After trimming the obvious fat, restaurant chains are now having to cut closer to the bone as they look for ways to combat rising food costs and preserve healthy margins while avoiding significant price hikes.

"There's only so much low-hanging fruit. After that, you've really got to strive to get the rest of it, so this year is going to be a little tougher," said Alice LeBlanc, chief global supply chain officer for AFC Enterprises Inc.'s (AFCE) Popeye's Louisiana Kitchen.

Most restaurant chains are expecting their commodities costs to rise as much as 4% this year, but can only afford to push prices up enough to offset half of that without losing market share.

The fried chicken chain was able to trim about $16 million off its costs in 2010, bringing franchisees one percentage point of improvement in restaurant operating profit margins before rent compared with the prior year.

Popeye's made its distribution more efficient by ensuring every truckload was full and by negotiating longer-term contracts with suppliers that are more beneficial to both parties. The fast food chain also created a purchasing co-op to leverage its volume and pay lower prices.

"No one would've anticipated what we've truly experienced this year in commodities inflation, so it was incredible that we did start with the cost cutting when we did," LeBlanc said.

Now, Popeye's is on to the little things.

"When we were making a lot of money, we didn't really think about the little things, because who wants to think about cleaning solution or bathroom products," LeBlanc said. "But now, every little thing counts. It all adds up."

Darden Restaurants Inc. (DRI) Chief Operating Officer Andrew Madsen says the operator of Olive Garden, Red Lobster and Longhorn Steakhouse chains has four cost-saving projects underway to help offset the elevated cost pressures.

The company is automating its supply chain; centralizing restaurant facilities repair and maintenance programs; adopting more sustainable restaurant operating practices for energy, water and cleaning supplies usage; and implementing an in-restaurant labor optimization program. Darden estimates these changes can save it $110 million to $130 million.

"We want to use those savings to help protect our price point accessibility and breadth of appeal of our brands, and not suffer any margin dilution at all," Madsen said on a conference call.

DineEquity Inc. (DIN) Chief Executive Julia Stewart says DineEquity continues working with franchisees at its Applebee's and IHOP restaurant chains to find cost reductions that will help them through these tough times.

Lately, at IHOP, it has implemented new tools that help with food portioning to reduce waste, which in turn lowers food costs.

"It's an ongoing effort, every month we look at options to cut where we can," Stewart said. "Yes, we did already get the obvious things, but as a restaurant operator, you'll never get me to say there isn't another way to cut costs. You can always find a way."

Cheesecake Factory Inc. (CAKE) says it's implementing $3 million to $5 million in cost savings initiatives in the second half of the year, as well as ongoing improvements in labor productivity.

Texas Roadhouse Inc. (TXRH) suffered a decline in its restaurant-level margins, despite its same-store sales rising in the first quarter with guest traffic up 4.2%, because the restaurant refrained from raising menu prices to levels that would fully offset its 3% commodities cost inflation.

To stick with its low prices, Texas Roadhouse Chief Financial Officer Scott Colosi says the steakhouse has contracted out expenses such as electric, gas, waste management and phones, continually negotiating those contracts downward.

"We're always looking at our purchasing power to see what we can do," Colosi said on a conference call. "And we continue to challenge folks on the labor end, particularly, how early people come in to start their shifts and when they leave, and we try to match that up with the business."

Brinker International Inc. (EAT) Chief Financial Officer Guy Constant says its Chili's bar and grill chain's "kitchen retrofit" program, being rolled out now, optimizes the labor component of the food preparation process, among other efficiencies. He expects it to result in a noticeable reduction in labor and cost of sales through reduced waste. It could also bring utility savings because the new equipment is much more energy efficient, he added.

-By Annie Gasparro, Dow Jones Newswires; 212-416-2244; annie.gasparro@dowjones.com
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