As commodity prices rise there may be no restaurant operator who will not fee the pinch between what they pay for major proteins and their current menu prices.  In many markets operators may believe raising menu prices to be a death wish; however, there are methods to mitigate the rising cost of goods.

One method we have offered to clients is to use menu engineering to create a layout that will potentially promote more guest choices of items with a higher contribution margin for their dining selection.  This can avoid the risky decision to pull many guest favorites from the menu which could result in a guest backlash.

Another method to push back on protein cost increases is to create new menu options utilizing alternate proteins and protein combinations.  These can be introduced across many menu categories from appetizers to entrees so the operator can maintain a manageable menu-mix with menu choices for their guests and potentially more high contribution margin items as well.  We have suggested using eggs, cheeses, legumes and brown rice to complement traditional proteins and in some situations healthy dining options occur as a result.

Following is a recent article we believe offers some additional suggestions and strategies to combat this issue of rising protein commodity prices that operators may find useful as they address how they will maintain their margins.  We hope you will find it insightful and should you seek other alternatives we welcome your inquiries.

Restaurants blunt the impact of menu price increases

Nation’s Restaurant News – June 10, 2014

Competing restaurants are under the same pressure in a surging market for several commodities, forcing many of them to raise menu prices.

The resulting pinch has prompted each brand to calculate how much it can hike what it charges, and the restaurant chains’ strategies for softening the blow of such increases vary widely, from taking up prices judiciously in certain parts of the menu to creating whole new menu categories that create tiers above and below those raised price points.

When Chipotle Mexican Grill’s chief financial officer Jack Hartung said during a first-quarter earnings call that the fast-casual chain had “built up quite a bit of permission to raise [menu] prices,” he stressed that Chipotle would try not to overstep that consent.

The Denver-based brand will raise aggregate prices between 4 percent and 6 percent, with targeted hikes for certain proteins. Other chains catering to customers with different sensitivities indicated that menu innovation would hold or possibly improve their value perceptions in the face of price increases.

Most brands noted that going the other way and aggressively discounting prices would involve unpalatable tradeoffs like shrunken portion sizes and profit margins — and likely not enough traffic to offset them.

“Do we take less meat in our sandwiches and charge less money?” said Frank Paci, chief executive of McAlister’s Deli, in a conversation about the chain’s Big Bold sandwich lineup that launched last fall. “We went the other way, with more meat for more money, and it drove demand for the product and improved our value scores.”

Menu mix as a fix

Hartung further addressed Chipotle’s plans to hike menu prices during the Sanford C. Bernstein Strategic Decisions Conference in late May, revealing that the chain’s increases would raise the price for steak more than for chicken. Customers thus far had enjoyed a relatively narrow gap between what Chipotle charges for a steak burrito and for a chicken burrito, he said, but that difference will widen to more accurately reflect beef’s higher commodity cost and its recent run of inflation.

“It’s only been about a 30-cent or 40-cent gap,” Hartung said. “Our cost is a lot higher than that, and so every time we sell steak instead of chicken, we’re losing money.” He went on to explain that “we’ll widen that gap to more like 70 cents or 80 cents, but if the customers really have their hearts set on steak, they understand it just costs more nowadays, and they will pay the extra amount.”

Hartung suggested the move may cause people to trade down to chicken.

“We want to put the choice in our customers’ hands,” he said. “We’re not seeing any evidence that people are visiting less. We are seeing that people are moving slightly away from steak and into some of our other items, principally chicken.”

During their first-quarter earnings calls, major quick-service chains stressed the need to maintain value relative to their competition in raising prices. McDonald’s said it would raise prices no higher than the expected inflation for food at home in the United States — somewhere between 2.5 percent and 3.5 percent — and Burger King officials said they would keep their menu price hikes in line with competitors like McDonald’s, “no more and no less.”

Value in innovation

While some brands have used pricing actions to move customers around existing parts of the menu to higher-margin choices, other restaurant chains are developing new items or menu categories to create more context for customers and what those people get for paying premium prices.

This month, BD’s Mongolian Grill began testing a “game changer” on its menu in its Denver location, according to Joe Phraner, its president and chief operating officer. The Burnsville, Minn.-based chain will supplement its core build-your-own stir-fry offering with cooked-to-order entrees at prices below and above the typical levels for stir-fry.

New items would “stay on the Asian fairway,” including miso soup and egg drop soup, some salads, and entrees built around steak, chicken or ribs, he said.

“Certainly cost of goods is a thought; this gives us a little more leverage so we don’t have to go to raising prices,” Phraner said.

Rather, BD’s is adding more price points toward the value end of the spectrum, with items between $6.99 and $8.99 that could help the brand compete better at lunch, as well as some entrees priced above the all-you-can-eat option to highlight that core offering’s value, he added.

“We basically had two price points: one for all-you-can-eat and one for one bowl,” he said. “There was nothing that sits around those that makes you say, ‘Wow, those are a good price.’”

A franchisee of Alpharetta, Ga.-based McAlister’s Deli brought a similar issue to the fast-casual chain’s leaders, when higher food costs had him asking whether to reduce portions in McAlister’s sandwiches to stave off a price increase or to effect a discount.

The brand did neither and instead rolled out the Big Bold line of premium sandwiches. For instance, McAlister’s doubled the meat in its club sandwich to make the King Club, and it took the New Yorker sandwich from 5 ounces of meat to 10 ounces, in large part to start moving through more pastrami and avoid waste of that type of meat, Paci said. McAlister’s increased the price of the New Yorker 28 percent, but orders of the sandwich increased 71 percent, he said.

Another sandwich, the Memphian, increased its order incidence — even with a $2 increase — after going from 1.4 ounces each of ham, turkey and roast beef to 2 ounces of each.

“It was a way for us to build the average ticket and take price but also change the products big-time,” Paci said. “It was similar in 2011 when we introduced new breads and new proteins, but took price at the same time.”

The “art versus the science” in raising prices is to strategically charge more for items with enough demand and wiggle room to take it, rather than enact an across-the-board increase, he added. When the New Yorker sandwich doubled its meat and went to $8.99, McAlister’s was able to trade some customers to the Choose 2 combo for half that sandwich and a cup of soup for $7.99, helping value perceptions, he said.

“It’s really trying to give the guests what they want and allow them to say that the worst thing that could happen was they got a lot of food for the money,” Paci said.

http://nrn.com/commodities/restaurants-blunt-impact-menu-price-increases