For restaurants, the high cost of doing business is food

The rising costs of coffee and protein-based foods, including bacon, eggs, ham and beef, are creating concern among industry experts and chains specializing in the breakfast day part who say the prices, historically, are higher than ever before.

Food cost pressures are building, said Hudson Riehle, senior vice president of research for the National Restaurant Association. “Operators have watched carefully what’s going on with staple breakfast items like eggs, bacon and coffee. Some will consider operational adjustments as cost pressures are sustained.”

According to the NRA’s monthly Restaurant Industry Tracking Survey, operators once again cite food costs as their top challenge. Last month eight in 10 operators said their average food costs are higher now than a year ago. Among family-dining restaurants, many of whom focus on breakfast, nine in 10 operators report higher food costs.

“Price fluctuations of commodities can have a significant impact on the operator’s bottom line, especially if the items in question are essential to a specific concept or menu. Breakfast has been a growing day part over the last several years, as restaurant operators explore new avenues to build business and more consumers live life ‘on the go’,” Riehle said.

John Barone, commodities analyst and CEO of MarketVision Inc., says prices eased over the summer but remain high, almost across the board.  A drought in Brazil this spring continues to drive up coffee costs, he noted.

“Coffee prices dropped 20 percent between April and July, but have regained most of that drop and look to be headed higher over the long term,” he said. “Brazil has a multi-year coffee problem. The bottom line is breakfast chains are really feeling the heat.”

Some larger restaurant companies were able to negotiate contracts before costs started climbing. Corner Bakery Cafe, right now is in a good position on its coffee contract, although that could end sometime next year, said Ric Scicchitano, senior vice president of food and beverage.

“We did a lot of forecasting and booking on the contract side to manage risk for all of 2014 and into 2015 as much as possible,” he said.  He said the company locked in a good coffee contract when it saw favorable prices in the last half of 2013, but will have to reset that contract for 2015. “We haven’t been exposed to the spike in prices, but I’ve been telling everyone that headwinds are brewing for next year because we don’t have positions to carry us all the way through 2015.”

Dunkin’ Brands, parent of Dunkin’ Donuts, indicated it is exploring the possibility of raising prices on its coffee beverages to offset the surging cost of coffee.

"We are currently holding conversations with our domestic franchisees about a modest increase in coffee prices,” spokeswoman Michelle King said. “We have not taken any significant price increases on coffee in the last several years and even with a modest increase, we continue to offer a great value to our guests every day."

Coffee isn’t the only commodity causing headaches.

Barone said prices on pork bellies, or bacon, are down about 20 percent from year-ago levels but remain historically high due to potential supply issues related to the outbreak of PEDv, or porcine epidemic diarrhea, which affects newborn piglets. Even after recent drops, the prices of ham and pork trimmings, or sausage, remain 30 percent higher than last year.

PEDv disease is expected to reemerge this fall, when the weather cools,  Barone says. “There’s really no end in sight because no one has any real information on when the virus will be under control or how much damage it will do to supplies.”

Dennis Lombardi, executive vice president of strategies for foodservice consultant WD Partners, says he expects more restaurants, especially small operations and independents, will update and re-engineer their menus to feature alternative items that aren’t as costly to serve.

“For independents, there really seem to be few choices available,” he said. “They basically can endure the higher food costs, change their menu prices accordingly, or update and re-engineer their menus, which they do three or four times a year anyway. A lot of the big chains are locked into supply contracts, which allow for more price sustainability.”

Scicchitano said his company is still in good shape regarding food costs, but 2015 could be another story.

“We took 95 percent of our risk off the table last December,” he said. “We’ve kind of been exposed to the cheese market a little bit, but for the most part we’ve been pretty insulated where pricing is concerned. I do think we have a little bit of a correction coming in some protein areas. I’m worried about that more than anything else ‑ and dried fruits and nuts. Those are the things that are going to keep me awake now for next year.”