Update for Chapter 10 News Article: What Do Restaurants Really Pay for Meals?
Wall Street Journal, March 10, 2000.
According to the website of the U.S. Department of Agriculture, overall food prices rose
every year from 2000 to 2003. As one would expect, this has translated into higher menu
prices at many restaurants.
According to Restaurants and Institutions, a restaurant industry publication, food cost in
2002 rose to 28.8 percent of sales on average in the nation’s largest 400 restaurant chains.
This sales figure reflects an average markup of 247 percent, more than three times the
cost of the raw ingredients. This markup is slightly lower than the target markup of 300
percent mentioned in the original Wall Street Journal article. It is expected that
restaurants become less profitable overall with lower sales relative to food costs, unless
the restaurants are able to save money in other areas. Otherwise, they will have to raise
menu prices to achieve past levels of profitability.
In 2004, major restaurant chains including the Cheesecake Factory, McDonalds, Chili’s,
Macaroni Grill, On the Border Mexican Grill and Cantina, and many others are
announcing menu price increases at many of their restaurants to combat shrinking
margins from higher food prices and increased insurance costs from higher liability,
health, and workers compensation premiums. These premium increases will likely be
exacerbated in the future if rules are put into effect like those put forth in California’s
Proposition 72. The measure that was narrowly defeated in December 2004 would have
forced restaurant owners to provide health insurance for hourly workers that work over
22 hours per week.
At the same time, there are many restaurants that are looking to create profits by
correcting counter-productive behavior in employees. According to a recent study, “The
Fourth Annual Survey of Restaurant and Fast Food Employees,” the average hourly
employee steals $218 per year. Combined with losses of business from some employees
having poor work habits and disrespectful attitudes toward managers and customers,
these counter-productive behaviors siphon a significant amount of profits away from
restaurant owners. Going forward, instead of simply increasing menu prices, restaurant
operators may also increase profitability by more aggressively targeting counterproductive employee behavior.
Sources:
Hollweg. Lewis. Stopping Crime Does Pay: Correcting Counter-Productive Behaviors
Boosts Profits. Nation’s Restaurant News. January 5, 2004.
Gibson, Richard. Restaurants Prepare to Dish Out Higher Prices. Wall Street Journal.
October 23, 2003.
Ruggless, Ron. Rising Insurance Costs Cut Into Profits. Nation’s Restaurant News.
March 10, 2003.
Husing, John. Election Reveals What Californian’s Really Think. The Business Press.
December 6, 2004.
Spinner, Brian. Food Cost Fluctuations. Restaurants and Institutions, July 15, 2002.
Food Price Index. www.usda.gov/Data.