Owning your own restaurant is notoriously one of the most daunting businesses you can enter, and in a down economy the pressure is on even more, particularly for independent restaurants. One reason for a lot of the stress is that small restaurants lack the buying power of the large national chains and can end up wasting countless hours (not to mention dollars) trying to find the best deals. Another reason is the ongoing havoc the national drought has played on commodity prices.
A recent report from the National Restaurant Association titled "Drought may have long-term impact on wholesale food, menu prices" features some startling insights from Hudson Riehle, senior vice president of the National Restaurant Association's Research & Knowledge Group. According to Riehle, "With food costs rising, restaurant owners are adjusting their cost management strategies while managing consumer expectations of value at the same time… With a typical restaurant averaging pretax profit margins of 3 percent to 5 percent, operators will have to manage their escalating input costs to ensure those margins remain viable."
With food prices on the rise independent restaurant owners will need to have a plan to deal with unforeseen circumstances.
Why Are Food Prices Rising Now and the Effect It Has on the Future
Price Hikes and Commodity Shortages Will Ebb and Flow for Months to Come. Because of the drought, prices on some food items are currently in a downturn as meat suppliers have killed off livestock early in anticipation of reduced feed supplies. This was written about a few months ago on CNN Money, in which that month's United Nations' monthly Food Price Index Report was quoted as stating that meat prices actually declined modestly, partly due to ranchers culling their herds to curb prices they have to pay for corn-based feed.
However, what that article didn't mention was that the early slaughters will create a future shortage, and the reduced supply of meat will start really having an impact in 3 to 5 months. Just last week, my company, Dining Alliance told our members meat prices will not only come back up, but shoot high above normal prior pricing in mid-winter, after the drought has ended (Dining Alliance Special Edition - Drought Advisory) . Thus, restaurant owners who're not thinking this through or paying attention could be lulled into thinking that the drought isn't that bad, or it's "over," and be caught by surprise when meat prices go up in the winter and spring.
Some food items have already hinted at what's to come on a larger scale. The price of bacon alone shot up 20% from May to August of this year due to herd die-offs from the heat, and that's just the beginning. The full negative impacts of the drought will continue rising like the tide during a hurricane as supplies continue to be in short supply due to smaller herds and even failed farms as some pig farmers in the U.S. and abroad abandon their operations altogether . When you consider that most restaurants have only about a 5% profit margin, a 15% increase in prices on food could put them under water.
Independent restaurants are particularly vulnerable to big price hikes in the coming months. The mega chains have major purchasing power and can lock in prices at favorable rates. But the little guys don't have that clout. They can't negotiate favorable deals because they just don't have the volume to get better pricing. They are at the whim of their suppliers.
What the Major Chain Restaurants s Are Doing to Grab Market Share - Knowing Independents Are Not Prepared
The major chains are not only constantly monitoring these price swings but have their auditors locking in the best prices continuously. They have the inside track and a huge head start over independents - all because of their incredible buying power.
The result is that independent restaurants are going to see their profits or even their survival under attack. The drought has already spiked pricing on foods like pork, chicken, and lettuce that are directly and immediately affected by the drought; but the price hike tidal wave is coming six months down the road. Prices then will drive upward on anything and everything affected by corn - and that's a huge number of items. A lot of restaurant operators will be caught in a price vise in the middle of winter, on everything from ketchup to fried foods; anything that contains corn syrup, corn oil, or even is delivered using fuel containing ethanol.
View the Forbes' recent slide show on the drought and what it's done to the nation's corn supply tells the story vividly.
Steps Independent and New Restaurants Can Take to Protect Your Bottom Line from Drought Damage
1. Follow the "use everything but the squeak" principle in menu planning and preparation. Cuts and trims of vegetables, for example, that you discarded in the past might now go into soups; less fancy cuts of meat might be worked into appetizer specials. Be extra creative and strive for 100% use and zero waste.
2. Up your usage of raw products as opposed to prepared, and use them in multiple dishes to make sure that what you buy is consumed and therefore contributes ultimately to an profits more than costs.
3. Offer specials and blue plates and change them up often to accommodate pricing. Be nimble; remove items whose prices are rising and emphasize those that are less affected or are in temporary oversupply.
4. If you typically name specific ingredients in your menu such as certain exotic vegetable varieties, change your focus on preparation, finishes, or flavor combinations and use much more general language about the specific ingredients.
5. Be serious with your staff about food waste. Talk to them, monitor them, and set goals. Even pull your large kitchen trash receptacles and use smaller ones in their place. Doing, not telling, is a powerful way to deliver and enforce a new management policy.
6. Increase your purchasing leverage by joining a group purchasing organizations that focus on small to midsized restaurants . You'll be able to enjoy lower pricing benefits, like the big chains, and often better guaranteed quality as well. You'll ultimately save hours of valuable time, too, by not having to deal individually with various vendor reps trying (without much clout) to search out and negotiate the best deals.
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