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Coffee is often one of a restaurant’s top selling beverages, which encourages operators to keep an eye on rising costs of beans coming out of South America.

Price Check

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Restaurants make their beverage programs profitable despite gulping down higher costs in the commodity market.

By Keith Loria October 2014 Finance

coffee crop disease, a deadly pig virus, and large-scale droughts are not the headlines restaurants hoped for this year.

Fluctuating prices on cocoa, coffee beans, milk, oranges, and citrus have many rethinking their commodity strategies when it comes to beverage, and restaurants with bars have the added problem of rising wheat and barley prices for beer and even limes for margaritas. But shrewd industry players are finding methods to soften the blow, whether counterintuitive, like premiering more high-quality items, or just buckling in for a seat on the commodity coaster.

Buffalo’s Café, a casual wings concept headquartered in Dallas, Georgia, has 25 franchises around the country, and COO Shaun Curtis says, as a brand, it continuously struggles with the inflation of commodity prices across the entire market place.

Sweet tea is the No. 1 seller at Buffalo’s Café, and Curtis says the constant price inflation of sugar, lemons, and tea made the once-high-margin item into more of a mid-range maker. “This hurts the operators, since we depended on these high-profit makers to help offset the rising cost in other areas,” he explains. “It’s simply become a no-win situation.”

Sugar prices rose early in 2014 as a drought in Brazil, the world’s chief grower and exporter of sugar, caused production of sugar cane to slow.

In efforts to reduce the impact, many Buffalo’s Café locations now ask guests whether they would like the garnish, such as the lemon in tea. The brand also introduced higher-margin, premium beverages to entice guests who might otherwise tend toward a free water.

This year, Buffalo’s Café rolled out a new milkshake line and a fresh-made lemonade product, both of which have been successful at Buffalo’s sister concept Fatburger for many years, Curtis says. “We expect for these items to continue to grow in our business, which should lead to higher check averages, helping to offset the higher cost.”

Robby Lucas, corporate chef of Bar 145, a full-service restaurant in Toledo, Ohio, says the increase in simple commodity items such as limes, sugar, and lemons has also affected the restaurant’s bottom line when it comes to beverages.

“It changes week to week. I spend a fair amount of time reading and reviewing the market reports that our suppliers email us, and try to stay ahead of the curve as much as possible,” he says. “Unfortunately, inflation is a reality in this country. We are lucky enough to be able to change our menu a few times a year and by doing so, not only are we staying relevant in the current culinary trends, but we are spending the time on what’s available at the time that we need it.”

Most major distributors and small produce companies will email a market report to every customer that asks, so Lucas recommends staying up to date on them to see market fluctuations so operators can make purchases ahead of time or make necessary menu changes.

In Short Supply

Coffee is often one of a restaurant’s top-selling beverages, and because of the up and down pricing with coffee beans, managers need to be cognitive of what’s happening.

Starbucks announced in June that it would raise prices on some of its products, including packaged coffees and beverages sold in stores, getting a jump on the increase in raw coffee costs that occurred earlier in 2014.

“With coffee, you buy in such a large volume, and that keeps the prices at a pretty constant level,” says Ron Green, CEO of Another Broken Egg Cafe, based in Miramar Beach, Florida. “We did raise prices on our coffee two years ago (to $2.49 for unlimited refills) because we went with a higher quality brand, but people haven’t seemed to mind.”

Lambrine Macejewski, business manager and partner at Cocina 214, a Tex-Mex restaurant in Winter Park, Florida, regularly serves thousands of margaritas a week, and for a time was worried about the escalating cost of limes. Costs for the green citrus increased exponentially in the two months leading up to 2014’s Cinco de Mayo, after a crop disease ravaged lime trees in Mexico, squeezing imports.

“When limes quadrupled in price, it was no fun for us at all,” Macejewski says. Cocina 214 has more than 14 margaritas on its menu, and Macejewski says they are incredibly popular with patrons. “Price increases on limes can make service of those drinks a bit of a challenge.”

The roller coaster of commodity costs does have one silver lining for operators: not all commodity prices rise at the same time.

“We’ve been lucky in that when some of our needed commodities rise in price, others fall in price—and thankfully, lime prices went back down to normal rates for the summer,” Macejewski adds. “That greatly helps us in offsetting costs so we can maintain selling price and product integrity. For us, raising prices on our menu items is always a last resort to solve issues.”

Jesse Gideon, chief operating officer for scratch kitchen Fresh To Order, headquartered in Alpharetta, Georgia, has a dozen franchises that need to have ingredients at the ready, so when costs go up in commodities, it is never good news. Gideon says that so far in 2014, the casual-dining space has been hit everywhere.

He says all vendors, farms, and manufacturers have been hit by rising costs, both in the sourcing and distribution of goods. Despite having great relationships with vendors and farmers, Gideon says it’s been tough to lock in prices.

“There doesn’t seem to be any area not [fluctuating],” he says. “With beverage specifically, we put a lot of work into our custom teas and lemonades that we run at our self-serve beverage station, so mango-flavored tea or strawberry mojito lemonade all are squeezed with pricing.”

Tricks of the Trade

Buffalo’s Café has had to make some tough beverage pricing decisions based on what’s happening in the commodity market.

“Many locations unfortunately have been passing a portion of the increase to the customer, as well,” Curtis says. “The problem here is, you can only go so high before the customer starts to resist and go with water instead.”

Most in the industry agree raising prices is a last resort, but sometimes it can’t be helped. Even so, creative thinking can work in a restaurant’s favor.

“We’ve found that making some presentation and plating changes to our drinks and dishes is another alternative,” Macejewski at Cocina 214 says. “We take a moment and ask ourselves if there is a different way to garnish our drinks and dishes with other items that don’t have as high of prices or low supply. We would rather make some plating changes than increase prices.”

Bar 145, which hasn’t increased menu prices yet, changes its purchasing process to help ride the tide. “I work with our suppliers and our chefs to change our purchasing practices a little bit when prices rise,” Lucas says.

During rough patches, for instance, Lucas purchases the 40-pound case of limes rather than the 10-pound case. The 10-pound case is generally more expensive, and he says buying in bulk keeps the price point where he’d like it.

At Fresh To Order, Gideon notes that the company doesn’t need to take a hard line on any specific beverage cost.

“Generally we look at a few alternatives to raising pricing, such as bidding out to competitive vendors, looking for a better deal with others, changing products with existing vendors, changing up displays, and swaying and altering our sales mix to better balance out our more profitable items,” he says. “We also will take advantage of seasonal items when quality and price is usually at its best.”

When there is a limited supply or prices rise too high, the brand will just stop serving the item.

“Simple as that: we cannot lower our quality or standards. A guest is expecting a standard that we need to deliver time and time again, and that is the true measure of consistency for any business,” Gideon says. “Everything starts with the raw ingredient in the back door; if you compromise that, your end product is affected and you are no longer serving quality or consistency.”

Another philosophy shared by most is that profit is not the main and only motivator in the hospitality business. It’s vital for survival and a fantastic gauge of how one runs a business, but it can’t be the only answer behind decisions.

Hugo Marin, president of Margaritas Mexican Restaurant with six locations across New England, says his brand won’t add on the extra cost to guests, and will live with the ebb and flow and take the loss if it has to.

“For us this year, the biggest impact has been the pricing on all fruits, especially limes. We sell millions of margaritas, but changing our recipes was non-negotiable. We took the hit,” he says. “We will ride the wave and understand that at times, that will happen. We made some minimal changes to our garnishes, but did not change any of our specs, so we continue to offer the best tasting beverage possible.”