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Taking Price Is a Thing of the Past

October 16, 2009
   

"Both restaurant and food companies are pointing to stable commodity prices in 2010 as production capacity cuts are offset by still soft consumer demand."

   More evidence of a "new normal"? Jefferies & Company restaurant analyst Jeff Farmer doesn't say so in an October 16 note to investors but it's evident that the recession is increasingly problematic for chains. Stable wholesale prices-- for chicken, beef, cheese and butter, for instance -- usually means better margins for well-managed companies. Until the first half of this year that notion held true:

"Our analysis of 28 restaurant company P&Ls indicates that favorable commodity [prices], G&A and pre-opening costs (in that order) were the key drivers of EBIT margin expansion in [the first half of '09]."

   Consider Ruth's Chris, Morton's, Domino's Pizza, Texas Roadhouse and Chipolte. They raised prices late last year and early this year and watched earnings swell as their cost of goods tumbled. The benefit was short-lived. Consumers stayed out of the loop. Warns Farmer:

Combine this with negative check trends over the last several months and it is clear that most restaurants have little if any pricing power. Our bottom line is that even if commodity costs are stable in 2010, restaurants have far less pricing power and will see far less COGS favorability.

   In short, managements will have to do more with less to boost earnings -- something they may acknowledge in conference calls as the third-quarter earnings season begins. 

Posted by David Farkas on October 16, 2009 | Comments (1)