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Rising Fuel Prices: A Concern for Restaurant Investors?

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Fuel price rises

In the US, gasoline prices have declined significantly, which has been a boon for retail consumers. Over the past few months, average fuel prices declined from a high of $3.67 per gallon of regular gasoline in June 2014 to $2.67 per gallon as of May 16, 2015. Lower fuel prices are a positive factor for restaurants, helping the supply as well as the demand sides of the industry.

Recently, prices for regular gasoline have been steadily climbing. During the week ending May 16, 2015, regular gasoline increased slightly to $2.67 per gallon from $2.64 per gallon in the week ending May 9. During the same period, diesel prices also increased to $2.86 per gallon from $2.83, as shown in the chart above.

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How fuel costs impacts restaurants

Restaurants feel the impact of higher fuel costs, especially in transporting ingredients and other supplies to each store. The increased expense pressures operating costs and squeezes the profit margins.

Not only is the supply side affected—the demand side also takes a hit. When gas prices are high, consumers tend cut back on unnecessary trips. This trend certainly affects restaurants that rely on their drive-through sales. Some of the companies affected by higher gas prices include McDonald’s (MCD), KFC under the umbrella of Yum! Brands (YUM), Wendy’s (WEN), and Dunkin Brands (DNKN). These restaurants offer drive-through ordering at their locations.

Some of the above-mentioned restaurants are also included in the Consumer Discretionary SPDR ETF (XLY), which holds ~4% of McDonald’s (MCD), 1.5% of Yum! Brands (YUM), and 1% of Chipotle Mexican Grill (CMG).

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