Northwest Arkansas Democrat-Gazette
Local eateries feeling the bite of food prices
Owners say business is up but profit margins flagging
In October, Charlie Nyborg bought the Celtic Grill restaurant in Bentonville.
His management of the Bentonville restaurant comes at a time when prepared-food tax collections indicate that business among restaurants of all sizes is on the upswing. Local restaurateurs, however, say caution should be used in interpreting sales tax revenue data.
While many say patronage is increasing, the industry has had to battle some of the highest wholesale food prices in recent history.
Price increases have whittled away at profit margins even while being at least partially passed along to customers. Because of the higher prices customers pay, an uptick in sales tax revenue doesn’t necessary mean there is a corresponding increase in the number of meals served.
“Sales and volume are back, but [ restaurateurs] are spending more ... costs have gone up,” said Montine Mcnulty of the Little Rockbased Arkansas Restaurant Association, an affiliate of the National Restaurant Association.
An estimated 4,488 restaurants were open for business in Arkansas in 2009, according to the most recent data from the National Restaurant Association. The Arkansas restaurant industry generated $3.2 billion in 2011 and employed an estimated 107,500 people.
Mcnulty said that even during the recession, the restaurant industry was a leading job generator, “and not every industry can say that.”
In Benton and Washington counties, prepared-food sales taxes are collected only in Bentonville and Fayetteville.
The revenue collection numbers show the maturity of the Fayetteville market, which is also the “more saturated market, as we’ve seen some national chains leave,” said Kathy Deck, director of the Center for Business and Economic Research at the University of Arkansas at Fayetteville.
In contrast, the presence of Crystal Bridges Museum of American Art in Bentonville, which opened in November, explains a surge of sales growth for some restaurants in that city, she said.
“You can’t begin a conversation without talking about Crystal Bridges,” Deck said. The museum is regarded by experts as one of the best in the country for displays of
American art.
Keith Jensen, owner of Bud’s Family Style Chicken in Bentonville, said he was thinking ahead to the positive tourism impact from Crystal Bridges when he opened in 2008, several years after plans for the museum were made public.
“I kind of looked at the pluses,” he said about his decision to open. He said competition from chains and other independents didn’t factor into his decision. “You don’t think about all the negative ones.”
Jensen said that since Bud’s opened, more chains and independents have opened in Bentonville, and “more are coming.”
While business at Bud’s has picked up in recent months, higher wholesale prices have made profitability a little tougher, he said.
Food pricing at the wholesale level has been volatile over the past five years, according to Producer Price Index data published by the U.S. Bureau of Labor Statistics.
A comparison of data between January 2007 and October 2011 (the most recent data available) shows a 28 percent index increase, said Ricky Volpe, a research economist with the U.S. Department of Agriculture’s Economic Research Service in Washington.
“Twenty-eight percent is a pretty substantial price increase that is going to hit restaurants pretty hard,” he said. “This is much higher than the increase of 17 percent seen in the retail [supermarket] sector.”
Compared with many grocery stores, the restaurant industry has passed along less of the wholesale price increase to consumers, the National Restaurant Association says.
Menu prices were up 2.9 percent in December compared with a 6 percent increase in December for grocery stores, according to Bureau of Labor Statistics data.
Mcnulty, of the Arkansas Restaurant Association, noted that chain restaurants can buy in bulk, unlike most independents that lack that pricing power.
Pat Gazzola, owner of the Catfish Hole restaurants in Fayetteville and Alma, said his profit margin in 2011 had been eaten up by food price increases.
“Last year was horrible,” the independent restaurateur said.
Catfish prices have doubled. Other items also have gone up, though not as dramatically.
“A 12-pound case of frozen greens I could buy for under $22 a case, now I pay almost $32,” Gazzola said.
Mcnulty said the past five years have been difficult for small-business owners.
“Gas prices are up, the price of food is up and when your margin is slim and there’s not a lot of lending going on — cash flow is an issue,” she said. “It seems like the economy is turning, and that’s good, but you still have a ways to catch up [to business] prior to 2008.”
Like other independent restaurants, the Celtic Grill in Bentonville has changed its menu, established new food vendor contracts and taken other cost-cutting measures to remain competitive in the wake of higher prices, owner Nyborg said.
The restaurant’s proximity to Wal-mart Stores Inc. vendors gives it a regular customer base. Previous owners of the Irish-themed restaurant managed to weather the hard times in 2009 and 2010.
“That’s one thing the place has been very good at,” he said.
In Fayetteville, Ed Knight, who owns three barbecue restaurants, characterized business as “crawling back.”
The Penguin Ed’s Bar-bque proprietor said he’s had to pass along the higher food prices.
“I feel like we’ve held in being a good value to our customers,” he said, “and we’ve held up more than many have.”