In a follow up to my most recent piece on the lower cost of food commodities and the impact on the retail grocery channel; the Chicago Tribune published an interesting article on the relationship to those lower costs and the impact on the restaurant industry.

The article describes the fact that the falling food prices for staple items such as beef, eggs, and other commodity products has not translated into lower prices at restaurants. In fact, dining out is more expensive than it has been when compared to eating at home, that ratio is at the highest difference in three decades in the United States.

I was thinking about this connection myself last week when I was working on the piece on food commodities. It came about at a couple of different points last week: I had picked up some mail and the menus for some restaurants in my area were included in the ads and coupons. The prices on some of the menu items really jumped out at me for being expensive. Then, I stopped one day last week in a time crunch to pick up lunch and it was pretty expensive compared to the servings of what I had ordered.

I kept thinking about people that eat lunch out every day and how that cost will definitely add up over time. In keeping along that line, just take an example of ten dollars a day for lunch during the work week. That ends up being fifty bucks per week and two hundred dollars per month for lunch which will end up being close to two thousand four hundred dollars per year, give or take. That is for one person, for lunch, and an average cost of ten dollars. That is a lot of money for the average family.

The lower cost of food has had the reverse effect on restaurants because the cost of running and maintaining the business has not decreased. The restaurant has to be staffed and it has significant overhead costs with insurance, energy, and other costs associated with running that business.

In order to maintain profitability amid an increasingly competitive market, most restaurants have had to increase their menu prices. The other pressure point for restaurants, especially the traditional sit down places and the fast casual chains, is that the grocery store channel has become increasingly more relevant in the prepared foods area.

The local grocery store in your neighborhood and mine now has expanded upon the offerings for prepared meals to go which suit our active lives and are at a lower price point than going out to eat. I think we all can attest to a recent shopping trip where we have grabbed a cooked rotisserie chicken for dinner or put together a meal on the go from a huge selection of choices at a Whole Foods or a Shop Rite.

The numerous alternatives at the grocery store and the emergence of fast casual dining options such as Chipotle, Salad Works, and a few others have impacted the margins of the traditional restaurant channel as well. The Tribune article cites the troubles of Chili’s and a few other regional Midwestern chain restaurants in surviving this trend. The article as well as other industry resources mentions the higher minimum wage in certain states as another mitigating factor in the demise of certain restaurants in this climate.

The fast casual or traditional fast food options have lower overhead because the employees are members of a “crew” where each person is cross-trained and can complete a variety of job functions. This approach has helped them sustain profitability more than a traditional sit down restaurant but even the fast casual and fast food operators are encountering issues with falling food prices and an uncertain economy.

Many consumers are opting to save money in their budget and eliminate eating out and they are staying home. The more health conscious consumer prefers to make their own food at home with ingredients which they select, which is becoming a larger trend resulting in eroding profits in the restaurant sector.

The fast food channel has displayed several indications that they are at an oversaturation point. The industry is focused on rolling out new product offerings or seasonal products to attract new customers. The major players in the industry are putting together special promotions and full meal deals such as “4 for $4” or a “McPick Two”, to drive the value to the customer.

However, even with all of those efforts in marketing, the channel is hitting a point where it cannot grow profits. Therefore, they all made a push for breakfast and that is the final frontier, so to speak, for the fast food industry to grow profits. It is the last untapped revenue stream available to them where they can maximize the lower commodity prices for eggs and other staple items to put together a profitable set of menu offerings. The demand for a fast breakfast is also very robust for the American consumer that is seemingly always rushing around in the morning to start a very hectic day.

The traditional restaurants are going to struggle in this scenario because it is hard to compete on cost with other establishments and the fast casual/fast food/grocery prepared foods channels while maintaining their profits. It is a situation to bear in mind as the commodity pricing on food overall, and certain products such as beef and eggs in particular, will remain at a point where the restaurants and the grocery stores will feel the squeeze for the foreseeable future.