Restaurants, now working to secure supply and price contracts for meat and other commodities for the upcoming year, are expecting big increases in food costs -- increases that will likely lead to menu changes and price hikes.
Fast-food leader McDonald's Corp. is considering making some changes to its popular dollar menu -- either by changing the items on the menu or bumping up prices -- saying the cost of selling meat at such low prices might be too high.
The decision to raise prices or change menus could have some harsh repercussions, especially because more diners are already eating at home to avoid pricey restaurant food.
But for restaurateurs, there might not be much of a choice.
"This is the most challenging environment for restaurant operators regarding food price inflation on the wholesale level for almost 30 years," said Hudson Riehle, senior vice president of research at the National Restaurant Association.
Mr. Riehle said wholesale food prices have jumped 8.7 percent year-to-date through August. That's on top of a 7.6 percent increase in 2007.
In 2006, in comparison, wholesale food prices climbed just seven-tenths of one percent, he said.
Menu prices, meanwhile, have gone up just 4.2 percent year-to-date through August -- a hefty increase for thrifty consumers but not enough of a boost to completely offset higher food and ingredient costs.
Beef and other proteins have arguably hit restaurant margins the hardest in this past year. Beef and veal costs have gone up about 19 percent through August from last year and processed chicken has jumped about 3.5 percent, according to Mr. Riehle.
Restaurants typically either pay for their meat on the spot market, which can be volatile because prices are based on supply and demand, or they negotiate longer-term contracts with suppliers that set the price.
The contracts typically last between 90 days and a year. Longer contracts are favored because they offer a guaranteed supply and price. Some suppliers, though, have been more reticent about signing the longer 12-month contracts for 2009.
Companies generally don't release the prices they pay in contracts, but Wall Street analysts are already warning investors that 2009 could be a tough year on margins.
Part of the problem stems from protein producers' plans to cut back on production in the next year to avoid paying more for animal feed, which has been a huge weight on profits as the cost of corn has skyrocketed. Beef producers cut supply by slaughtering more animals, which sends more product to market initially but reduces the size of herds to lower future inventory. And chicken producers set fewer eggs to hatch.
A dip in production means a smaller supply, which typically boosts prices and results in higher costs for restaurants that buy their meat on the spot market. Even those that contract for meat can be affected since the spot market price can provide a guide for the contract price.