(UPDATED COVERAGE, Sept. 2) While the beginning of 2010 brought optimism to the restaurant industry, the middle of the year is replacing that optimism with uncertainty for many operators, and rising food costs are partly to blame.

The National Restaurant Association’s Restaurant Performance Index showed contraction in the industry for the fourth consecutive month, after hitting a two-year high in March.

UPDATED: Food price inflation, economy take toll on restaurant industry

Courtesy National Restaurant Association

After reaching a two-year high in March, the National Restaurant Association's Restaurant Performance Index continues to slip for the fourth straight month in July.

The index takes into account current performance and future expectations, polling restaurant operators across all concepts. Scores of more than 100 show growth, and scores less than 100 depict contraction in the industry.

July’s Restaurant Performance Index was 99.4, essentially on par with June’s 99.5.

The Current Situation Index has been below 100 for almost three years — it was the Expectations Index that bolstered the score above 100 on March. The number of restaurant operators reporting negative same-store sales in July was up 1% over June, at 44%. Traffic was also down for 46% of operators.

Inflation in wholesale food prices is playing a role in keeping revenue in the red.

“Wholesale food prices are up a hefty 5.4% in July over year earlier levels,” said Hudson Riehle, senior vice president of the Research and Knowledge Group for the NRA, in a video webcast. “This is driven by double-digit gains in certain commodity groups, for example produce, certain dairy and meat, and this does put additional pressure on operator margins, since food and beverage purchases account for roughly one-third of the restaurant industry sales dollar.”

Houston-based Sysco Corp., the nation’s largest foodservice distributor, reported rising food costs for the first time in a year at its latest quarterly report, and also blamed fruit and vegetables. The company said product costs rose 2.2% during the three months ending July 3.

Even with the higher prices, foodservice demand tends to be fairly steady through changes in prices, said Tim York, president of foodservice distribution network Markon Cooperative, Salinas, Calif.

“It’s not like we’re talking about $50 lettuce and $50 tomatoes,” York said. “For those core items, demand is rather inelastic.”

York said Markon’s distributors are up on sales volume, but he wasn’t quite sure why. Markon is a sponsor of the Foodservice 2020 initiative — a partnership with the NRA, the Produce Marketing Association and the Foodservice Distributors Association to double the use of produce in foodservice by 2020 — but York couldn’t attribute the growth to the initiative.

“It really hasn’t gotten traction yet,” York said. “The last year has been about laying the foundation. This is the year when we expect the rubber to really meet the road.”

The casual and fine dining segments showed some growth at the beginning of the year, but it has leveled off the last couple months, said Steve Winders, food services director for Des Moines, Iowa-based Loffredo Fresh Produce Co. Inc., a Pro*Act member.

“In 2009, definitely, the economy had a pretty negative impact,” Winders said. “We’ve seen a little bit of growth back but have not reached 2008 levels.”

Gene Loffredo, president and chief executive officer, said there has been a volume decline in foodservice due to high commodity prices. Tomato, onion and pepper prices saw some all-time highs in the winter and spring months due to weather conditions.

Loffredo said he has also noticed more restaurant closures so far this year than last.

When the entire first half of 2010 is considered, the NRA’s index is up 2% over the second half of 2009, Riehle said in the webcast.

“There is definite caution among restaurant operators regarding the current economic environment, as well as expectations for the future,” he said. “Operator sentiment was definitely higher several months ago.”

Uncertainty about unemployment in the U.S. has also taken a toll on the industry and operators’ expectations, Riehle said. The number of restaurant operators who expect to have higher sales in six months dropped 4% in July over the previous year, to 38%.

However, international tourism is providing some hope.

“International spending by tourists in the United States in June was up a substantial 15% over year earlier levels,” Riehle said. “That’s positive news for the restaurant industry because there’s always been a very strong correlation between spending by international visitors and ultimately, growth in restaurant spending.”