Why fuel prices affect restaurants

Fuel costs have declined over the past five months—from a high of $3.67 per gallon of regular gasoline in June 2014, to $2.94 per gallon as of November. Diesel also hit its lowest point in November, dipping to $3.62 per gallon from $4 in March 2014, as we see in the chart below.

This is good for restaurants as it helps both the supply as well as the demand side of the business.

The connection may not seem direct, but many factors that are affected by higher fuel costs affect a restaurant’s bottom line. From product supply to running locations, higher fuel costs put pressure on operating costs, and can squeeze profit margins.

And it’s not only the supply side that’s affected. The demand side also takes a hit. When gas prices are high, consumers tend to economize on transit by eliminating unnecessary trips. According to the NPD group, this behavioral change affects drive-through restaurants most. Restaurant chains including McDonald’s Corporation (MCD), KFC under the umbrella of Yum! Brands, Inc. (YUM), Wendy’s Company (WEN), and Burger King Worldwide, Inc. (BKW) all offer drive-through options.

Some of the above-mentioned restaurants are included in the exchange-traded Consumer Discretionary Select Sector SPDR Fund (XLY).

A study titled “Carpooling and Driver Responses to Fuel Price Changes: Evidence from Traffic Flows in Los Angeles” shows that higher fuel prices increase the carpooling rate. Carpooling naturally reduces the number of consumers making random stops at retail stores.

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