Yesterday’s post on extra charges for the various items a guest requests caused me to ponder on a larger scale. It is remarkably common to hear guests say, “I could buy that steak/wine/etc at the store for half that much.” This is the same principle as walking into a car dealership and demanding a price based on the total price of the steel, glass, and plastic contained in the car. In both cases, the price of production goes far beyond the cost of the raw materials. Next week, I will be addressing in detail the difference between the actual cost of an item as simple as a burger and also the actual price of production. When the cost of labor and overhead is factored in, a burger is far less profitable than the average consumer would imagine.
First, it is necessary to establish as a premise that food is a commodity. A meal is comprised of many components each of which has a finite supply. There are only so many acres of wheat or corn being produced. There are also only so much beef, poultry, pork, and seafood being brought to market. This means that supply is more of less the same and therefore demand is what determines the price restaurants pay. The commodity we are all most familiar with is oil. When demand for oil rises worldwide the price rises as well. This is followed shortly by a rise in the price of gasoline. We as consumers understand why this affects gas prices, but rarely do we relate it to restaurants.
This is where my friend the chicken wing comes in. I am not a fan of buffalo wings. I don’t much care for spice and during my time as the manager of a famous wing chain I got my fill of wings. The wing does however explain some basic principles of the restaurant industry very effectively. Wings as a trend, a commodity, and a menu item can teach us a great deal about food prices.
Several stories circulate as to who invented the buffalo wing. They all place its creation in the mid 60s. They began to gain prominence regionally in the late 70s but did not take off on the national scene until the 80s. Prior to this point thrifty chefs had used chicken wings to create stock, but most simply threw them away. Just as word of this fabulous new appetizer was spreading, something more important happened. McDonalds introduced the McChicken in 1980 and shortly thereafter came the Chicken McNugget. McDonalds quickly became the second largest consumer of chicken in the country. This caused a revolution in the industry leading to sky rocketing demand for chicken breasts. This meant there were far more cheap chicken wings waiting to become an appetizer.
So the cheap wings came out on menus. The secret was that the markup on them, like most appetizers, was through the roof. They were highly profitable and chains like Hooters, Buffalo Wild Wings, and others began to expand with the wing as their core product. Casual dining restaurants began to add a variety of wing options. The prices were not based on the cost of the wings, but rather what the guest was willing to pay. Wings became synonymous with sports, beer, and general manliness.
Then the second perfect storm came. All of the factors that conspired in restaurant’s favor during the wing “boom” were about to go bust. Fast food restaurants in the last decade have tried to enter the wing business. Pizza places added wings to the menu and wing delivery outlets began to pop up around the country. This began to raise the price, but it was only one part of the downfall of the wing. The boom turned to bust for the wing when the economic troubles began. People began to eat out less and look for greater values when they did. As a result the demand for chicken breasts went into a rapid decline while demand for the less expensive wing exploded.
While on the surface an increased demand for wings would seem beneficial for people who sell wings, it has proven to be quite the opposite. As you recall chicken wings were a hit with restaurant owners because they were cheap. In the current market, the price per pound of chicken wings can equal or exceed those of chicken breasts. Previously I mentioned that the price of wings on a menu was not set to the price owners paid for the wings. This continues to be the case, but now the tables have turned. Guests are used to cheap chicken wings and will not tolerate large price increases even though the price of the wings has doubled. Restaurants are forced to take a very small profit margin or even the occasional loss to get the customers in to drink a few beers over a plate of wings.
Food is a commodity. Food prices fluctuate wildly, but can only be passed along to consumers incrementally. Guests rarely are aware of food pricing trends or the myriad of other costs that go into the meal they are served. Instead they simply demand value based on what they paid last time they were in or the prices of your nearest competitor. Even if that means they want the car for less than the price of the steel.
On Monday I will discuss the differences between the cost of the components of a burger and the cost to serve it in a restaurant. A detailed breakdown of all the costs that go into running a restaurant that most people do not consider. This weekend I should have a great point/counterpoint on dating your coworkers. You won’t want to miss any of the posts coming in the next few days.
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