However, a national study suggests a positive outlook
Even though local restaurateurs say they’re serving more customers, the cost of doing business is eating into their profits.
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“Our year-to-date utilities cost is up 9 percent,” said John Elkhay, co-owner of Providence’s Big Fish, XO Steakhouse and 10 Prime Steak and Sushi. “I expect it to keep climbing from where we are now.”
Energy costs aren’t the only things driving up the cost of doing business this year, Elkhay said. Payroll is 16 percent more expensive than last year at Elkhay’s restaurants, he said.
“It’s a tight, competitive market for cooks, bartenders and managers,” Elkhay said.
At the Oak Hill Tavern in North Kingstown, owner Brian Casey said the price of chicken wings – one of the restaurant’s most popular offerings – has increased 20 percent in two months.
“It’s eating into profits,” he said of the increase he’s paying for chicken, beef, shellfish and other raw materials. “It’s tough to cut back on gas and electric consumption.”
Casey said business is up, but profits are down. The cost of everything he needs to do business keeps increasing, he said.
“The expenses are outweighing the increase in sales,” Casey said.
But a National Restaurant Association “Restaurant Performance Index” shows that the outlook for restaurants nationally is a positive one.
“Despite the recent increase in gas prices, the overall outlook is positive according to our latest industry survey,” said Hudson Riehle, senior vice president of research and information services for the association.
The monthly index, which tracks the health of and the outlook for the industry, was 101.7 in July, down 0.4 percent from a record level of 102 in June. July was the 27th consecutive month above 100. A rating above 100 indicates expansion in eight of the index’s key indicators.
The restaurant association compiles the monthly index based on responses to the industry tracking survey, which is distributed to restaurant operators nationwide.
July was the 24th consecutive month that operators reported an increase in same-store sales. Forty percent reported an increase of customers when comparing July 2004 and July 2005. Thirty-eight percent said they saw a decrease in customer traffic in the same time frame.
The “expectations index” measures restaurant operators’ six-month outlook in same store sales, employees, capital expenditures and business conditions. That index went down 0.4 percent in July to 102.2, marking the fourth decline in five months.
The index was compiled before Hurricane Katrina hit the Gulf Coast.
Riehle said one of the challenges restaurant owners face is the recruitment and retention of employees. Last year, Riehle’s research indicated food prices were the top challenge.
“What you see emerging among the top challenges now are the energy and gas pricing,” Riehle said. “Consequently, operators will be keeping a close eye to see how that plays out in the months ahead.”
The skyrocketing cost of gasoline could turn out to be a doubled-edged sword for restaurant owners, Riehle said. Ten percent of operators listed gas and energy prices as their top challenge, up from 4 percent in June.
“The operators have to deal with the increased costs they incur, as well as the consumer impact of how their behavior has changed because of higher gas prices,” Riehle said. “Obviously there’s very little good that can come from sustained higher energy process. But restaurant usage is much more essential to consumers now than it was 10 years ago – people are very used to dining out.”
Liquor Tolerance
More locally, Elkhay said the price of liquor has been steadily chewing into his bottom line.
“We’ve taken 60 liquor price increases from suppliers this year,” he said. Vodka prices are among the hardest hit, he said, as are French wines. The combination of a soft dollar against the euro and the cost of transporting the wine and spirits from overseas has helped drive up the price.
The tight restaurant market in the state makes it tough for Elkhay to raise the cost to his customers. With new restaurants steadily opening, the market becomes more competitive and less amenable to price increases.
“You can’t keep charging more for a mixed drink, or you’ll price yourself out of the market,” Elkhay said.
Dale Venturini, president and CEO of the R.I. Hospitality and Tourism Association, said many people in the restaurant industry are adopting a “wait-and-see” attitude when considering consumer price increases.
“There’s a fine line between what customers will tolerate and what they won’t,” Venturini said. “There’s a tolerance point and we don’t know what it is yet.”
Regardless of the consumer tolerance of price increases moving from the gas pump to the dinner tab, restaurateurs may have no other choice but to raise their prices.
“We’re going to have to sit back and look at the numbers and we might have to look at increasing prices,” Casey said.
Elkhay, too, said customer price increases might be inevitable. None of his restaurants have increased prices in two years.
“This could force us to raise our prices,” Elkhay said. “That’s not our game plan, but nothing’s getting cheaper. That’s going to put a lot of pressure on everyone’s bottom line.”
Elkhay said he tries to work with suppliers to negotiate prices so he doesn’t have to pass price increases on to his guests.
Venturini said while it’s difficult to predict how or if the restaurant industry can absorb the escalating costs of doing business, an increase of menu prices seems pretty likely.
“I’ve already spoken with many owners who are worried about the cost of heating oil coming into play,” Venturini said.
