Food cost is one of the most important operating costs for a restaurant. In our McDonald’s overview series, we learned that food and paper costs can be as much as 34% of sales. High inflation in this area can squeeze a restaurant’s operating margins. Yet restaurants can also adjust menu prices and pass on higher food costs to their customers, like Chipotle Mexican Grill (CMG) has done in the past.
In March 2015, the price index for meat stood at 265.8, having dropped from 267.2 the previous month. This index has been increasing sharply since the beginning of 2014. The poultry index came in at 241.1 in March compared to 239.3, and the fish and seafood index stood at 287.7, unchanged compared to a month ago. The dairy products index stood at 224.4, down from 225.5 in February, and the fruits and vegetable index came in at 332.5 in March 2015 compared to 339.3 in the previous month.
Meat prices rose sharply toward the end of 2013 because of a hit on the supply side. According to the U.S. Department of Agriculture, lower cattle numbers and a dry spell in Texas resulted in a supply shortage of beef products. These prices are likely to remain high because of the time it takes for cattle to be ready for slaughter.
Higher costs for key items such as beef will affect restaurant stocks, including McDonald’s (MCD), Darden Restaurants (DRI), Wendy’s (WEN), and Chipotle Mexican Grill (CMG). CMG makes up ~1% of the Consumer Discretionary Select Sector SPDR Fund (XLY).
The increase in food prices has been somewhat mitigated by declining fuel prices. Recently, gasoline prices have dropped significantly. This is positive for a restaurant from both the supply-side and demand-side perspectives. We’ll look at this more closely in the next part of our series.