back door about 1 percent.

“Linen surcharges have just begun and account for 12-13 percent of the order twice a week, and they have also just added 95 cents to every invoice for a gas charge,” he said.

Bramble said the company is watching all controllable purchases, including linen and paper supplies, and is trying to order only what will be used. Still, he said, the company will soon have to raise menu prices to reflect rising costs.

“The energy costs have also risen and we are trying to watch energy costs by using lights only when needed and keeping the A/C at a higher temperature during the day when guests are not present,” he said. “Even water costs are rising here in Atlanta, as the city just raised the price of water by 15 percent.”

Ashley Rathgeber, director of supply development for Fort Lauderdale, Fla.-based Pizza Fusion [5], the five-unit organic pizza chain, said in a recent interview that she has seen fuel surcharges up as much as 5 percent this year.

In response, the chain has cut back its deliveries from three to two times per week and this winter joined a distribution alliance that allows the chain to “compete with the big guys,” she said. The alliance helps cut the cost of deliveries and pulls delivery costs out of food costs so the chain knows what it is paying for fuel surcharges.

The company also is investing in more advertising to keep traffic moving under the theory that busy restaurants with higher revenues can address inflation better than operations that raise menu prices and chase guests away.

“The top priority now is keeping the guest counts high,” she said. “When your sales are low, your food cost and every other expense is high. … We would much rather have lots of happy repeat customers filling our stores than to price every menu item to optimum food cost and have no one to serve it to.”

Josh Martino, vice president of operations and franchising for 24-unit Bono’s of America Inc. in Jacksonville, Fla., said fuel surcharges are a popular topic these days at the barbecue chain whose average unit volumes range from $1.6 million to $1.8 million. The company has six corporate locations and the rest are franchised or licensed.

Martino acknowledged in the last year almost all suppliers and distributors have added on a fuel surcharge ranging from $1 to $15.

“With our linens, the fuel surcharge has been the highest,” he said. “But we were noticing a great deal of inefficiency in the pickups. They were coming for pickup and drop off twice daily, and then charging us fuel surcharges twice. We asked them why? Gas charges are hitting us as a business and hitting us personally.”

Martino said the increase in prices made the company take a good look at its expenses. Upon examination, the chain found that half of the companies it did business with were overcharging. That assessment allowed the company to cut more than $150,000 in expenses in the last nine months, and the cuts made in linen deliveries alone yielded about $12,000 annually, including the fuel surcharges and the lower cost of reduced quantities, Martino said.

“Without being forced to look at our expenses, who knows how long it would have taken us to figure it out,” he said. “When things in the economy were good, there were lots of things we didn’t notice. This has improved our bottom line this year better than the first quarter last year. If the economy comes back, we will be that much more efficient and streamlined, just because we took a lot more responsibility about what was coming in the back and we didn’t pass on burdens to those coming in the front door.”