Higher costs make turning a profit tougher, but raising prices can be the touch of death for local restaurants.
What to do? Foods prices climbed much higher in 2012, with foods like milk and chicken increasing by as much as 10 percent. Meanwhile local restaurants fear that higher prices could drive away customers.
Mission Viejo restaurants are beginning to feel the effects of the 2012 mid-west drought that saw 39 percent of U.S. crops in severe conditions by September. Many restaurant owners are struggling between raising prices and keeping customers loyal.
Several food costs will inflate past historical averages in 2013, according to December’s Consumer Price Index, a program from the Bureau of Labor Statistics that tracks consumer price changes.
Some local businesses are choosing to stay the course.
“We haven’t increased our prices,” said John Green, Owner of Oggi’s Pizza in Mission Viejo.
Although margins are smaller particularly because the “cost for chicken skyrocketed,” Green doesn’t want to make a move and then have to change his menu again if the prices come down.
Drought and the resulting loss of corn and soybean production caused chicken prices to increase 5.5 percent in 2012. CPI forecasts another 3-4 percent increase for 2013.
And it isn’t just chicken. CPI reports dairy product prices were up two-tenths of a percent from Nov. to Dec. 2012, with a 2012 yearly total increased cost of 2.1 percent. Increases for 2013 are projected at 3.5 percent to 4.5 percent.
According to a recent Forbes report, the demand for chicken increases in the spring. For farmers to “recoup increasing costs, the industry needs to quell supply and reduce output so as to drive up prices.”
National chains will likely feel the price increases less than smaller restaurants.
Dwayne Boar, who manages Chili’s Grill & Bar, says that because they have “nationwide contracts [where] the prices are set for some time,” these kinds of food price increases don’t affect their business as much.
Smaller businesses are more likely to feel they can’t afford to weather the storm. Michelle Houston, part of the Heller family that owns Paul’s Pantry, said, “We had to increase prices,” but didn’t go into details.
For many restaurants, maintaining profit margins is a constant struggle between keeping the customers happy and staying in business.
According to Ricky Volpe of the United States Department of Agriculture (USDA) Economic Research Service, we should expect “above-normal food price inflation” in 2013. Volpe said that we are experiencing “historically low inventory levels for cattle,” coupled with inflation and the 2012 drought that just exasperated this situation.
What about produce? According to the CPI report, fresh fruits and vegetable prices dropped by about six-tenths of a percent in 2012. They are forecasted to be 3-4 percent higher for 2013.
Some Mission Viejo restaurants avoid the yearly price escalator and unpredictable markets by purchasing local produce. Gustavo Tirado, owner of Don Gustavo’s Authentic Mexican Food, buys a lot of his fresh produce locally.
“These costs have increased slightly, (but) they are manageable,” he said.
Price increases for chicken, beef and dairy have definitely impacted Tirado’s business this year. Because Tirado has been in the restaurant industry for 25 years, he believes that even slight increases can be the kiss of death for a small restaurant. So he has chosen not to increase menu prices for the past five years.
“My demographic is families,” he said. Customers are extremely price sensitive, he said, particularly when the economy is down. “People don’t want to pay extra” for their favorite menu items, he said.
The owner of Gustavo’s works hard to keep his expenses down by negotiating with his vendors as well as by better planning for projected daily consumption to create less waste, he said.
Tirado estimates that his total food costs have gone up from 26 percent to 30 percent in 2013. As a small business, he doesn’t have the luxury of extending contracts out over a year, so he makes up the difference in volume by promoting his restaurant within the community, advertising, using coupons and Google search advertising.
Increased dairy costs have also affected a local coffee house. Wayne King, Manager of It’s a Grind Coffee House on Marguerite, reports that his milk costs have risen 10 percent in 2013, not to mention that the coffee bean itself is up 30 percent worldwide as is cacao (aka chocolate), which is somewhere between 30 percent and 40 percent higher in cost this year.
But a long, four-to-five-year shelf life for coffee beans has kept It’s a Grind from raising prices.
King also promotes his business within the Mission Viejo community which he says is a “highly supportive group of people.” That outreach includes work with non-profits, churches, and schools and King believes this is instrumental to helping him bring him in new, family-oriented customers.