Restaurants Resist Price Hikes to Keep Cost-Conscious Consumers Loyal

Restaurateurs grapple with increasing food prices, customer loyalty, and staying in the black.

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Scorching temperatures and scarce rain have scarred the plains, damaging crops and driving up prices for everything from soy beans to corn.

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The restaurant industry has taken quite a beating over the past several years as cost-conscious, recession-weary consumers pulled back on dining out. Now, after regaining some steam as the economy improves, restaurateurs face another challenge, this time from Mother Nature.

Scorching temperatures and scarce rain have scarred the plains, damaging crops and driving up prices for everything from soy beans to corn. Increases are gaining speed, with prices on track to jump 3 percent this year on top of a more than 8 percent uptick last year.

Not surprisingly, food costs rank as the second biggest challenge for restaurateurs, according to the National Restaurant Association, primarily because roughly one third of the typical restaurant sales dollar is allocated toward food and beverage purchases.

Drought-driven food price increases are already starting to trickle down to restaurant buyers, who are seeing revised reports for prices and availability.

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"We have been seeing a little bit of an increase in price," says Humberto Martinez Jr., owner of Chicago, Ill.-based Timothy O'Toole's Pubs. "We've been receiving a lot of updates to reports saying, '[Price increases] are coming, so don't be surprised.'"

Analysts also expect beef, chicken, and pork prices to tick up from record highs in coming months, especially since ranchers are still trying to shake off the impact of a fairly severe drought last year.

"The cattle producers have lost all their grazing land, [and] feed prices have gotten so high. That combined with when creeks dry up and they have trouble watering their cattle, and a lot of these guys are selling off their stock," says John Barone, president and commodity analyst at Market Vision Inc.

While the influx of livestock sold for slaughter now and in coming months will mute some of the price increases for the next few months, it's bad news going into next year, especially given the declining herd sizes.

"The first chance we'll have for lower beef prices might be as far out as 2015," Barone adds.

For the time being, it looks like consumers will dodge a bullet, especially since restaurateurs are loath to raise prices in such an ultra-competitive environment. Owners usually look to every other option when it comes to cost reductions before dinging consumers with higher prices.

"We're biting our tongue right now," Martinez says, adding that he's currently working on several versions of new menus that could eliminate pricier food options to keep the core food offerings at affordable prices.

"We're watching very closely," he says. "Competition is so tight in our category, and we're in downtown Chicago. In our building there are five [establishments]."

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While restaurateurs may be holding off on hiking prices for now, experts say the trends are troubling. The restaurant industry is on track to reach record high sales of $632 billion, but this bump in the road thanks to the drought could derail those aspirations.

"Even with the price growth moderated this year, it's still at higher levels overall than several years ago," says Hudson Riehle, senior vice president of research at the National Restaurant Association, adding that restaurateurs had already driven out most cost inefficiencies during the recession, leaving them fewer options when it comes to breaking even.

"In general, for a restaurant operator, there's no substitute for stable, predictable, slow food-price inflation," Riehle says.

Meg Handley is a business reporter for U.S. News & World Report. You can reach her at mhandley@usnews.com and follow her on Twitter.