Restaurant inflation is edging up

Thanks to the recession, 2010 was a year of $5.99 lunchtime specials, dollar-menu bargains and 2-for-1 meal deals; 2011 is turning out to be quite different.

Rising commodity prices and the high cost of gasoline have finally broken the budget-minded approach that restaurants embraced to keep their cash-strapped customers coming.

Across the country, in chain after chain, menu prices are climbing — or portions are shrinking — as restaurants contend with across-the-board increases in the cost of everything from pork to plastic cups.

So far, the price increases have been incremental and nearly negligible — 1% seems to be the norm — but federal agencies predict that relief won't arrive for restaurants until next year, meaning more increases could be ahead. By the time 2011 ends, expect restaurant prices to be 3% or 4% higher, according to the U.S. Department of Agriculture.

Many restaurateurs are struggling to find ways to avoid raising their prices, recognizing that alienating a loyal clientele could be disastrous. They are pressuring vendors to keep charges reasonable and working with chefs to minimize waste and maximize every ounce of food.

"We've really had to tighten the belt back in the kitchen … making sure we're not wasting any product," said Steve Lucey, co-owner of Six Paupers Tavern & Restaurant in Hockessin, Del.

Yet that approach can only go on for so long before owners say they have no choice but to raise menu prices. Larger chains have more leverage to get better prices from suppliers, and also more power to keep menu prices down.

"Today, what we've done by increasing our business (is) we increased our buying power," said Matt Haley, who has opened seven restaurants at the Delaware beaches. "We've forced the people to lower their price to us."

In 2010, restaurant prices rose 1.3%, the lowest annual increase since 1955, according to the USDA. Since then, commodities such as corn and wheat have spiked as world demand grew and fuel costs soared.

Since March 2010, beef prices have risen 12.2%, the USDA said; pork prices are up 11.2% and poultry 2.2%. By the end of the year, beef prices are projected to increase 7% to 8%; pork prices, 6.5% to 7.5%.

As a result, the average menu price increase for 2011 at major chain restaurants is expected to be 1.6%, according to an industry analysis by the Nation's Restaurant News.

"It's inevitable that we're all going to have to increase prices," said Eric Sugrue, owner of Big Fish Grill.

Restaurants that focus on Italian or Mexican food will see the biggest rise in costs, the research found, driven by big increases in such ingredients as bread and pasta, up 23%, and potatoes, up 21%.

Some relief is expected in 2012 — but not for eggs, forecast to rise 17%, and chicken wings, expected to be up 10%. Higher projected prices for milk in 2011 are expected to mean retail dairy product prices will rise 4.5% to 5.5%.

All of this presents a dilemma for restaurant owners, especially at a time when customers have grown used to "value" menus and have become cost conscious when it comes to dining out. Consumers are even likely to view attempts at controlling costs through reduced portions skeptically, research has found.

The recession has had a profound and likely long-lasting effect on how consumers regard restaurant spending, according to a report by the NPD market research firm. More than a quarter of all customers now consider themselves to be cautious spenders — people who have been reducing their restaurant visits, "trading down" and ordering fewer items.

"While these consumers anticipate that they will be less restrictive with their restaurant visits when the economy recovers, they do not expect the economy to recover any time soon," the report said.

Bob Goldin, executive vice president of Technomic, a food industry researcher, said he believes the rapid rise in gas prices has heightened sensitivity to menu price increases.

"Consumers are deeply concerned about the price of gas. … As a result, they are very likely to reduce their spending on groceries and restaurant meals and increase their reliance on coupons and deals," Goldin said in a recent report.