Restaurateurs Struggle to Reconcile With Rising Prices

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As the owner of Rick’s Bakery, Rick Boone has created a successful career sugar coating everything.

The donuts, cakes, cookies and pastries in his Fayetteville bakery are a testament to his ability to make everything better with a drizzle, sprinkle or crispy layer of sugar.

But try as he might, Boone can’t sweeten the one bitter aspect of his business – the rising cost of food and supplies.

“My flour prices have increased 300 percent since January,” Boone said. “I used to pay $8 to $10 for a bag of flour. Now I’m paying $25 a bag. And the rising fuel costs have caused every product I buy to increase in price.”

Food prices have been on an upward climb, fueled in part by the rise in ethanol production, which has spiked corn prices and diverted it from other uses.

Seeing the huge increase in corn profits, many farmers have begun replacing other crops with corn.

And because corn is used as feed in the meat and poultry sectors, beef, chicken and eggs have all risen in cost.

The months of tornados, rain and flooding have decreased crop yields in Arkansas and across the country, hurting supply.

Plus, a global increase in the demand for commodities has stressed prices even further.

On top of it all, rising fuel costs have impacted all supplies and staples that must be transported from the manufacturer to the restaurant and even such things as plastic cups and cutlery – made with petroleum – have faced markups.

At the close of business on May 13, corn prices on the commodities market had increased more than 69 percent from the same time the year prior, and soybeans had skyrocketed 81 percent from May 13 of 2007.

Raymond Crosier, district sales representative for Ben E. Keith Co., said he has advised his clients to factor in an 8 percent increase in food costs for the year.

As food and fuel prices continue to inch upward, restaurant owners like Boone can only watch the prices climb and find ways to absorb the costs and sweeten the situation any way possible.

“I carry a slush fund for when things get out of whack,” Boone said. “That has helped us to not have to raise prices. I’ve already gone through all of that. Now we’re looking at other options.”

Purchasing Power

Restaurant owners’ buying power and purchasing agreements have been a major factor in how hard they have been hit by rising prices.

Jim Waselues, owner of JRP Enterprises Inc., which operates the Jim’s Razorback Pizza locations in Northwest Arkansas, contracts his largest product, cheese, on an annual basis.

Because he buys the products and supplies for all of his locations, Waselues said he has been able to leverage his purchasing power to negotiate annual or quarterly contracts that have helped him avoid some of the price spikes.

Without an annual contract, Waselues, who oversees 19 stores in and around the Northwest Arkansas market, said he could be paying up to an additional 50 cents per pound of cheese.

Boone, who only operates one location, doesn’t have the purchasing power of Waselues and other medium to large chains. Therefore, he is more susceptible to the daily swings in the commodities market.

“I can’t get a contract for my flour until two days before I need to make a purchase,” Boone said. “That makes it tough to estimate costs.”

Rhett Hall, owner of Urban Table in Fayetteville, said being independent of a large corporation allows him to be more flexible with his buying, which he views as a positive.

“We don’t have the purchasing power of a large group of restaurants but we do pick what we get and from distributors that have buying power,” Hall said. “Being small makes us very nimble.”

Foot Traffic

Boone has had one welcomed increase, sales and foot traffic at his bakery has been up over the past year.

“We’re seeing about 50 to 75 more people a day than this time last year,” he said.

And the added foot traffic has helped bolster Boone’s sales, which go a long way in making up for the extra operating costs.

According to monthly hotel, motel and restaurant taxes collected by the Fayetteville Advertising and Promotion Committee, sales at Boone’s bakery increased 1.5 percent from March 2007 to March 2008.

Waselues said sales have varied for each location, with some stores seeing an increase in sales and other having down months.

Sales for the Bentonville Jim’s Razorback Pizza location increased 0.8 percent from March 2007 to March 2008 but the chain’s three Fayetteville locations had a cumulative 10.7 percent decline in sales for March 2008 compared to a year prior.

Dave Godwin, managing partner for MarketPlace Concepts LLC, said foot traffic hasn’t decreased substantially at any of the seven MarketPlace restaurants in the region, but customers’ spending habits do show signs of tougher times.

“There’s no question that there’s been a shift in consumer spending habits,” Godwin said. “One area that we’ve seen a change in more than traffic is what they order. People are still dining out but they are finding ways to not spend as much. We are seeing people excluding desserts and trading down from a full meal to a sandwich.”

Montine McNulty, executive director of the Arkansas Hospitality Association, which is the umbrella organization for the Arkansas Restaurant Association, said restaurant sales across the state have “been a mixed-bag.”

“Obviously people aren’t going to quit eating out all together,” McNulty said. “But in some cases they make a different choice to lower costs. They might opt for a fast-food restaurant instead of a high-end, full-service restaurant.”

Making it Work

Raising the price of meals would be an easy way for Hall to recoup a portion of his lost revenue.

But he created a business on the idea of affordable fine dining and he intends to keep his prices affordable.

“When we priced our menu we gave ourselves a little wiggle room,” he said. “We’re right where we need to be. I don’t see commodity prices forcing us to do anything we don’t want to do.”

Instead, Hall said he has placed an emphasis on efficiency and frugality in areas such as food usage, utilities and labor.

By being thrifty in all areas, Hall said he has been able to recoup some of the additional food costs.

Waselues said he never likes to increase his prices but the impact of rising food prices have caused him to consider making changes.

“We are looking at an increase in probably June or July,” Waselues said. “The increases will be across the board. Increases have affected everything. Even our pastas are going up. It’s something we have to do but we never like to take increases.”

Increasing the price of meals will help owners recover some of the additional operating costs but restaurant owners have to be careful to maintain their brand image when making cuts or raising prices, Godwin said.

“I think the biggest mistake companies make is changing their products or cheapening things,” he said. “That’s something we will never do. It all goes back to maintaining our brand. People choose to eat at our restaurant because of our service, selection and prices.”

Changing products and supplies is also not an option for Waselues. Instead, he said the chain has looked at changing operating hours and revamping the menu in some areas.

Boone said the increases have had a substantial effect on his operating costs but because little can be done at this point to lower food costs, the only thing he can do is continue to deliver the best product possible and finding ways to tighten the spending and sweeten the situation.