For months, many restaurant operators have blamed high gasoline prices for hurting sales. Now they've got a new culprit to worry about -- their own menu prices. From hamburger joints to hoity-toity dining establishments, prices of meals are currently rising, often by 2% or more.
It may mean another nickel for a Whopper at Burger King or 50 cents more for a steak at an upscale eatery as restaurateurs scramble to protect profit margins against growing pressures from rising food, labor, packaging and other costs.
"Unless we see an abrupt change in the cost environment, I see no other way to restore store-level margins than to increase prices," Domino's Pizza Inc. Chief Executive David Brandon predicted last week.
Mr. Brandon forecast "a material price increase" in the pizza category, noting recent cost increases for everything from cheese to pork to wheat flour to corrugated pizza boxes. "With so many commodities at or near [their] 10-year high, chances are consumers will have to get used to higher prices," he said during an earnings conference call.
A Domino's spokesman wouldn't say when or how the delivery chain and its franchisees might raise prices, but since discounting has long been widespread in the pizza category, a reduction in deals is considered a likely strategy.
Rival Papa John's International Inc. recently raised the price of its large cheese pizza about 15% in company stores to help offset what it said was a 50% increase in the cost of cheese this year, a spokesman said. McDonald's Corp. last week disclosed it has increased many of its prices about 3%, noting that cheese costs had jumped 14% in the second quarter.
It added that its labor costs have risen nearly 1% this year. Although McDonald's and many other chains already pay their help more than the federal minimum wage, that rate went up 70 cents an hour, to $5.85, on July 24.
To help its restaurants in China deal with soaring poultry prices, McDonald's said it has shipped dark chicken meat -- it uses primarily white meat in the U.S. -- to the mainland.
Restaurant chains are scrambling to lock in long-term prices for beef, chicken and other staples in the belief that those costs will only go up.
The consumer price index reported a 4% increase in the market basket of food in the year ended June 30. Grocery-store prices rose 0.6% in June alone. Feeling such inflationary pressures, restaurant chain operators may have no choice but to raise menu prices.
However, they may find it counterproductive, since it makes going out for a meal more costly to many consumers already being financially drained at the gasoline pump. "We believe that the increases in food and gas prices significantly impacted our consumers' disposable income, causing many of our guests to postpone a visit to Chuck E. Cheese given the discretionary nature of our experience," CEC Entertainment Inc.
President Michael Magusiak said on the company's recent earnings conference call. Wendy's International Inc. blamed price increases it's been taking lately for "impacting transactions in the short term," adding that, in the long term, they ought to fatten profits.
Starbucks Corp., citing higher prices for milk, cream and other dairy products, raised the price of beverages by an average of nine cents beginning yesterday in the specialty-coffee retailer's company-owned stores. Licensed outlets are expected to follow suit.
A few chains are resisting ratcheting up menu prices, perhaps believing that sales already are precarious. "We have a bias not to raise prices," an executive of P.F. Chang's China Bistro Inc. said on a conference call recently after the Asian casual-dining-concepts operator reported guest-traffic declines.
Others have held back on raising prices, only to their regret. "We may have blown it," Panera Bread Co.'s CEO said last week, noting that input prices are rising faster than what it's charging customers.
The bakery-cafes operator reported sharply lower restaurant-level profit margins for the second quarter and its stock got hammered as a result. An executive of Rare Hospitality International Inc., which operates the LongHorn and other steakhouses, has said it will analyze pricing for the second half, but that "I don't believe there is going to be an opportunity to put more than 2% into the menu."
Stacey Calbert, a spokeswoman for Brinker International Inc., said the multibrand casual-dining company hasn't announced any forthcoming price increases.
But she added that "we take price cautiously and would intend to do so only to offset permanent increases in our cost structure." A spokesman for Burger King Holdings Inc. said pricing decisions are made on a market-by-market basis and wouldn't elaborate.
But one Midwest franchisee said prices were up about 3% on large sandwiches. Another franchisee, Omaha-based Michael Simmonds, said he plans to raise his menu prices soon. "The cost of cheese, bacon, beef, etc., have all increased significantly over the past few weeks," he said.
(END) Dow Jones Newswires