Restaurants panic over rising beef prices
Skyrocketing costs are forcing eateries and supermarkets to choose between asking customers to pay more or eating the increases themselves.
Faced with soaring beef prices, many restaurants and food retailers are shifting strategies to woo consumers and protect profit margins.
The record costs are forcing beef purveyors from Ruth's Chris Steak House to Carl's Jr. to choose between asking customers to pay more for steaks and burgers and eating the costs themselves.
Many are passing along the higher prices while embellishing their menus with new items, smaller-portion cuts and more sauces, toppings and side dishes. Others are seeking to control costs by locking in beef purchases at current prices as they envision further inflation to come.
The scramble shows how a prolonged drought in the southern U.S. Great Plains that has shrunk the nation's cattle supply to six-decade lows is rippling from slaughterhouses to drive-ins and high-end steakhouses.
"There are people out there that are panicked," said Gregory Schulson, chief executive of Burrito Beach Mexican Grill, a Chicago-area burrito chain with six locations. "Restaurants have a philosophical choice to make. Are you going to maintain your current products and eat the margin, charge your customers more, or adjust your product to meet the consumer at their price point?"
Burrito Beach recently introduced specialty accoutrements like pickled onions and homemade coleslaw, which servers add to burrito or taco orders at no charge. The move came after it raised prices on beef items by about 4 percent.
"If you can add something that's not particularly expensive but that people think is special, it helps justify the price increase," Mr. Schulson said.
Wholesale prices for choice-grade beef -- the main variety consumed in the U.S. -- surged 11 percent over the 12 months through May as cattle prices reached all-time highs, according to the U.S. Department of Agriculture. The gains come as supermarkets gear up for the week of Fourth of July -- typically the year's busiest period for beef sales.
In many cases, companies are sticking consumers with that higher tab. Average retail fresh beef prices rose 12 percent to $5.45 a pound in May from a year earlier, according to the USDA, and were just shy of the all-time high reached in April. The government forecasts that consumer beef prices will increase as much as 6.5 percent for all of 2014, compared with gains of up to 4 percent for both pork and chicken.
Some consumers are balking at the higher beef prices in favor of lower-priced chicken, creating challenges for restaurants and retailers that emphasize red meat. Rich Brashear, a 23-year-old accountant in Chicago, said he has cut back on burgers and buys more chicken at the grocery store. "I eat a lot less beef," he said while munching on a hot dog at a sports bar one recent afternoon. "You don't have much choice. It's either spend more or eat less."
In the first four months of this year, U.S. beef sales volume fell 0.6 percent from a year earlier after rising in the last two quarters of 2013 at 18,000 grocery stores, supermarkets and other retail outlets tracked by market-research firm Nielsen Co. In contrast, sales volumes for chicken rose 1.9 percent.
"We're preparing ourselves that it's going to be a long journey on beef," Arne G. Haak, chief financial officer of Ruth's Hospitality Group (RUTH), said of the tight U.S. cattle supplies at an investor conference earlier this month.
The company, which operates 120 Ruth's Chris Steak House restaurants and other steakhouse and seafood outlets, said its operating expenses rose by 3.3 percent in the first quarter, in part because of higher beef costs. The company responded by locking in nearly half its beef needs from May through the end of the year at a price about 5 percent above last year's, executives said at the conference. A spokeswoman declined to comment further on its purchasing strategies.
Ruth's Chris also has added a 12-ounce rib-eye steak to its menu, smaller than its traditional 16-ounce version, to give consumers more options, executives said.
Some burger chains are making similar moves. Hardee's and Carl's Jr., which are operated by closely held CKE Restaurants Inc., have in recent years introduced smaller-size burgers and more burger alternatives. Those include a $3.99 five-ounce chicken sandwich launched in May, comparable in size and price to the company's signature black angus burger.
"It turned out that this was a smart time to do chicken because beef prices are so much higher," said Chief Executive Andy Puzder.
Smaller package sizes and less pricey cuts of beef are showing up in grocers' meat cases as well.
"We're seeing customers purchase more cube steaks instead of T-bones . . . and burgers instead of steaks," said Keith Dailey, a spokesman for Kroger (KR), the largest conventional U.S. grocery chain. The company this month launched a Mexican-themed event in stores nationwide featuring thinner, marinated slices of beef for fajitas.
Theo Weening, global meat buyer for Whole Foods Market (WFM), said the upscale retailer is promoting cheaper cuts of beef like boneless short rib.
"We knew we wouldn't have many promotions that feature deep discounts on beef this summer" due to high prices, Mr. Weening said. "It used to be we'd have a sale on New York strip steak every week. That's not happening right now."
Others are asking consumers to shoulder the burden of higher costs. Some, like burrito chain Chipotle Mexican Grill (CMG), are raising menu prices to more closely reflect actual costs. Chipotle in May raised prices for beef-based entrees by 8 percent compared to 4 percent to 6 percent increases for chicken, pork and vegetarian options, according to William Blair & Co.
"Steak prices are rising faster," said Chipotle spokesman Chris Arnold. "Rather than bringing everything up proportionately, We decided to let steak prices carry more of the load and let customers decide if they wanted to pay the premium for steak."
Texas Roadhouse (TXRH), a steakhouse chain with about 420 outlets, boosted its prices by 1.5 percent in December, President Scott Colosis said in an interview. The company also added a beef specialist to its purchasing team last year to help negotiate better deals with meatpackers.
"It's always a battle to protect your margins," Mr. Colosis said. "You have the option of raising prices to a level that offsets inflation or betting that you can drive store traffic, which is a hard thing to do."
More from The Wall Street Journal
Nah, there is no inflation... The FED says it's under 2%. Who you going to believe the FED or your stomach?
Besides the Food Stamp people are buying Lobster. The Democrats will do something if Smokes, Liquor or Lobster go up too much in price, the problem is they will increase Food Stamps again...
So all of us can start eating better? I guess there is a silver lining in every situation. I prefer affordable food. Inflation is way higher than we are being told. If they calculated it the way it was done in the 80's it would be over 10%. The numbers are being manipulated to make administrations look better. The problem with that is we don't know the depth of our problem, making it hard to fix.
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