Challenges & Opportunities: Cost Conscious


For Bill Pratt, ground chuck giveth and ground chuck taketh away. “We live and die by food costs,” says the CEO of the Dartmouth, N.S.-based Chef Inspired Group of Restaurants, which operates the regional QSR chains Cheese Curds and Habaneros, as well as the popular Gecko Bus food truck and the Truck-Side food truck food court.

In an industry where the average restaurant operator makes just 43 cents for every $10 spent by customers — according to the most recent data from Restaurants Canada — rising food costs are a constant worry for Pratt and his fellow operators.

Restaurants Canada’s recent Restaurant Outlook Survey found food costs are a “significant” pain point for seven in 10 restaurant owners, while also noting operators are running out of options on where to cut costs.

There is no immediate relief in sight. According to the eighth edition of Canada’s Food Price Report, prices are expected to increase between one and three per cent this year — led by a four to six-per-cent increase for vegetables, one to three per cent for fruit and as much as two per cent for meat and seafood. The report also notes the average Canadian family will spend $208 more when eating out at restaurants this year.

Regina restaurateur Roberto Florez says he, too, has seen food prices creep steadily upward since opening a food truck and pop-up restaurants early last year. Increases have affected key ingredients, including dry peppers (which have increased in price from $3.50 to $5 per 100g), tomatillos (from $5 per kilogram to $7) and tortillas (from $3.50 to $5).

Florez, whose family has been in the restaurant business in Mexico for several decades, says an insistence on using imported Mexican products — which cost more to ship and import — is contributing to the increased costs for El Tropezon. “We started the business to show people [authentic] Mexican food, not just burritos and tacos and whatever you can find here,” says Florez. “We’ve been trying to keep our prices [the same] and keep a positive attitude during this economic episode.”

For Pratt, one of the biggest problems is coping with seasonal variances in food costs. He was paying $55 for a box of tomatoes in January and expected prices to go as high as $70 before dropping back down to $15 or $20 during the spring and summer.

It’s not an option to raise prices to compensate for increased food expenditures in the colder months, so Pratt is often forced to absorb those temporarily increased costs. “I’ve got to suck it up,” he says. “I can’t raise the price and I can’t take tomatoes off my tacos or my hamburgers.”

Unlike operators in casual or high-end dining, Pratt has to be mindful of downloading increased food costs to his customers. They’re not only sensitive to even the slightest fluctuations in price, but in a crowded category such as burgers, they can easily vote with their feet.

“If a burger patty was $1 when I first started and now it’s $2, I can’t raise the price of the burger that much,” says Pratt. “I’m competing against the Wendy’s, the McDonald’s and Burger Kings of the world, so it’s a different model for me. I have to be very tight and savvy in order to keep my head above water.”

Being a multi-unit operator does give Pratt a certain amount of leverage when it comes to negotiating prices with suppliers, although that pales in comparison with the buying power of the country’s QSR giants.

For Pratt, one of the keys to successfully managing spiralling costs is upselling. Combos, he says, are the lifeblood of his company. “When people come in and order just a burger, I cringe,” he says. “But if they order a burger, fries and a fountain pop, I’m pretty happy. The upsell is a key part of the business.”

It’s located just across the Angus L. Macdonald Bridge in Halifax, but Cut Steakhouse is a world away from Cheese Curds. A 4-Diamond AAA/CAA Award winner, Cut — one of several restaurants operated by RCR Hospitality Group — is the embodiment of old-school opulence. Its tables are bedecked with bone china, Riedel stemware and luxury linens from the Italian textile company Frette, while its menu includes the likes of a $55 Atlantic lobster and a $220 boneless rib-eye from Queensland, Australia’s Darling Downs Wagyu. Yet RCR president, Shannon Bruhm, shares a business problem with Pratt, as prices continue to rise for key menu items such as USDA prime beef and premium seafood, such as scallops and lobster.

“It wasn’t that many years ago we were buying lobster for $6.99 or $7.99 a pound; now it’s almost double that,” says Bruhm. “Those are items we’re not seeing on menus in quite the amount we might have three or four years ago.”

Food can represent as much as 40 per cent of total costs for high-end restaurants such as Cut, but while the easiest solution for restaurateurs would be to simply offload any increased costs on customers, Bruhm’s patrons are similarly sensitive to being asked to pay more.

“People notice when your prices are increasing,” he says. “It’s not [a case of] the next time they come in and have the same steak and you’ve marked it up another 10 per cent that they’re fine with that.”

Bruhm says operators can mitigate rising food costs by engaging in menu engineering and introducing lower-priced alternatives, such as replacing cuts such as rib-eye or strip-loin in popular items such as steak frites, or swapping out more expensive fish such as halibut and salmon.

Bruhm says RCR’s six restaurants — which in addition to Cut Steakhouse include the East of Grafton Tavern (as well as a catering business) — are more likely to look for a cheaper cut of beef or a different type of fish rather than pass food increases on to customers. “If the price of halibut is increasing 10 to 15 per cent, maybe we just remove it from the menu and look for other options,” says Bruhm. “Most restaurateurs recognize that customers want to see affordable options on the menu.”

But, for restaurants such as Cut, which tend to attract well-heeled and discerning customers, simply swapping out high-cost items isn’t always a viable solution. “If people are used to a certain type of USDA rib-eye in a steak house and you’re trying to serve flank steak, that might not go over as well as it might at a tavern or bistro,” says Bruhm.

One potential solution to rising food costs for independents is group-buying services such as Edmonton-based Groupex Canada, which secures volume-based purchasing discounts on a variety of restaurant-related services.

Director of Operations Kim Teichroeb characterizes the company’s growth as “slow but steady” as operators continue to seek out ways to reduce costs. Teichroeb says Groupex is able to secure discounts ranging from five to 20 per cent from a variety of suppliers. Increased consumer interest in plant-based diets might also provide relief for some operators. A November 2015 report from Chicago-based research firm Mintel found vegetarian menus in the U.S. grew 66 per cent in three years, which Bruhm says is attributable not just to the growing popularity of vegetarianism and veganism, but the rising cost of proteins such as meat and fish.

“It’s less price prohibitive [as a restaurateur] when you have some items on your menu that are not protein-based,” he says.

Written by Chris Powell

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