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Rising costs, frugal customers pinch restaurants at both ends
Sunday, March 09, 2008
Richard and Marlene Hartman, of Franklin Park, two regular customers at Kings Restaurant in Wexford, prepare to order.

The price of eggs these days is almost enough to turn that Breakfast Smile -- complete with toast, bacon, hash browns and two eggs cooked to order -- upside down.

Local restaurant chain Eat'n Park's bill last year for eggs was $500,000 higher than the year before, even though the number of eggs it bought was about the same -- approximately 200,000 a week. If prices hold at current levels -- 60 percent higher than a year ago, according to the government's Producer Price Index -- the company's egg bill could go up another $500,000 this year.

But diners aren't paying more for the chain's signature breakfast combo -- $3.99 weekdays and $4.99 on weekends -- or many other items that have begun to cost more to make. "Those costs aren't getting passed on to the consumer," said Kevin O'Connell, senior vice president of marketing, "because the consumer can't handle it."

The nation's chain restaurants have been swallowing hard in recent months as they wrestle with the soaring costs of ingredients, new fuel surcharges from vendors and rising labor costs at the same moment that their customers have decided to eat out less often.

"It's been a tough year," said Ron Paul, president of Chicago-based food consulting group Technomic Inc., which found sales growth rates at chains like Eat'n Park slowed last year to 5.1 percent from 6.1 percent the previous year.

And 2008 isn't shaping up much better. "We think it's probably going to be worse," said Mr. Paul. Factoring in 4 percent inflation, the group is projecting real spending to be down.

Over a third of 1,200 consumers surveyed by Technomic last month reported visiting both fast-food restaurants and full-service restaurants less often than they did three months ago, and more than 70 percent said they have less money to spend on extras.

So even as consumers try to cut back, they're likely to find themselves more popular than ever, as chains from Applebee's, Chili's and McDonald's to Eat'n Park and Kings hustle to whip up new menu items and cook up values to help diners justify going out.

Bond rating agency Fitch Ratings is predicting greater competition for fewer dollars will make many restaurants skittish about raising prices, forcing them instead to focus on cutting costs, playing with portion sizes and trying out new specials.

"It's a fight for share of stomach," said Mr. Paul.

Standing the heat

Getting a seat at a Kings Restaurant got a whole lot easier in September. That's when restaurant traffic seemed to slow. "Last fall, the consumer, I think, started to feel the [economic] pressures as well," said Chris Whalen, vice president of finance for the White Oak chain.

By then, many restaurants already had been feeling plenty of inflationary heat in the kitchen even as they tried not to let guests see them sweat.

Rising fuel costs meant many suppliers bringing in produce, meat, pasta and other ingredients had started adding surcharges for every load. Eat'n Park officials studied ways to consolidate truck loads. Or, as Mr. O'Connell put it, "Can we make two deliveries instead of three deliveries to a restaurant a week?"

The cost of ingredients also weighed on results. Beef prices are up, as are wheat, dairy, even fats and oils used in cooking. For Kings, food costs rose more than $560,000 above the previous year.

Kings officials weren't too happy either when Pennsylvania-mandated minimum wage increases began taking effect in January 2007. A second round came in July of that year. The raises, which sent the pay for more experienced workers up as well, raised costs about $250,000. The 35-store chain responded by trimming the number of minors in its workforce by a third.

Electricity prices went up, but natural gas dipped a bit. Insurance fees rose. "It just trickles and trickles and trickles," said Mr. Whalen.

Looking for cost savings that wouldn't affect customers, Eat'n Park Hospitality Group began looking more closely at ways to take advantage of its size. In addition to its 75 namesake restaurants, the company operates divisions that run cafeterias for colleges, companies and hospitals. Buying china plates, for example, for all three from the same source brought volume discounts.

Downgrading the quality of ingredients was not an option. Guests can tell. "You can't afford to lose customers right now," said Mr. O'Connell.

