Restaurants Plan for Commodity Inflation, Menu Price Increases

Commodity costs will continue to skyrocket in 2012

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.”