Restaurants risk margins to keep prices in check

By Lisa Baertlein - Analysis

LOS ANGELES (Reuters) - Many big restaurant chains plan to keep on eating the bulk of rising food costs, risking a further hit to their margins in order to keep attracting customers.

Industry analysts estimate that restaurant food costs were up more than 8 percent in the first half of the year, and they expect July figures to show an additional rise.

But menu prices increased only about 4 percent in the first seven months of 2008 as restaurant chains struggled to remain an option for cash-strapped consumers who are choosing to eat at home more often.

The gap between cost increases and price hikes is not likely to close soon, analysts and executives say.

Starbucks Corp (SBUX.O) -- which for years has rolled out one price hike after another to offset higher costs for items like milk and coffee -- is planning no increases for its upcoming fiscal year ending September 2009.

Others, from industry leader McDonald's Corp (MCD.N) to Olive Garden owner Darden Restaurants Inc (DRI.N) and burrito chain Chipotle Mexican Grill (CMG.N), are ticking prices up at a rate that lags inflation on ingredients.

Chipotle, which sells burritos and other fare made with naturally raised meats, has limited its menu price rise to 4 percent so far this year, even though its food costs are among the highest in the industry.

"We know that every customer that comes in is prioritizing their hard-earned money," Chief Financial Officer Jack Hartung told Reuters. "We want to be accessible to everybody."

Chipotle would prefer to put off any additional price hikes, he said, but added: "You can only survive or thrive with mediocre margins for so long."

Some investors and analysts have accepted the fast-food industry's stance on pricing.

"I'd like to see the margins improve, but I think the more they turn the screws on the consumer, the more it puts them at risk of losing traffic," Stifel Nicolaus analyst Steve West said.

For the most part, though, Wall Street has not given restaurant chains a break. Chipotle shares are down almost 50 percent year to date, while Starbucks stock has shed nearly 20 percent of its value as traffic to U.S. stores sags.

Still, the industry does have its stars. McDonald's shares are up nearly 10 percent this year as its Dollar Menu continued to drive traffic. And Darden is up 30 percent as it kept a lid on costs and saw strength at Olive Garden.

HOW LOW CAN YOU GO?

Consumers are no better off, with declining home values, mounting job losses and surging prices for groceries and gas.