Marco and Petra Pineyro, owners of Kiko's Mexican Restaurant in Perry Hall, tried everything to keep their restaurant running amid the worsening economy - they sought marketing advice, lowered prices and even offered a "dinner for a nickel" special.
But squeezed between skyrocketing food, electricity and labor costs, as well as penny-pinching consumers who are eating out less, the Pineyros reached the end of the line. Kiko's - which had received good reviews from food critics and was named "Best Mexican Restaurant" in 2006 by Baltimore Magazine - is closing March 31, exactly three years after it opened.
"We kept asking, 'What is changing?'" said Marco Pineyro, a retired research scientist at the National Institute on Aging. "There weren't many complaints about prices. Customers said [they were] cutting back on a lot of things with energy, gas, everything going up."
Amid gloomy economic trends - falling real estate values, layoffs and stock market volatility - many consumers are changing their spending habits. And eating out is among the first expenses they look to trim in times of economic uncertainty, economists say. Consumers can adjust "in terms of frequency, spending levels and venues," said Bob Goldin, executive vice president of Technomic Inc., a food industry consulting and research firm.
The sharpest pain is felt by the neighborhood mom-and-pop restaurants, which lack the marketing muscle and buying power of national chains, experts say.
Still, restaurants are only a slice of the small businesses facing pressure as consumers pull back. Economists say broader economic woes are starting to undermine consumer spending. Retail sales fell in February, including spending at restaurants and bars, according to the U.S. Department of Commerce.
That can mean less spending on any kind of purchase that isn't necessary, said Christopher D. Carroll, an economics professor at the Johns Hopkins University. Even people whose own financial situations haven't worsened may join in, feeling it's the thing to do, he added.
For example, engaged couples are spending less on wedding flowers, said Amy Epstein, owner of Crimson & Clover Floral Design Inc. in Canton, which had a great year in 2007, supplying flowers for multiple weddings every weekend. Things are slower now, and customers are asking for less expensive options.
And fewer people are buying large, pricey artwork, said Canton Gallery owner Carolyn Wilkinson, who said she began seeing the slowdown in mid-October. She cut her staff from two to one to deal with the change but is hopeful that the federal tax rebates due this year will make a difference.
"I know I'm going to spend mine at some local business, so I hope someone else does," Wilkinson said.
When the economy sours and money gets tight, Americans will still eat out because of their busy lifestyles, industry analysts say. But instead of visiting a casual dining restaurant, they'll buy meals at say, McDonald's or Taco Bell, or they'll cut back on the number of restaurant visits.
"People will go out, and instead of steak, they'll order chicken. Instead of chicken, they'll order pasta," Goldin said. "They won't have a side dish or wine. They'll trade down."
Joseph Heeke and his wife, Jean, of Bel Air, can't give up eating out entirely because of their busy schedules. Heeke, a technician at Verizon Communications, and his wife, an assistant manager at a Goodwill store, visit restaurants at least four times a week.
But as part of their overall budget-cutting, the Heekes are forgoing meals at restaurants like Red Lobster and turning to fast-food joints.
"For the two of us to eat out at Ruby Tuesday's and Red Lobster, it's about $30 to $40 dollars. If we go to Cactus Willies, it's only $25. It's a little buffet place," Heeke said. "We like Taco Bell, and it's $15. If we go Chinese, it's $20. We save about 30 percent by avoiding nice, middle-of-the-road places."
The restaurant industry saw less than a 1 percent growth in consumer traffic last year, driven largely by a slowing economy, according to market research firm NPD Group. It was the smallest gain since the 2000-2003 recessionary period. Last year, 207 restaurant meals were purchased per person, compared with 211 in 2001, according NPD Group. Meanwhile, Americans made 861 meals at home in 2007, up from 817 in 2002.
Even national chains and high-end establishments are not immune to such bleak news. Ruth's Chris Steak House, for instance, reported that its net income last year dropped 24 percent, to $18.1 million, as consumers scaled back. Domino's Pizza Inc. said recently that higher costs - it was paying 64 percent more for cheese at one point - and cautious consumer spending hurt its domestic sales, causing 2007 profit to decline by more than half, to $37.9 million.
Higher food costs are especially pronounced for mom-and-pop restaurateurs, which don't have the buying or marketing scale of larger restaurants, said Steve West, a casual and fast-food industry analyst at Stifel Nicolaus.
