Anyone who has shopped at a grocery store lately can attest to the rising price of food.
But the increasing cost of dairy, beef, pork and other foods is putting some of L.A.’s largest restaurant chains in a squeeze. They need to increase prices, but they are reluctant to do so given that customers have been shocked by high gasoline prices and are struggling with a still-fragile recovery.
So eateries, including Cheesecake Factory, California Pizza Kitchen, Applebee’s and IHOP, are looking to charge diners only modestly higher prices to offset food inflation. Instead, Cheesecake Factory and California Pizza Kitchen are scrambling to cut expenses to alleviate the pressure.
“You still need be very careful with your price increases,” said Brad Ludington, an equity research analyst at Cleveland investment banking firm Keybanc Capital Markets Inc. who covers Cheesecake Factory and California Pizza Kitchen. “Consumers are still a little sensitive to that.”
Calabasas-based Cheesecake Factory has been working to improve the productivity of its restaurant employees and better manage expenses in an effort to absorb some of the cost pressure.
Meanwhile, California Pizza Kitchen, headquartered in West Los Angeles near Los Angeles International Airport, has scrapped low-selling dishes that require a lot of preparation and is planning to take seven other low-margin dishes off the menu in June.
“California Pizza Kitchen is going to be more active with reducing their (costs),” said Conrad Lyon, a senior analyst at West L.A. investment banking firm B. Riley & Co. who covers the chain in addition to Cheesecake Factory.
The U.S. Agriculture Department expects food inflation to increase 3 percent to 4 percent this year, with significant pressure on prices for meats, poultry, fish, dairy, fats and oils.
The run-up on food prices began last summer and has continued due to a strong global economy – including China’s growing middle class – a weak U.S. dollar and the increasing use of corn for ethanol production.
Bill Lapp, president at Omaha, Neb., agricultural research company Advanced Economic Solutions, said he expects the consumer price index for food to increase by 4 percent to 6 percent by the end of this year and continue to rise into next year.
“When food commodities increase, ultimately those costs are going to be passed on to the consumer,” Lapp said.
Restaurant operators have been dealing with fluctuating food prices since 2008, when costs skyrocketed 5.5 percent. But they slowed sharply to increases of 1.8 percent and 0.8 percent, in 2009 and 2010, respectively, due to the recession. Those were the lowest increases since 1962.
But this time around, there’s no recession to slow inflation.
At Cheesecake Factory, known for its large portions and large restaurants, executives have said they may have to increase prices when the chain updates its menu in August, but they will raise prices only as much as 2 percent
“No one likes it, but everybody knows that food’s expensive,” Cheesecake Factory Chief Executive David Overton said during the company’s first quarter earnings call with analysts. “It’s going up everywhere. It’s in people’s minds. And our price increase will be reasonable compared to really what’s going on out there in supermarkets and in many other restaurant chains.”
The emphasis will be on savings during the second half this year as the company reduces costs to absorb the commodity price pressures.
“This year, they’re looking at controlling labor costs,” said Keybanc’s Ludington. “They are looking at better managing scheduling and labor during slow and busy times.”
When it reported earnings last week, California Pizza Kitchen said it is on track to reduce costs by about $6 million this year, mostly due to axing the low-selling, labor-intensive dishes.
But the chain increased its commodity cost estimate from 2.5 percent to 3 percent or more for the year, and is planning to raise prices 0.7 percent when it rolls out a revamped menu in June.
“We think this price increase is modest and appropriate,” said Susan Collyns, California Pizza Kitchen chief financial and operating officer, during an earnings conference call last week with analysts.
Menu prices may also rise at Applebee’s Neighborhood Grill & Bar and IHOP Restaurants, divisions of Glendale-based DineEquity, if commodity costs continue to increase. Since the combined 3,500 restaurants are majority owned by franchisees, any price increases would be at the discretion of individual franchisees.
Julia Stewart, DineEquity chief executive, has said that franchisees of both chains have the ability to raise menu prices and still remain competitive in the market.
“We can price to cover at both brands,” Stewart said last week during an earnings conference call with analysts. “We can certainly cover inflation with our brand cachet and the work that we’ve done.”
During DineEquity’s presentation at last month’s Barclay’s Retail & Restaurants Conference, Stewart said the company expects inflation this year at Applebee’s to be 1.5 percent and 3 percent at IHOP.
Analysts said Applebee’s and IHOP haven’t been hit as hard by commodity prices primarily because of a food purchasing co-operative DineEquity established in 2009. At the time, the company said it expected to see 3 percent to 5 percent in cost savings because the co-op would allow nearly 3,400 franchisee- and company-owned Applebee’s and IHOP restaurants to leverage their buying power and secure more favorable contracts for beef, cheese, soy oil and other commodities.
“They’ve been less affected relative to others because the co-op has been in place,” said Destin Tompkins, a senior research analyst at Memphis, Tenn., investment banking firm Morgan Keegan & Co. Inc. “And they used that purchasing power that they have to limit the overall inflation a little bit.”
DineEquity has also been aggressive about getting customers to eat at its casual-dining restaurants, especially with such promotions as Applebee’s “2 for $20” meal deal and an all-you-can-eat soup, salad and breadsticks deal starting at $5.99. Cheesecake Factory and California Pizza Kitchen have been adding menu items to get diners excited about eating out again.
Amid the potential for higher costs and price increases, the restaurants have to make sure their marketing campaigns hit their targets.
“Even in a high commodity price environment, you need to get butts in the seats,” said B. Riley’s Lyon. “You want to keep that momentum going and customers interested.”
