Falling food prices take bite out of restaurants

The United States is awash in pork, beef, eggs, milk and bountiful harvests. U.S. meat companies are producing nearly 5 percent more beef than in 2015, thanks in part to plentiful feed supplies.

In turn, the big food producers such as Cargill are seeing profits rise. The Minnesota conglomerate recently reported a 66 percent jump in profits because of demand for its steaks and hamburgers.

And yet the boom in supply is driving down prices at the grocery store, pinching retailer profits. The pressure may build with news that online retailer Amazon.com is opening a string of brick-and-mortar stores for its Fresh line of groceries.

But while food price deflation may be good news for grocery shoppers, it’s having a boomerang effect on the restaurant industry, which is seeing other costs rise at the time demand is flattening because folks are cooking at home.

Part of the problem is that grocery stores and restaurants have different business models, despite being reliant on the same products. Real estate, labor and taxes are a big part of restaurant costs. When those prices rise, they pinch the industry’s razor-thin margins.

“Restaurant prices are primarily comprised of labor and rental costs with only a small portion going toward food,” according to a recent report by the U.S. Department of Agriculture. “For this reason, decreasing farm-level and wholesale food prices have had less of an impact on restaurant menu prices.”

Menu prices have been rising at a 2.7 percent rate, said Hudson Riehle, senior vice president for research at the National Restaurant Association. “Grocery store prices have dropped by 0.9 percent over the same period ... For a typical restaurant patron, the gap between menu price inflation and grocery store price deflation is now in excess of 3 percentage points.”

Translation: It’s getting cheaper by the day to shop at the grocery stores rather than head for a restaurant.

But despite challenges, the industry should post $783 billion in sales this year, up 5 percent over last year, Riehle said. Some restaurants, such as Olive Garden, have shown growth.

Part of the problem is cheap gasoline. Lower gas prices in normal cycles boost cash available for families to spend going out to dinner. But the gas savings are paying for things like higher rent and insurance. That is creating unfulfilled demand for eating out.

“The slow-growth economic environment has made them much more thoughtful on how they spend their food dollar,” Riehle said.