Financing

Labor and commodity costs hammer big Burger King franchisee Carrols

The operator’s dual inflation issues highlight problems restaurants are having in the current environment. But it also sees some improvement.
Burger King labor commodity costs
Photograph: Shutterstock

Carrols Restaurant Group, the 1,000-unit Burger King operator out of Syracuse, N.Y., is paying 13% more for wages and is paying premiums and overtime to meet customer demand.

Even then, executives told analysts this week, it is struggling to keep employees and is paying premiums to keep stores open past 9 p.m. As a percent of sales, labor rose 250 basis points in the third quarter and the company paid $15 million more in labor costs in the period.

Commodity costs took off, too. Carrols said its beef costs rose 15.5% in the quarter as suppliers faced their own labor challenges.

The dual challenges offset some improving sales—same-store sales at its Burger King restaurants were up 5% in October, an improvement to the 2.7% growth in the third quarter.

“The questions we’re struggling to answer are, what portion of the higher labor costs are transitory and will commodity costs follow their traditional cyclical patterns and revert to the mean,” CEO Dan Accordino said, according to a transcript on the financial services site Sentieo.

“We don’t have these answers, but we do know that the inflationary cost pressures we experienced during the third quarter were not expected to the degree that they impacted our industry.

“The economic conditions stemming from the pandemic and its effect on the labor force, supply chain and consumer habits continue to be challenging to navigate and difficult to predict.”

The issues at Carrols, one of the nation’s biggest franchisees, illustrate problems affecting much of the industry, even as sales recover.

Both labor and commodity costs routinely spike for one reason or another. But it rarely happens at the same time. Food and labor are the two biggest costs for any restaurant, and inflation is driving up prices at record levels.

For a chain like Burger King, which has seen its sales slow this year, the problems are magnified, putting more pressure on franchisees such as Carrols.

There are some green shoots. Sales are improving, after all, though Accordino notably told investors that the market share the chain lost to rivals McDonald’s and Wendy’s is not expected to improve for several months.

Accordino also said that applicant flow is increasing into the restaurants, something executives with other companies have suggested. “The challenge continues to be with retention,” Accordino said.

Beef costs were a bigger surprise. Total commodity costs rose 9.2% in the quarter. Anthony Hull, Carrols CFO, had previously told analysts that beef costs would be $2.40 to $2.45 per pound between September and December.

Instead, the cost was $2.68.

There has been a “modest reduction” in beef costs the past two weeks, Hull said, but “we now believe that commodity costs will remain elevated through the remainder of the year.”

That said, commodities appear to be heading in the right direction, Hull said. “They seem to have plateaued,” he said. “Pork’s slowly coming down. Chicken is slowly coming down. Some of the French fries are steady but seems to be coming down.

“I’d say they’re holding steady and maybe starting to stabilize. Maybe [we’re] starting to see some light at the end of the tunnel.”

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