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Restaurants plan for commodity inflation, menu price increases

Many in the restaurant industry will look back on 2011 as a year of recovery that was hindered by skyrocketing commodity costs and caution about raising menu prices — a move many feared would scare off consumers still skittish about spending.

Going into 2012, rewind and press play: More of the same is expected.

After a year when many chains reported food basket inflation of 5 percent or more, the outlook for next year is that those costs will ease only slightly. A recent report by investment bank Barclays Capital projected year-over-year food cost inflation of between 3 percent and 5 percent for restaurants in 2012.

Others are less optimistic. Fitch Ratings, a global market, credit opinion and research agency, expects U.S. food and beverage costs for restaurant to increase 5 percent or more in 2012, mostly as a result of more expensive proteins. That leaves many restaurant chains grappling with whether — and how — to raise menu prices in the year ahead.

“The fundamental strategic challenge we face this year is how to address the growing need for affordability that’s demanded by our guests, while also protecting our margins, given significant commodity cost inflation,” Darden Restaurants Inc. president and chief operating officer Drew Madsen said this month, during an earnings call with investors.

Indeed, in a webinar earlier this year, Warren Solochek, vice president of client development for market research firm The NPD Group, warned that consumers in 2012 are expected to remain price conscious — and that’s partly the restaurant industry’s fault.

“The restaurant industry has done a very good job of sensitizing American consumers to price, and we have done that via a lot of advertising and a lot of promotion that’s been specific to price points,” Solochek said. “That is going to suppress the opportunity that operators are going to have to take across-the-board pricing.”

Restaurants outline pricing plans

The Barclays report projected that menu pricing across the industry will increase an average of 2 percent in 2012, and hikes are likely to come earlier in the year, when commodity inflation is expected to be higher.

Madsen at Darden said the company’s plan is to maintain an annual price increase of between roughly 2 percent and 3 percent for fiscal 2012, which, he said, “will allow us to protect the guest value equations we believe are fundamental to long-term brand vibrancy.”

At the same time, however, Darden is looking to cost-cutting measures to expand margins as food and beverage costs ease in the latter half of the year.

Already halfway into its fiscal 2012, the company expects its food and beverage inflation to total 6 percent. During the first half, costs rose 8 percent, with seafood costs alone up 20 percent during the first and second quarter. Inflation is expected to total 6 percent for the third quarter and 3 percent in the fourth, Darden officials said.

In the casual dining segment in 2011, average menu prices rose about 1.2 percent, compared with the prior year, according to a survey by Intellaprice LLC in Boston. In 2010, average menu prices dropped 1.4 percent in the segment.

BJ’s Restaurants Inc. delayed its price hikes in 2011 to the latter half of the year, and company officials recently said they are confident in the chain’s pricing power as BJ’s heads into 2012.

At the end of the third quarter, the Huntington Beach, Calif.-based chain expected its menu price increases to total about 3 percent for 2011. Jerry Deitchle, BJ’s chief executive, said in October that he believes the chain has room to raise menu prices more in 2012 without affecting traffic.

Quick-service players are less confident when it comes to increased menu prices.

McDonald’s Corp., Starbucks Corp. and Chipotle Mexican Grill Inc. have indicated they have seen little pushback from consumers on price increases to date, but any potential menu pricing actions to come will be taken judiciously.

Jack in the Box Inc. has increased menu prices about 2.7 percent since May. Company officials indicated that the chain may raise prices further in 2012, but they said plans are to keep any increases behind competitors and grocery store inflation.

At CKE Restaurants Inc., parent to Carl’s Jr. and Hardee’s, chief executive Andrew Puzder said more aggressive pricing strategies may be in the future for both chains in 2012 — although the company also plans to remain focused on promoting less inflation-prone menu items, such as turkey burgers and hand-breaded chicken tenders.

“At the moment, I don’t see any relief coming down the pike on food costs,” Puzder said. “We’ll continue to adjust our prices and our product mix.”

Contact Lisa Jennings at [email protected].
Follow her on Twitter: @livetodineout

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