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Restaurants to gain pricing power in 2011

Analyst expects chains to pass menu price increases to consumers

As commodity prices rose through 2010, restaurant operators kept one eye on increasing costs and the other on the tight grip that recession-battered consumers kept on their wallets. Now they may be able to at least blink.

Restaurants may begin increasing menu prices next year without the fear of losing customers accustomed to deals and discounts, according to a recent report from Jeff Omohundro, a senior securities analyst at Wells Fargo Securities.

He based the “increased confidence in restaurant-sector pricing power” on recent data from the Bureau of Labor Statistics that showed inflation for food at home and food away from home approaching the same rate.

"With the rate of inflation for food at home increasing in recent months to 1.4 percent, in line with food away from home, we think restaurants may be better positioned to pass along menu price increases to consumers," he said.

Omohundro said Texas Roadhouse Inc. and McDonald's Corp. already expect to increase prices next year to offset higher commodity costs.

Texas Roadhouse was testing a menu price hike of about 2 percent in 25 of its casual-dining restaurants, he said. The 330-unit chain is expected to implement price increases across its system by the end of 2011’s first quarter.

“However, management is not yet sure how much or when the increase will be rolled out,” Omohundro said. “The test has been underway for only a couple of months and is not yet sure what impact the price increase could have, although management did note that it has not seen a negative impact from the test so far.”

In its third-quarter earnings report, Texas Roadhouse said it expected food-cost inflation of between 2 percent and 3 percent in 2011. Management said the company has locked in pricing for about 80 percent of its protein for 2011, which make up about half of its total food costs for the year, Omohundro said.

McDonald's also has said it may increase prices next year to counter expected increases in commodities and labor costs, Omohundro said. The company expects commodity costs to rise 2 percent in the United States and 3 percent in Europe.

Separate from the Wells Fargo report, Ruth’s Hospitality Group Inc. said in late October that it took a modest price increases on a limited number of items in the third quarter, which ended Sept. 26. Mike P. O’Donnell, the company's president and chief executive, told analysts the annualized effect would be about $1 million in sales with no change in menu mix.

The overall Restaurant Commodity Index is estimated up 15 percent in 2010 and for 2011 up 4 percent, according to the American Restaurant Association Inc. consultancy of Sarasota, Fla.

The ARA commodity index is comprised of eight sub-indices based on restaurant type and menu mix across key food categories ranging from ground beef and chicken breasts to cheese, french fries, pasta and produce. It is based on the spot commodity market and does not include any contracting assumptions.

The ARA forecasted the highest commodity inflation in the casual-dining and steakhouse segments next year, and the least among fast-casual and wing-focused restaurants, which actually may experience some deflation.

ARA restaurant commodity index changes by segment, year-to-year:

Casual dining: up 4 percent in 2010; up 13 percent in 2011
Fast casual: up 25 percent in 2010; down 3 percent in 2011
Fast food: up 36 percent in 2010; up 1 percent in 2011
Italian: up 15 percent in 2010; up 2 percent in 2011
Mexican: up 16 percent in 2010, up 1 percent in 2011
Pizza: up 9 percent in 2010; up 2 percent in 2011
Steakhouse: up 12 percent in 2010; up 12 percent in 2011
Wings: up 2 percent in 2010; down 1 percent in 2011.

Contact Ron Ruggless at [email protected].

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