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The cost of higher costs

Labor, food, energy, insurance, real estate—you name it, the fundamental prime costs of doing business are up, in some cases dramatically.

“Labor costs, in particular, have moved up the hierarchy of pressures that operators are experiencing,” says Hudson Riehle, senior vice president of research and information services at the National Restaurant Association. “Bureau of Labor statistics show that wage pressures in our industry have been escalating over the past year faster than in others.”

Driving the increase, Riehle says, are historically low unemployment rates and new minimum wage mandates. State-mandated minimum wages have risen. At the federal level, bills supporting an increase in the minimum wage from the current $5.15 to $7.25 over the next 26 months recently passed in both the House and Senate.
When the law passes, the NRA says nearly nine out of 10 restaurant operators will increase menu prices. And in addition to eliminating positions, half say they’ll cut back on employee hours.

Some areas are being hit hard already. Mandate-mired operators in San Francisco are fighting mad about new costs they’re facing. In California, a $7.50 state minimum wage was enacted on January 1, 2007, which rises to $8 a year later. San Francisco’s municipal minimum wage, however, is indexed to the Consumer Price Index and goes up every year (last year by 4 percent).

It includes no tip credit and currently is $9.14. What’s more, new city mandates require all employers to provide paid sick leave and companies with more than 20 employees to pay up to $1.68 per employee hour toward the city’s new universal healthcare ordinance.

Kevin Westlye, executive director of the Golden Gate Restaurant Association, says the costs are forcing restaurateurs out of the city and discouraging new dining establishments from opening. The GGRA is suing the city to try to block the universal healthcare mandate, and is rallying its membership to fight back in other ways.

About 100 members met in March to strategize. One option discussed is a one-day shutdown of city restaurants to protest the mandates. Individual members are also considering a service charge of 3 to 5 percent to offset mandate-related costs.

“You can only raise your menu prices so much,” Westlye says. “Both the service charge and the shut-down are intended to raise public awareness about the impact of these mandates.”

It’s not just labor costs causing pain. Oil prices nearly tripled from 2003 to 2006, sending energy costs soaring. Gas prices are expected to reach $4 per gallon this year.

Distributors hit hard by the price of fuel last year began levying surcharges. And food prices continue to climb. “Starting around 2003, operators have been under sustained increases in the cost for food,” Riehle says. “That, too, has been a factor in menu price inflation, which is running at about 3 percent for the fourth consecutive year. This is easily the strongest period of menu price inflation in well over a decade.”

As of February, the Labor Department had recorded three consecutive months of sizeable increases in food costs, attributed in part to harsh winter weather that sent the price of staples such as strawberries, oranges and onions soaring.

This winter’s blizzards and torrential rains in the West also caused ranchers to lose a lot of feeder cattle. And cattle that did make it to the feed lots, where cows are fattened on corn before slaughter, are now considerably more expensive to feed. That’s in part because of the frenzy surrounding ethanol production. The alternative fuel, made from corn, is siphoning off corn supplies and driving prices up as farmers trade food uses for their crops for higher-paying fuel uses.

The U.S. Department of Energy says ethanol output is expected to jump in 2007 from 5.6 billion gallons per year to 8 billion gallons. Corn prices doubled over the past year alone.

With meat prices already rising—to the tune of more than 3 percent for choice U.S. beef in the first three months of this year alone—other product categories are feeling the pinch from short corn supplies, as well. Poultry, pork, dairy and high-fructose corn syrups, in particular, are rising. And, according to the Food and Agricultural Policy Research Institute at Iowa State University, ethanol-fueled increases in world corn demand and prices are expected to continue for at least another three to four years.

Coping strategies

You can only raise menu prices so much. Here’s what else you can do.

Train and retain. “It’s easier to retain the workforce you already have through training and development than it is to recruit from today’s very shallow labor pool,” says NRA’s Hudson Riehle.

Tighten your scheduling. “Don’t just start cutting employees,” says Barry Brown, president of Profit Strategies & Solutions, in Oswego, Oregon. “Work first on ways to stagger employees in and out so you’re fully staffed only when you really need to be.”

Know your true costs. “If you don’t have a handle on the true cost of every item on your menu, you have no idea which are making you money and which aren’t, or what you should adjust to improve profitability,” says John Nessel, president of Restaurant Resource Group, Boston.

Get timely, accurate P&Ls. “Independents, in particular, often get P&Ls too late to be of use, or they’re not accurate enough,” Nessel says. “As costs keep rising, you have to be proactive and make changes for tomorrow based on what happened yesterday.”

Tap technology. Invest in a POS system with sales analyses and labor management components. “For labor controls, these systems let you input employees’ schedules and prevent them from clocking in before or after their scheduled shift times without approval,” says Brown. “It might mean 15 minutes a day difference per employee, and it adds up.”

Be smart about real estate. Save by co-branding or finding nontraditional locations. “Also consider smaller, more efficient locations and, for long-term growth, ‘land banking’ in underdeveloped markets,” says Marty Kolis, president of the Council of International Restaurant Real Estate Brokers, Greensboro, North Carolina.

Bid out business. “Do it from the start and then again every six months to a year, even if you’re happy with your
distributor,” Nessel suggests. “If suppliers think you’re not paying attention, your prices will creep up.”

Negotiate. Ask suppliers what you can do to lower your costs. Can you take one less delivery per week? Or increase your spend with one company? “These are the types of things that should enable you to bring your costs down,” Brown says.

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