Rising food costs hit the restaurant industry

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Food inflation

In the McDonald’s Corporation (MCD) overview series, we learned that food is a major operating cost for a restaurant. Food and paper combined can represent as much as 34% of sales. High inflation in food costs can cause a restaurant’s operating margins to squeeze. Or, like Chipotle Mexican Grill, Inc. (CMG) has done, restaurants can increase the menu prices and pass on these higher costs to customers .

Indi Nov Food Inflation 2014-11-17

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Interpretation

In September 2014, the price index for meat stood at 267.7 compared to 264.3 in August. This index has been increasing sharply since the beginning of 2014. The poultry index was 238.99 compared to 238.61, and the fish and seafood index was 294.2 compared to 292.1 a month ago. The dairy products index stood at 227.6 compared to 226.4 in August.

Meat prices rose sharply toward the end of 2013 as  a result of a hit on the supply side. According to the U.S. Department of Agriculture, lower numbers of cattle herds and a dry spell in Texas resulted in a shortage in beef supplies. The department expects these prices to remain high because of the time it takes for cattle to be ready for slaughter.

The increase in the cost of a key food item such as beef will affect restaurant stocks such as McDonald’s Corporation (MCD), Burger King Worldwide, Inc. (BKW), Wendy’s Company (WEN), and Chipotle Mexican Grill, Inc. (CMG). Other restaurants included in the Consumer Discretionary Select Sector SPDR Fund (XLY) will also likely be affected.

Besides food inflation, fuel costs also impact operational costs. Continue on to the next part of this series to learn how.

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