As restaurants raised prices aggressively over the past year, much of the focus has been on labor, and for good reason. Wage rates for employees are up in the 11% range over the past year, and simply keeping enough workers has been a massive challenge.
But supply chain concerns are rapidly taking center stage, especially as labor concerns begin to ease along with the pandemic.
Consider that, on their most recent earnings calls, operators of publicly traded restaurant chains painted a relatively bleak picture of commodity costs this year. Double digit increases, many of them in the high teens, were commonplace. And steak chains are paying nearly 25% more for their food basket than they did two years ago.
We looked at publicly traded restaurants’ projected commodity costs for this year, using a combination of earnings call transcripts on the financial services site Sentieo and a recent report from Bank of America analyst Sara Senatore. Here’s an assessment, broken down by sector.
Fast-food chains: Most of the chains expect high-single digit to low teens inflation this year. McDonald’s expects double its 2021 commodity prices, which were 4%. Wendy’s projected its food costs to be in the high single digits. Burger King did not provide a projection, but its largest franchisee, Carrols Restaurant Group, said commodities rose 16% in the fourth quarter and a similar level was expected this year. The pizza chain Domino’s expects 8% to 10% commodity inflation this year.
One company stood out for its relative lack of commodity price increases: Starbucks, which is expecting just 4% inflation this year, according to Senatore—despite soaring coffee prices. Senatore said Starbucks was in the best position in an elevated cost environment.
Fast-casual chains: These chains’ commodity headwinds appear to be stiffer. El Pollo Loco expects its first quarter commodity costs to be 18%. Those costs are expected to moderate this year. But they would be relatively comparable to Portillo’s, which is expecting 13% to 15% commodity inflation in 2022. At Potbelly, commodity costs last year rose 10.2%.
Full-service restaurants: Full-service restaurants’ commodity costs appear to be worse, largely because of their broader menus or dependence on steak. At Ruth’s Chris, for instance, its food costs rose 24% in the fourth quarter compared with the same period two years ago. Costs at Texas Roadhouse are expected to increase 12% to 14% this year.
Yet Cracker Barrel’s costs are increasing, too. It expects commodity inflation this year to hit 15%. At Dine Brands, owner of IHOP and Applebee’s, costs are expected to be “north of 10%.” On the other hand, Fiesta Restaurant Group expects only 4% to 7% food cost increases.
Maybe the worst problem is that there is just so much uncertainty behind the cost environment. While many operators see some light at the end of the tunnel when it comes to labor, with applications increasing and some acute problems over, world events keep conspiring to raise commodity costs.
For instance, gas prices and wheat prices have soared in recent weeks due to the Russian invasion of Ukraine. Both countries are heavy wheat producers and Russia is a big oil exporter. Wheat prices are up 74% year over year.
“It changes daily,” Keith Anderkin, chief supply chain officer of the fast-casual chicken chain Zaxby’s, told me on the most recent episode of the A Deeper Dive podcast. “That’s the world we’re living in. We’re definitely wired to solve problems. But usually we like to see light at the end of the tunnel and go solve it. But what do you do when there’s no light at the end of the tunnel?
“We came out of the pandemic and now we have a war going on, which has a whole new set of elements.”
Rising prices for gas and corn raise the specter of more long-term inflation for items like beef or chicken—which, we might note, could have supply problems due to a brand-new bout of Avian flu, as if we need one more problem. That means, rather than easing in the back half of the year, commodity costs could keep going up well into next year. Anderkin, for what it’s worth, doesn’t expect things to get easier until the middle of 2023.
All of which brings up pricing. Restaurants have been raising prices aggressively all year, in part because of labor and more recently because of food costs. Yet, Senatore noted, consumers accept price increases when food costs increase, and they know food costs increase because they visit the grocery store. That means the industry could have more pricing power, even after raising menu prices at historically high rates the past year.