In a restaurant business, commodities are the most important input cost, sometimes representing even more than 30% as a percentage of sales, as you can see in the chart below. Theoretically, a rise in commodity prices would mean an increase in menu prices, but that increase would spook customers, so restaurant companies can’t raise prices very often. Last quarter, Shake Shack increased its menu prices. Its pricing mix increased 5.5% during the quarter.
The company’s food costs increased to 32.3% from 30.5%, which resulted from an increase in the prices for commodities such as beef. According to Shake Shack, its menu price increase partially offset this cost. As you can see in the chart above, McDonald’s (MCD), The Habit Burger Grill (HABT), and Popeye’s (PLKI) all have food expenses above 30% irrespective of the scale of their operations. This expense applies to several other restaurants included in the Consumer Discretionary Select Sector SPDR ETF (XLY), which holds about 4% of MCD.
Labor costs declined to 26.3%, down 90 basis points (one basis point is one-hundredth of a percentage) year-over-year as the percentage of company-operated Shake Shack sales during the quarter. Occupancy costs also declined to 9%—30 basis points down year-over-year compared to the corresponding quarter a year ago in 2013.
The company incurs some costs before opening a Shake Shack (SHAK) restaurant, called “pre-opening expenses.” These expenses increased 3.8% as a percentage of sales to $2.3 million from $1.7 million, while depreciation expenses also increased to $1.7 million during the quarter, related to the opening of new Shake Shack units.