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Meat Prices Are Hitting BBQ Joints Hard
Meat prices increased more than any other food category, but what happens when a BBQ restaurant believes they can't raise prices or even reduce portion sizes?
Nearly every grocery item you have purchased is more expensive than when you bought it a year ago. The grocery industry has been hit by the same supply chain disruptions and labor shortages as every other industry, and the war in Ukraine and high energy prices aren’t helping. Some combination of these events has resulted in a more noticeable level of inflation than we’ve seen in a long time. When the cost of producing products increases, businesses generally pass those costs on to their customers. But what happens when local businesses, particularly ones serving price-sensitive customers, don’t think they can raise their prices?
The New Yorker recently published an article on how inflation has impacted a small-town BBQ restaurant in the Texas Hill Country. The owner of R-BBQ shared how inflation has impacted everything from portion sizes to pricing decisions. The easiest way to handle risings costs is to increase the final price of the product, but the restaurant’s owner, Robert Rodriguez, felt price increases wouldn’t go over so well in this small town. In a sense, the restaurant’s prices were sticky:
Rodriguez’s regulars are so regular that they have a table that’s unofficially reserved for them; some know his prices so well that they come in with exact change for their meal already portioned out. “You raise the prices ten cents, and they know it,” Rodriguez said.
If prices can’t be adjusted upward, the next idea might be to change the production process to decrease the average costs. This might mean adjusting the use of labor and capital to achieve the same product, but recently it has resulted in shrinkflation, which has gotten a lot of attention over the past year. Instead of changing the inputs to sell the same output, companies have opted to reduce the size of their final product and charge the same price as before. Outside of a restaurant, shrinkflation might be the reason a small box of Kleenex has 60 tissues instead of 65, even though the price doesn’t change:
For restaurants, shrinkflation might cause a chef to reduce portion sizes but charge the same price as before. That decision can be tough to implement when most of your meals are served by weight, as they often are in BBQ restaurants. R-BBQ, however, also serves breakfast and Rodriquez’s attempt at introducing shrinkflation was met with little success:
“I was thinking that they wouldn’t want to pay more—they’d rather eat less,” he told me recently, when we spoke at his restaurant. “So I started doing the shrinkflation.” He scrambled one egg instead of two for a breakfast taco, and started making smaller pancakes.
Customers generally don’t like paying higher prices, and some of them can’t afford to pay the higher prices. Many in the town are on fixed incomes, unemployed, or retired. Very rarely are customers happy to pay the same price as before, but receive smaller portion sizes:
One of Rodriguez’s regular customers scolded him, saying that his patrons loved the big tacos. Rodriguez, who was behind the griddle that day, as he is most Sundays, decided that the experiment was a failure.
But if businesses don’t increase prices, what happens when their costs continue to increase? Every business has a break-even point in which the company earns no excess economic profit after selling all of its products. Zero profit sounds like a bad thing (and it most likely would be from an accounting standpoint), but everyone still gets paid under this scenario. Zero economic profit is actually the ideal long-run scenario for competitive markets because it implies that the business owner has no better alternative for their time and prices are as low as possible for consumers.
There may be some moments when business owners incur losses but continue operating in the short run. This may occur when companies have fixed obligations they must pay (like rent) or demand is unexpectedly lower. Companies continue operating under these conditions so long as the price of their product is above the average cost of its variable inputs. For a BBQ restaurant, that means the price for a chopped beef sandwich must be higher than the cost of the ingredients used to produce that sandwich. The price difference will cover all the ingredients and some, but not all, of their fixed costs. Businesses can’t lose money forever and must make a decision about raising prices or finding ways to reduce costs.
Restaurants are facing food price increases just like customers at grocery stores. Walk through any meat department at your local grocery store and find some of the most significant changes over the past 6 months. For a BBQ restaurant, however, there aren’t a lot of alternatives to combat the rising cost of meat. If the average cost of producing the product increases above the price of the product, businesses are better off shutting down and losing money on any remaining contractual obligations, like rent or bills.
Four companies (Tyson, JBS, Seaboard, and Marfrig) control over 80% of the US meat market. While these companies have almost doubled their profits over the last year, the restaurants selling the final product haven’t been so fortunate over the past year. The higher costs of producing meals, coupled with the inability to pass on those higher costs to consumers, have resulted in many restaurants owners opting to shut down:
Meanwhile, all over Texas, barbecue places have shut their doors: Two Sawers BBQ, in Floresville; 1836 BBQ, in New Braunfels; Brisket Bar-BQ, in Bellaire. Emily Williams Knight, the president of the Texas Restaurant Association, recently called the rising price of brisket a “crisis.”
Firms can (and should) operate with short-term losses so long as they cover the cost of the variable inputs. Shutting down, in an economic sense, doesn’t always mean going out of business. Some restaurants are closed depending on the season and most restaurants aren’t open 24 hours per day because there isn’t enough business at 2 AM to justify staying open. For some restaurants looking to cut back, it might mean reduced operating hours during the day or closing an extra day each week.
It’s not clear in the beef industry when (or if) prices will come back down. Feed prices have increased over the past year (an input to the production of beef) and droughts increase the need for more feed. It’s possible, however, that the demand for beef and, therefore, cattle won’t remain as stable in the face of mounting inflationary pressure. Substitutes like pork and chicken could increase their shelf space at the grocery store or consumers may finally be willing to introduce more plant-based alternatives to their diet to supplement their meat consumption.
Food prices have risen 10.4% from June 2021 to June 2022 [US Bureau of Labor Statistics]
The average US city price for ground beef in June 2022 was $4.89 per pound [US Bureau of Labor Statistics]
There are an estimated 53,798 restaurants in Texas [CHD Expert]
There are approximately 2,500 BBQ restaurants in Texas [Texas Comptroller of Public Accounts]
Texas Monthly ranks the Top 50 BBQ restaurants in the state each year [Texas Monthly]