MorrisAnderson

Soaring global food prices, particularly for meat, sugar and coffee, are putting pressure on the restaurant, travel and hotel sectors as they pursue a fragile recovery. In a bid to offset added costs without passing them on to price-sensitive consumers, many companies are scrambling to renegotiate contracts, find cheaper suppliers and reconfigure menus.

Increased demand and market speculation, as well as bad weather like the recent flooding in Australia, have driven up prices for items ranging from coffee beans to beef. Prices of corn and soybeans, used as feed for cattle and chicken, have leapt over the past six months, pushing up meat prices. As a result, meat prices have also increased.

Marriott International Inc. has been coping with higher prices for beef, fish and chicken over the past six months, says Brad Nelson, a vice president andthe global corporate chef for the hotel chain. The company is also paying higher prices for sugar and arabica coffee beans, which have both soared over the last year. "It's a global challenge," says Mr. Nelson.

The company swung to a profit in the third quarter but, like many of its peers, struggled to raise room rates, doing so for the first time in two years in the second quarter. So far, it has ruled out raising food prices at its restaurants, instead re-engineering its menus to offer alternatives to popular and pricey cuts of beef such as filet mignon and New York strip. These items remain on the menu at hotel restaurants, but the company offers alternative cuts more often, such as flat-iron and hanger steak, which costs Marriott 53% less than a filet, according to a spokeswoman.

"When prepared properly, it has a very comparable quality level and delivers a great flavor," says Mr. Nelson. He says more diners are ordering the alternative cuts, though the pricier cuts are more popular at large group dinners at conferences and other events.

Restaurant chain Johnny Rockets, known for its burgers, uses about eight million pounds of ground beef a year, and its prices have risen 20 cents a pound over the last two months, says Ray Masters, senior vice president of purchasing and distribution. To offset part of the increase, the privately held company has renegotiated its poultry costs, cutting them 5% for 2011, and its ice-cream prices are down 4%. Still, this won't offset the higher beef costs, Mr. Masters says.

Ground-beef prices are expected to continue to increase throughout the year. If that happens, the company would consider a price increase, says Mr. Masters, a move it hasn't made in two years.

Adam Werner, managing director at consulting firm AlixPartners, says companies are reluctant to pass higher costs onto fickle consumers. Instead, he's seeing clients remove expensive items, trim portions and introduce alternative items.

While cruise operator Royal Caribbean Cruises Ltd. hedges against increases in cattle prices, that hasn't fully offset its rising costs for beef, says Chief Executive Richard Fain. Since the fall, meat prices have risen steadily for the cruise operator, which serves about 53 million pounds of beef, poultry, lamb, veal and pork a year. The most popular restaurants on the ships are steakhouses, Mr. Fain says.

"Meat is important to our guests," Mr. Fain adds. "We aren't prepared to sacrifice the quality and we can't raise prices enough to reflect it, so it ends up being a cost we have to absorb." Royal Caribbean is also paying more for citrus fruits and fish, particularly shrimp, another popular dish on its cruises.

Royal Caribbean's third-quarter earnings soared 55% on improved demand. But the company has said consumer confidence is still affecting bookings, and it hasn't been able to restore price cuts it made during the downturn.

Norwegian Cruise Line began using e-auctioning last year to find better food prices as commodity costs rose, says Chief Executive Kevin Sheehan. The company, which uses 34 million pounds of meat and 9.5 million pounds of seafood a year, has had higher costs for dairy items, meat and fish, he says.

Through e-auctioning, the cruise operator can specify what food items it needs and accept bids from suppliers. The competition keeps prices lower, says Mr.Sheehan.

Hawaiian Airlines, part of Hawaiian Holdings Inc., has been reconfiguring its menu to offset rising food prices. The carrier is protected from increases on food it serves in economy class because of a contract that doesn't expire until 2013. But in business class, it is subject to commodity pressures.

As one of the few carriers still offering free in-flight meals, Hawaiian Airlines constantly evaluates food costs, says Louis Saint-Cyr, vice president of in-flight services. Increased food prices make it even more pressing for the company to manage costs. "Free meals [are] the elephant in the room, and it is something that will always be scrutinized," he says.

Meat and poultry prices have been of particular concern for Mr. Saint-Cyr, who says they are staples of lunch and dinner offerings in first class. He has ruled out reducing portions or removing meat entirely, but his chefs and vendors are evaluating the carrier's menus, looking for ways to make other meal ingredients, from sauces to vegetables, less expensive.

"We micromanage every component of our meals" now, he says.

The company has also been able to partially offset higher meat and poultry prices by renegotiating other food and beverage items. For instance, Hawaiian just renegotiated alcohol and beer prices for 2011 at a lower rate than what it paid in 2010. Later this month, Mr. Saint-Cyr says he'll begin renegotiating the prices of disposable cutlery.

Write to Dana Mattioli at dana.mattioli@wsj.com

Subject

Restaurants Franchise

Industry

Franchise