To cope, some Baltimore-area restaurants are considering raising menu prices and cutting back on staffing and hours. And instead of scrimping on fresh ingredients, some restaurants are offering smaller-plate dishes, food industry analysts say.
The U.S. ended 2007 with the biggest increase in inflation since 1990. Last month, the price of staples such as flour and milk was about 25 percent higher than a year earlier, according to the U.S. Department of Labor. Coffee was up more than 18 percent at the end of last year compared with 2006.
"The fact that expenses are so extreme not just for food but labor, restaurants have to either raise menu prices or cut back on something," said Patricia Cobe, senior editor of Restaurant Business Magazine in New York. "There's just no way they could be profitable unless they do that, no matter what the traffic is."
Ann Nault, owner and chef of Taste Restaurant in Belvedere Square, does not want to raise prices. But it's getting harder to avoid when she's paying a $4 fuel surcharge to her suppliers for every order.
She's paying almost $30 for fryer oil that cooks 35 pounds of food, up from $19 dollars a year ago. That expense adds up when she changes the oil twice a week and buys up to four orders during that span.
On top of that, business has slowed during the weekdays. And when she has customers, they're ordering less, like appetizers instead of larger meals, or just a single entree. Sales dropped 10 percent last year, Nault said.
"The restaurant business is a nickel-and-dime business. Every penny counts here," said Nault, who is more aggressively marketing weekly dinner and drink specials as well as promotions.
A week ago, Nault decided to close Taste on Sundays, except on holidays. She cut back on the number of servers and kitchen help during the slower days. And she adjusted her menu, eliminating a few higher-priced items, such as the $38 jerk lobster tail that neither she nor her customers will pay for.
"We'll do what we can to survive," she said.
To be sure, not every restaurant is feeling such hardships.
The spike in costs for dairy products, for instance, aren't as pronounced for Woodberry Kitchen, which uses organic and locally grown ingredients and products, said co-owner Spike Gjerde. Woodberry, which opened in October, buys milk from dairy farms that feed their cows grass. In contrast, prices for wheat, corn and soybeans used to feed traditional livestock are rising, Gjerde said, though higher fuel costs are hitting the restaurant.
"We're still new enough that a lot of people are in the 'checking us out' phase," Gjerde said. "People seem to be coming back."
The growth in Americans' spending on goods and services in 2007 was at its weakest in three years, rising $508 billion, to $9.7 trillion, according to the commerce department. And consumers acknowledge that higher prices are forcing them to make choices about stretching their dollars.
It was hard for Darcel Harris, of Westminster, to start making meals at home instead of going out five days a week amid her busy life. But Harris, a reading specialist in the Carroll County school system, said she had no choice but to limit her trips to once a week.
"Electricity and gas bills are crazy. They raised the water bill, property tax," Harris said.
Such changes in dining habits are hurting restaurants like Kiko's.
When Kiko's opened in 2005, Marco and Petra Pineyro had such high hopes. Relatives and friends, who ate dishes made from Marco's family recipes, told them for years to open a restaurant that would serve authentic gourmet Mexican dishes, including menudo and chicken flautas.
"Of course, no one could predict what the economy would do," Marco Pineyro lamented recently at his restaurant, which is filled with colorful and cheery decor.
The restaurant received good reviews, including one from The Sun, and sales in the first year exceeded their expectations. But the Pineyros started seeing business slip in 2006, and sales last year dropped 60 percent. As a result, they started losing money in the middle of last year.
Customers who used to dine twice a month are coming in just once or not at all, Marco Pineyro said. The lunch rush during a recent Wednesday resulted in just one table being seated, said Petra Pineyro, a retired music teacher.
Marco Pineyro acknowledged that a lack of a liquor license hurt, but that alone doesn't close a business.
Meanwhile, the Pineyros face rising expenses, including their BGE bill, which has increased 70 percent since last summer. Soybean oil, which they used to cook the food, is $30 per 5 gallon container - double the price from a year ago. The restaurant uses up to eight containers a month.
All those expenses are too much to bear. The Pineyros are trying to sell their restaurant but they haven't found a credible buyer yet as banks tighten lending requirements.
Petra Pineyro called the restaurant's closing bittersweet, but she has no regrets. "We put everything we could put into it."
Marco Pineyro added, "I still think it could be made into a profitable business. Unfortunately, we're out of operating money. There's no sense in continuing to hit our heads against the wall."
hanah.cho@baltsun.com
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