Food cost is one of the important operating costs for a restaurant. In the McDonald’s (MCD) overview series, we learned that food and paper costs can be as much as 34% of sales. Food inflation can cause a restaurant’s operating margins to squeeze, but a restaurant like Chipotle Mexican Grill (CMG) can adjust its menu pricing and pass on the costs to its customers.
In November 2014, the price index for meat stood at 267.3, compared to 267.7 in October. This index has been increasing sharply since the beginning of 2014. The poultry index increased to 238.4 compared to 236.9, and the fish and seafood index was at 291.8 compared to 290.8 a month ago. The dairy products index stood at 228.4 compared to 228.8 in October.
Meat prices rose sharply toward the end of 2013 due to a hit on the supply side. According to the U.S. Department of Agriculture, a lower number of cattle herds and a dry spell in Texas resulted in a shortage in the supply of beef products. It further stated that these prices will remain heightened because of the time it takes for cattle to be ready for slaughter.
The increase in food costs for key items such as beef affects restaurant stocks such as McDonald’s (MCD), Burger King (BKW), Wendy’s (WEN), Chipotle Mexican Grill (CMG), and other restaurants included in the Consumer Discretionary Select Sector SPDR (XLY).
You can learn more about the restaurant industry by reading why Wendy’s (WEN) saw its top line decline. You can also learn about Tim Hortons’ (THI) digital strategy and cash-back cards and why Yum! Brands (YUM) fell after earnings. You can also learn why Starbucks (SBUX) is expanding its relevant offerings.
Recently, gasoline prices have significantly declined. This is positive for a restaurant from the supply as well as the demand side. We’ll look at this in more detail next.