As a result of this summer’s drought, restaurants already struggling with high fuel costs and a sluggish economy are starting to feel the pinch of higher food costs. Commodity prices were increasing even before the dry spell, and economists say even bigger hikes are ahead as the poor U.S. harvest ripples through the food chain, according to a Los Angeles Times report.
The price of corn–a key component in livestock feed and an ingredient in powdered sugar, salad dressing, soda, and much more–catapulated 60 percent in early summer. Now, fast-food giants, white table cloth eateries, and corner coffee shops are scrambling to adjust. The cost of food now rivals labor as the top expense for most restaurants.
As a result, restaurateurs are revamping menus, reducing portion sizes, and even considering staff cuts, and in the months ahead, possible menu-wide price increases. In lieu of price increases, some restaurant report they are forced to scrimp on portions or drop the extras.
Beef prices are rapidly rising, and in the meantime, chickens and turkeys are getting more expensive as well. Already, wholesale, chicken prices are up 5.3 percent from a year earlier, while the cost of turkey and other poultry is up 6.9 percent. Eggs cost 18 percent more in September than they did a year earlier.
Restaurant prices have been rising for more than a year. Wholesale food costs rocketed 8.1 percent last year, the largest jump in more than three decades. Minnesota-based Buffalo Wild Wings recently told analysts that it is boosting menu prices by an average of 4 percent in its company-owned stores to help offset soaring wing costs. This summer, a Big Mac cost $4.33 on average in the United States, up from $4.20 in January and $4.07 a year earlier, according to the popular Big Mac index compiled by The Economist.
Analysts expect overall food costs to rise 5 percent to 20 percent by the end of the year–a painful squeeze for businesses that, even in the most prosperous times, operate on tight margins with little room to maneuver. “If the cost of the food goes up that much, it can pretty much wipe out their profit,” said John Davie, chief executive of food service partnership Dining Alliance. “Restaurants will be forced to look at everything from the phone bill, to payroll, to food costs, and how they negotiate with vendors.”
Many big chains have avoided hefty menu price hikes thanks to long-term deals with their suppliers. “Sophisticated large guys can hedge far into the future,” Don Krueger, an analyst at Motley Fool, said. “The smaller mom-and-pop restaurants are going to get hit with the drought very shortly.”
