How Will the Restaurant Industry React to Rising Beef Prices?

03/27/2015 08:38 pm ET | Updated May 27, 2015

Beef prices are at historical highs due to low supply, increasing demand, the effects of drought and rising feed costs. According to a January 2015 report from the USDA, Beef prices climbed 19 percent in January over a year earlier. Prices are expected to continue climbing 5-6 percent. Restaurants large and small are being faced with tough choices. As demand for premium beef like natural, organic or grass-fed rises against shrinking supply, those wishing to continue offering these are faced too often with compromise.

At my restaurants, Backyard Beef is the number one most popular item on our menu even though we are known for seasonal vegetables, produce and salad.

Q: Why are beef prices rising?

A: There are several reasons. One is the availability of the high-quality, premium beef because ranchers have to rebuild herds that were reduced as a result a multiple years of drought that drove up feed prices. It takes three years from gestation for cattle to reach market weight. Also, because there is limited supply and increased demand. More restaurants like Chipotle and better-for-you concepts are using premium beef so there is less to go around, which means cattle ranchers need to increase their sustainable beef practices.

The message is clear, we are not going to see relief anytime soon. Restaurants are faced with few good options. We can continue with the cuts, quality and portions our customers have come to expect while holding the line on menu price to protect our customers and stay competitive knowing that we will get hit on margins. Or we can pass the increase to the customer and risk pricing them out of support. Both options carry unknown risks to the long-term success of a business. We feel that it is important in this case to create dialogue with our customers, chefs, ranchers and suppliers to find a win-win option for everyone. The answers may compete, making decisions more challenging.

Another option many will choose is to move to a "less desirable cut." We see this with the higher end chefs moving from filet, ribeye and New York strip steak to hanger, flatiron or top sirloin. This migration downward puts pressure on those historically using the next level, driving them to transition to flank, flap or chuck roll. Which in turn would enable chefs to continue sourcing from premium animals but challenges them with less desirable cuts. Will the guests notice or care?

The easiest road is to simply source beef from the commodity market. Meat from regularly fed animals is widely available and considerably less expensive than that of natural, grass-fed or organic cattle. The reason why it's widely available beyond supply level is production efficiency. These animals are administered growth hormones and antibiotics two days after birth. They live the majority of life in a feedlot consuming genetically modified grains under industrial conditions. This is beef for the mass market. Though prices have risen in this category as well, it is a much cheaper option for those restaurants who traditionally command prices well above the fast food or casual dining market. This is a very dangerous option for those who have built a reputation and trust with their customers around food integrity. Honesty may bring backlash. Dishonesty may bring bankruptcy.

In the extreme, some restaurants will choose to discontinue beef altogether. A choice carrying unpredictable risk considering American's love affair with steak, burgers and summer barbecue.

As with everything, we may find a silver lining. Higher prices may reduce waste and excessive beef consumption. Some might see this as a victory for plant dominated diets, planet health and individual wellness. We might find a trend towards smaller portions and higher quality in some restaurants. But the most telling tale will be how each restaurant chooses to navigate this market. I believe those who are transparent, engage their customers and stick by their values will differentiate themselves from those who do not. Crisis always filters the winners and losers. This one is no different.