Less can be more

It is possible to offer customers choices that allow them to splurge in a more frugal way.

Take the "senior menu" at Eat'n Park. It's never been just for seniors, Mr. O'Connell said, because anyone could order from it, but in February the chain turned it into a "smaller portion" menu. Someone who wants the Rosemary Chicken but wants just one chicken breast can get that.

"It's really, 'Hey, here's another way for people to save money,' " he said.

Kings is approaching desserts in the same way. "Our desserts were huge," said Mr. Whalen. In the past couple of years, the chain has been offering mini-desserts for those who want just a taste.

Soup and sandwich chain Au Bon Pain now has a menu section devoted to portions with 200 calories, and T.G.I. Friday's offers a Right Portion, Right Price menu. That same trend can be seen in the growth of 100-calorie snacks in the grocery stores.

For restaurants, it can make people feel as if they have options that can cut calories as well as the check. "You can moderate your costs," said Mr. Balzer.

Women typically are the ones most satisfied with smaller portions, he said, while some men might like the opportunity try a little bit of the fudge sundae ... and the cheesecake and the key lime pie.

Another tactic Eat'n Park has used was to drop the price of adding the salad bar to another purchase from $3.29 to $3. Just keeping the salad bar open means incurring certain fixed costs, and while it may seem counter-intuitive to cut prices when costs are rising, the company is counting on picking up more volume.

Raising prices on the menu can be done, of course, but restaurants are being careful. Eat'n Park raised coffee prices in Ohio after discovering competitors charged 10 cents more. Kings put out a new menu last year with higher prices on some items but offered discounts to customers who carried its Royal Rewards loyalty card.

Selling values

"This year, the message has got to be value," said Mr. O'Connell. That assessment fits with trends sweeping the industry. The recent Fitch report noted Taco Bell is asking consumers, "Why Pay More?" and Applebee's is marketing its $9.99 Three-Course Classic.

Kings is on the program, too. "Our goal is we're trying to provide a great value meal at a great price," said Mr. Whalen, citing as an example a line of appetizers that starts at $1.99.

Last month, Eat'n Park introduced a line-up of weekday breakfast deals at reduced prices. The company also has been more heavily promoting its Tuesday senior breakfast buffet special. "I think that overall, building traffic is the key thing," said Mr. O'Connell.

The private company doesn't release financial results, but Technomic estimates Eat'n Park's restaurant sales hit $189 million in 2006, up from a little less than $183 million in 2005. The company's restaurant sales account for about half of its total business, with contract dining services making up the rest.

Mr. O'Connell described 2006 as one of Eat'n Park best years ever. He said last year's results were down mainly as a result of sales lost because of the chain's decision to go smoke-free. He said breakfast business overall was up as a result of having more nonsmoking space to seat people, but late night sales dipped.

Mr. Whalen of Kings, also a private company, said business dipped about 1.5 percent last year. Technomic estimates Kings sales in 2006 were about $60 million.

Eventually, the economy is bound to take a turn for the better, but industry analysts think some chains, especially those with heavy debt, will struggle to make it through. Consolidation may become more of a factor for the chains, which as a group have been taking market share from independents for years.

Even before this, the industry had problems, said Mr. Balzer. Several years ago, for the first time in decades, the percentage of women in the workforce stopped growing. That had been a reliable driver of restaurant business.

The average American bought 207 meals at restaurants last year, according to NPD Group statistics. That's down from a peak in 2000 of 210 meals but much higher than the 160 meals purchased in 1984.

The majority of those meals, however, are not consumed in restaurants, said Mr. Balzer. The number that are has fallen from around 90 in 1984 to about 80 last year, which helps explain why more restaurants are promoting their takeout menus.

No matter what else is changing, according to Mr. Balzer, "One thing that's consistent -- we don't want to cook."

Teresa F. Lindeman can be reached at tlindeman@post-gazette.com or at 412-263-2018.
First published on March 9, 2008 at 12:00 am
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