Orange County-based restaurant chains are wrestling with whether to sacrifice profits or raise prices in a bid to offset higher natural gas and electricity costs. Trouble is, there’s little wiggle room in an industry selling 49 cent hamburgers and 69 cent tacos.
Most chains say they already are cutting energy usage. But some restaurant operators contend that may not be enough.
“I think you’re going to see people raising their menu prices,” said Daljit Hundal, president of the Star Franchise Association, which operates 14 San Francisco-area Carl’s Jr. restaurants, franchises of Anaheim-based CKE Restaurants Inc. “There’s only so many things you can do to reduce the amount of consumption on electricity and natural gas.”
Bob Wisely, executive marketing vice president at CKE, said the company is reviewing all options, including altering hours of operations, menu changes and cutting back on equipment use.
Santa Ana-based Wahoo’s Fish Taco is looking at tacking a 75 cent surcharge on to its checks. But marketing director Wing Lam calls that a last resort.
“We’ll be OK,” he said. “But if there is another major hike we may be forced into it. We don’t want to operating at a charity level.”
Wahoo’s has gone from three- to two-door refrigerators, streamlined ordering for efficiency and is relying more on natural light in various locations, he said.
Wahoo’s and other so-called quick-serve restaurants may be able to get away with surcharges and higher prices, according to Tony Cherbak, a retail analyst in the consumer products group at Deloitte & Touche LLP’s Costa Mesa office. But among fast-food chains such as Carl’s Jr., Irvine-based Taco Bell Corp. and Laguna Hills-based Del Taco Inc., no one wants to be the first to up prices, he says.
“That causes them a competitive disadvantage,” Cherbak said.
Still, Cherbak added, “Anytime you have greater fixed costs the only way that you can offset that is to increase your prices.”
Eventually Cherbak predicts someone has to blink.
“If we ultimately end up in a period of long-term higher energy costs, then those costs will have to be passed on,” he said.
Del Taco officials didn’t return phone calls for this story. When Taco Bell was asked how it plans to offset the impact of higher energy costs, the company pointed to a recent financial statement from Louisville, Ky.-based parent Tricon Global Restaurants Inc.
Tricon, like the rest of the industry, is “challenged with managing energy cost inflation, which was particularly severe in the first quarter,” Tricon Chief Executive David Novak said in the statement. “We expect energy costs to continue to show significant inflation throughout the year.”
According to Carl’s Jr. operator Hundal, his restaurants are paying about 25% more,or about $1,000 per month vs. $800 a month a year ago,on natural gas. The stores are bracing for further increases in electricity rates with recently enacted hikes, he said, though some Carl’s Jr. franchisees have contracted for energy at fixed prices directly with Houston-based Enron Corp.
And franchisees have trimmed electricity use by 10% to 15%, he said. That isn’t enough to cover additional utility costs, but “it helps,” Hundal said.
“You can raise your prices but there’s a limit to how much you can raise them,” he said. “People say, ‘Gosh I’m not paying that.'”
But it’s not just higher energy bills that are squeezing restaurant operators, according to Hundal.
“If gas prices go up, you’re going to see commodities go up and products go up,” he said. “Ultimately the consumer will pay. There’s no way around it.”
A spokeswoman for San Clemente-based Pick Up Stix Inc. said the quick-serve chain believes customers shouldn’t have to pay for higher energy increases and doesn’t plan to raise prices. The company’s eateries are trying to offset higher operations costs through conservation, including turning off thermostats at night, reducing air conditioning when possible and retrofitting lights for efficiency.
Aliso Viejo-based Johnny Rockets Group Inc. says it’s looking to land new customers amid the industry’s turmoil. The chain of 1940s-style diners is absorbing a 0.2% increase in its food cost to give customers bigger portions, according to Kimberly Myers, vice president of brand marketing.
When asked if the move isn’t a double-whammy on top of higher energy costs, Myers said: “We definitely are anticipating a traffic increase. That’s what we’re counting on.”
In lieu of higher prices, the first casuality of higher energy prices could be the cheapest items on the menus of fast-food chains, according to Hundal.
“I don’t think that everybody can continue these 49 cent hamburgers they’re selling,” Hundal said, adding that wages and prices for contracted services also have increased. Rising costs prompted Carl’s Jr. to discontinue its 99 cent Famous Star hamburger, he said. n
