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Higher Labor, Food Costs Eat Into Profits; Restaurants’ Prices to Rise

The outlook for San Diego’s hospitality sector is lopsided in 2008. While the local lodging industry is expected to be able to increase its room rates and see greater RevPAR , increased revenue from rooms that they let , predictions are that restaurants will also increase their prices to cover overhead, but they won’t reap greater profits.

The reasons: Higher labor and food costs, coupled with a decline in customer counts as people dine out less frequently in a belt-tightening approach to the possibility of an oncoming recession.

In January, a 50 cents-an-hour increase in the federally mandated minimum wage will take it up to $8 an hour. But labor intensive restaurants are getting a double whammy, since workers’ compensation insurance costs, which were in decline mode in the last couple of years , California paid the highest rates in the country , are now increasing with higher payrolls, said Steve Zolezzi, executive vice president of the San Diego Food & Beverage Association.

On top of it all, people are spending less when they dine out.

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“It’s not that people are making less money. It’s that they’re concerned about whether they will continue to have the ability to make money, so they’re changing their spending habits,” he said, adding that declines in customer counts and check volumes started at the beginning of last year. “They don’t go out to eat as often and they’re not spending as much.”

Zolezzi said that a restaurant broker he knows who was concerned at the start of 2007 that there might not be enough establishments looking for buyers now has more than enough listings.

Mark, who asked that his last name not be used, is a good example of a frequent diner whose habits have changed. A father of two young children, he and his wife both work, earn an income above the norm, and like many DINCs , dual-income couples now referred to simply as the time-starved , they dined out often because they were tired after work and daily commutes.

“Now we do take-out and we spend about half as much,” he said.

As for restaurants , the county has roughly 1,000 , Zolezzi said to “expect fallout.” To what degree is uncertain, however. It’s hard to gauge profitability of the county’s restaurants since their earnings, as taxed entities, are lumped in with other retail operations. So information about the industry’s well-being is largely anecdotal.

Yet, if tradition holds, Zolezzi expects that for every restaurant that fails, another entrepreneur will come along who thinks they have the right concept to make it happen.

Putting marginal restaurants further in jeopardy, however, is the expectation landlords have of their ability to continually raise lease rates.

“Landlords seem to be more unforgiving and less understanding of the economic trends that prevail,” he said.

Meanwhile, some communities such as El Cajon, Chula Vista and even Clairemont are underserved from a restaurant standpoint, but Zolezzi predicts that those markets which offer greater opportunity and lower lease rates than downtown and the beach communities are prime targets for new restaurant openings.

In order to offset higher overhead, most eateries are going to have to raise the prices of their menu items, Zolezzi predicted.

Mike Morton Jr., an executive in the Brigantine Restaurant Group, which his family owns, says revenue in 2007 was up by more than 5 percent from the year before, but expectations are that it will be flat this year compared with last. He declined to cite figures, but said that the company, which counts 11 restaurants, including six Brigantine Seafood Restaurants, three Miguel’s, Azul La Jolla and Z & #243;calo Grill, expects to raise prices by 3 percent this year, “but just to absorb the overhead.”


Price Increases

Raising prices may be necessary, but it’s a double-edged sword, said Sami Ladeki, who owns the Sammy’s California Woodfired Pizza chain, which currently counts 14 restaurants , including 11 in California and three in Nevada, as well as Roppongi Restaurant & Sushi Bar, a fine-dining establishment in La Jolla.

“We see less spending when we raise the price of products,” he said. “When you look at the checks, you’ll see that people are only ordering a salad and coffee, whereas before they’d get a salad, entr & #233;e, dessert and coffee.”

Nonetheless, Ladeki has five more pizza restaurants under construction, including two in Nevada.

“Because you have corporate expenses you can spread them further if you are growing,” Ladeki said. “You do it for the health of the company and to improve the lives of a dedicated pool of employees, to give them a chance to grow and improve.”

Dennis Lombardi, a restaurant consultant with WD Partners of Ohio, said that the outlook for the industry nationwide is rather dim.

“We’re seeing slowdowns in consumer spending and not a lot of signals that something will change to make it a whole lot better,” he added. “I’m cautiously pessimistic as opposed to being cautiously optimistic.

“I’d be thrilled if (the restaurant industry) in 2008 was as good as 2007, and 2007 was not a spectacular year.”

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