Food Price Inflation, Economy Take Toll On Restaurant Industry

While the beginning of 2010 brought optimism to the restaurant industry, the middle of the year is replacing that optimism with uncertainty for many operators, and rising food costs are partly to blame.

The National Restaurant Association’s Restaurant Performance Index showed contraction in the industry for the fourth consecutive month, after hitting a two-year high in March.

The index, which takes into account both current performance and future expectations, is a poll of restaurant operators across all concepts. Scores of more than 100 show growth, while scores less than 100 depict contraction in the industry.

July’s Restaurant Performance Index was 99.4 , essentially on par with June’s 99.5.

The Current Situation Index has been below 100 for almost three years — it was the Expectations Index that bolstered the score above 100 on March. The number of restaurant operators reporting negative same-store sales in July ticked up 1% over June, to 44%. Traffic was also down for 46% of operators.

Inflation in wholesale food prices is playing a role in keeping sales in the red.

“Wholesale food prices are up a hefty 5.4% in July over year earlier levels,” said Hudson Riehle, senior vice president of the Research and Knowledge Group for the NRA, in a video webcast. “This is driven by double digit gains in certain commodity groups, for example produce, certain dairy and meat, and this does put additional pressure on operator margins, since food and beverage purchases account for roughly one-third of the restaurant industry sales dollar.”

Houston-based Sysco Corp., the nation’s largest foodservice distributor, reported rising food costs for the first time in a year at its latest quarterly report, and also blamed fruit and vegetables. The company claimed product costs rose 2.2% during the three months ending July 3.

When the entire first half of 2010 is considered, the index is up 2% over the second half of 2009, Riehle said in the webcast.

“There is definite caution among restaurant operators regarding the current economic environment, as well as expectations for the future,” Riehle said. “Operator sentiment was definitely higher several months ago.”

Uncertainty over unemployment in the U.S. has also taken a toll on the industry and operators’ expectations, Riehle said. The number of restaurant operators who expect to have higher sales in six months dropped 4% in July over the previous year, to 38%.

However, international tourism is providing some hope.

“International spending by tourists in the United States in June was up a substantial 15% over year earlier levels,” Riehle said. “That’s positive news for the restaurant industry because there’s always been a very strong correlation between spending by international visitors and ultimately, growth in restaurant spending.”