Restaurant Deals
Burger King Corp. added the $1.39 Spicy Chicken BK Wrapper to its value menu.
updated 8/29/2008 1:25:27 PM ET 2008-08-29T17:25:27

Fall's cool winds could make eating out cheap a breeze — depending, that is, on what you order.

After a second quarter of too many empty tables and falling profits, restaurant companies are planning to woo diners back with lower-priced dishes as the weather grows colder.

But consumers won't see discounts across the board, since many chains have either already raised prices on select items like steak or are planning to do so in the next few months to cover still-high food, energy and labor costs.

Boston Market, for example, first offered five of its most popular meals for $4.99 in July. Seven other menu items were lowered to about $5 in August. The meals regularly cost closer to $7.

"We've been able to pick things that offer the biggest value," said spokeswoman Angela Proctor.

But other items, including the chain's roasted sirloin, have become more expensive in the past year. Boston Market raised prices on several of its menu offerings earlier in the year — a strategy Proctor said has given the chain some "balance" as operating costs stay high.

Burger King Corp., meanwhile, added two new items this week to its value menu — the Cheesy Bacon BK Wrapper and the Spicy Chicken BK Wrapper — for $1.39.

Just weeks earlier, though, Chief Executive John Chidsey told investors that the chain will likely increase its menu prices to offset a 5 percent to 7 percent rise in food costs during this fiscal year, which started in August. Chidsey offered no details on how much more customers can expect to pay for Whoppers and other signature items, saying only that the chain will "monitor what the competition does."

Fast food restaurants and casual dining chains have been increasing prices steadily for the past year, largely to combat far higher costs for food caused by soaring grain prices that have trickled through the food chain.

Menu prices in July were on average 4.2 percent higher than they were a year ago, according to Hudson Riehle, senior vice president of research and information services at the National Restaurant Association.

Raising menu prices can be an especially tricky move since the restaurant business relies largely on the amount of cash in consumers' bank accounts. If diners have less money to spend or they perceive that it could cost more than usual to eat out, they typically head to the grocery store instead.

"Consumers are really sensitive to menu price inflation," Riehle said.

Meanwhile, with gas staying near $4 a gallon, consumers are less likely to spend money on any discretionary item, whether it's a meal out, a new outfit or a flat-screen TV.

With spending on the decline and prices higher than they were a year ago, restaurant companies — particularly casual dining chains — have had a hard time convincing customers to walk through the door.

Ruby Tuesday Inc. reported its same-store sales, or sales at locations open at least a year, at company-owned restaurants plummeted more than 10 percent in the April to June quarter, while same-store sales at company-owned locations tumbled 7.1 percent at Ruth's Hospitality Group Inc., which operates the Ruth's Chris Steakhouse chain.

Even if chains were able to increase sales in the past quarter, the high costs of food, energy and labor cut into margins and hurt profits. Brinker International Inc. reported a rise in sales at its Chili's Grill & Bar chain, but its profit slid 49 percent due to the spike in costs.

Darden Restaurants Inc., the owner of the Olive Garden and Red Lobster chains, appeared to have beaten back the spending slowdown and cost headwinds, swinging to a profit in its fiscal fourth quarter on strong Olive Garden sales.

But earlier this week, this bright spot in the industry dimmed as Darden trimmed its full-year guidance and forecast first-quarter profit below Wall Street's expectations. The news sent the company's shares down as much as 15 percent.

Lynne Collier, senior restaurant analyst at KeyBanc Capital Markets, called Darden's guidance cut "a strong indication of the macro environment getting a lot worse."

Collier said until gas prices drop and the housing market strengthens, most restaurants probably won't see much of a recovery in sales and profits. But higher prices on premium items may still help offset some of the higher costs, while the emphasis on value could help reverse the sales slide somewhat.

"At least it physically gets more people through the door," she said.

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