May 09, 2008
Contact: Mike Donohue (202) 331-5902, Annika Stensson (202) 973-3677

(Washington, D.C.) The National Restaurant Association's Senior Vice President of Research and Information Services Hudson Riehle today made the following statement about how increasing wholesale food and commodity prices impact restaurants:

"While current economic challenges weigh on the minds of operators, the restaurant industry remains a powerhouse in the nation's economy. Restaurant industry sales are projected to reach $558 billion this year - an increase of 4.4 percent over 2007 - and overall, the industry is expected to have an overall economic impact of $1.5 trillion. So, while sales growth is slower than in recent years, it is by no means anemic. Flexible by nature, restaurateurs adapt quickly to what goes on around them and do what they can to not pass increasing costs onto consumers.

"However, the softening economy presents certain challenges specific to restaurant businesses. Food and beverage costs are one of the most significant line items for a restaurant, accounting for approximately 33 cents of every dollar in sales. With average margins of roughly 4 to 6 percent, any increases in food costs can have a dramatic impact on a restaurant’s bottom line.

"The wholesale food price inflation we currently see is the highest in 27 years. Last year, it jumped 7.6 percent, and on a 2008 year-to-date basis through March, wholesale food prices continue to rise at 8.5 percent. Several individual commodities critical to the majority of restaurant operations are also posting dramatic gains this year, with flour (87%), eggs (73%), fats and oils (49%), cheese (27%), milled rice (25%) and milk (20%) rising most sharply. And, many of these increases are all coming on top of double-digit growth rates in 2007.

"Several factors have contributed to the dramatic rise in food prices in recent years, including higher oil and energy prices; the growing global demand from rapidly developing economies such as China and India; a weak U.S. dollar; and a larger share of the grain market being diverted to ethanol production.

"The National Restaurant Association's Restaurant Performance Index (RPI) stood at 97.9 in March, down 0.9 percent from February. Operators' outlook for sales growth and the economy deteriorated sharply, which led to this record-low reading of the RPI.

"This is also reflected in what restaurateurs count as their biggest challenges right now. Economic slowdown was cited in the March RPI as the top challenge by one-quarter of restaurant operators, followed by food costs, which was cited by one out of five. It was the first time in 29 months that recruiting and retaining employees was not cited as the largest challenge by operators.

"However, some restaurant operators are noticing that both sales and customer traffic have softened compared to last year. Fifty-five percent of operators surveyed in the RPI said same-store sales declined this March over March of last year, and 61 percent said customer traffic has declined. Still, 28 percent of restaurant operators reported a same-store sales gain between March 2007 and March 2008, and 19 percent of operators reported an increase in customer traffic.

"Amid these challenges, there are still plenty of opportunities for restaurateurs to maintain the vitality of their businesses. Some are substituting ingredients, while others are modifying recipes and portion sizes. They are maintaining the balance of the cost-value relationship, as consumers pay more attention during economic slumps. Some are also ramping up marketing efforts to keep customers coming through the door, such as offering value-specials, customer loyalty promotions, and highlighting menu items with relatively high profit margins.

"While menu price inflation is projected to remain elevated this year due in part to increasing food costs, many operators are not ready to raise their prices unless absolutely necessary. To offset costs in ways that don't involve menu price hikes, restaurateurs are looking at integrating technology in restaurant operations to increase productivity. Multi-purpose equipment and staff cross-training are also effective measures in battling cost pressures. Another trend we see more is "going green" to address escalating utility bills, which is also beneficial for many other reasons.

"Despite the challenges restaurateurs are dealing with, dining out is still essential to Americans' lifestyles and they spend nearly half of their food budget in the restaurant community. Even with pinched wallets, consumers are reluctant to cut back on their restaurant visits because they rely on the convenience, socialization and quality of meals they provide."