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Big Banks Have LIBOR; Small Business Has Lobster?
 

Maine's lobstermen have gotten hammered by plummeting prices. So why are restaurants soldiering on without adjusting prices?

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Banks are fighting off interest rate collusion accusations over London Interbank Offered Rate, known as LIBOR. Could some small business owners face similar accusations, over the price of lobster?

By all accounts, Maine has had a banner lobster year, hauling in 110 million pounds of the crustaceans since May. The catch season started a month earlier than usual, thanks to the warm winter. Maine's early season also overlapped with the Canadian lobster fishermen's year, which tends to start in April. There, too, they've had a plentiful year.

And that's led to more lobsters than you shake a claw cracker at. Maine's lobster fisherman have found that local distributors and factory processors, located primarily in Canada, are willing to pay sometimes half of what they've gotten in leaner years--sometimes as little as $2 a pound.

But the dropping price per pound has not necessarily found its way to consumers' tables. Whole lobsters and other derivative delicacies, such as the much coveted lobster roll, aren't dropping at all.

Take Luke's Lobster, the nine-store chain with 150 employees, based in New York. The price for its lobster rolls is $15, or $17 if you get it with chips and a coke. ($12.95 is the going rate in Maine, lobster purveyors in that state say.) That's about what it was last year. 

"We are trying to keep our prices consistent, but the cost differential for us has been a noticeable increase," Luke Holden, founder and president of Luke's, says.

So what's going on? For starters, that lobster meat has to make its way to Manhattan, where local denizens usually don't blink at paying hefty sums for meals out. Lobster is a trendy little luxury that New Yorkers crave--and they certainly don't mind shelling out for a succulent lobster roll in the summer.

It also turns out the lobster is carved up into almost as many pieces as the cow, with certain cuts garnering more money than others. The most coveted sections are knuckle and claw meat, which Luke's uses exclusively, and that runs $23 a pound--up about a buck since this time last summer.

By contrast, tails sell for about $10 a pound wholesale, since the meat is chewier. Those prices have dropped dramatically from $15 a pound last year, due in part to less demand from U.S. casinos, European consumers who favor it, and the U.S. government, which apparently was a big buyer.

And what about restaurants serving the whole lobster? Prices for whole lobster should be going down, experts say, but generally they're not budging. If you were a tourist and buying lobster from straight from the docks, you'd probably pay $3.99 a pound now, says Cal Hancock, owner of Hancock Gourmet Lobster, a purveyor of specialty lobster items in Cundy's Harbor, the oldest commercial lobster village in Maine. There, restaurants tend to serve lobster for $10 or more a pound.

Sandy Owens, owner of the retail pound Day's Crabmeat & Lobster in Yarmouth, says the still-high restaurant prices have caused some ire.

"Some of the fishermen in this area are complaining, 'How can they charge that much for a lobster dinner when the fishermen are getting $2.25 or $2.40 a pound?'" Owens says.

The typical cost of a lobster dinner in Owen's neck of the woods in August is between $9.99 and $10.99. 

It's not real price collusion, as happened with LIBOR, says economist John Dunham, founder of economic consultancy John Dunham & Associates, in Brooklyn. It's closer to what happens in the oil industry, where refining bottlenecks can cause oil prices to swing wildly from day to day, yet cause gas prices to nudge up or down only a few pennies.

Despite the bounty of supply, there are limits to the number of lobsters that restaurants can sell, and that the processors can handle and freeze. 

Plus, restaurants have some of the worst margins for sales of any industry, around 4%, says Dunham, once all of their overhead is factored in. Food only accounts for 25% of the costs, generally, he says.

One restaurateur in central Maine, who asked not to be identified, says the prices of its lobster dinners haven't gone down at all this year, nor will they. (The restaurant's menu shows a lobster platter at a stubborn $17, or $20 with a salad.) 

"It is not just the lobster you have to takes into consideration," the restaurateur says. "It's also the potatoes and the vegetables on the plate, and the waitress who brings it to your table."

IMAGE: ilkerender via Flickr
Last updated: Aug 3, 2012

JEREMY QUITTNER is a staff writer for Inc. magazine and Inc.com. He previously covered technology for American Banker and entrepreneurship for BusinessWeek.
@JeremyQuittner




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