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Restaurants start getting some relief on inflation

Food costs remain historically high. But it’s increasingly looking like they have peaked. And gas prices are coming down, too.
restaurants easing inflation
Companies like Noodles & Co. say that inflation may have peaked./Photograph: Shutterstock.

Food cost inflation has hit restaurants a lot harder than they thought it would, which is saying something for an industry that went into 2022 expecting their cost of goods sold to rise at least by high single digits.

But industry executives on earnings calls this past week indicated that things were getting better.

Chicken prices soared so much at Noodles & Company this spring that the company had to institute a surcharge for customers that added chicken to their various noodle dishes, which amounts to about half of its customers. But those prices are down 20% since their peak.

“The worst is behind us in terms of the market volatility,” Noodles CFO Carl Lukach told investors this week. For the company, the easing prices of chicken, coupled with some improvements in processing, could improve the chain’s cost of goods sold, or COGS, by 150 basis points by the end of the year.

Similarly, Wingstop said the price of bone-in chicken wings fell 19% in the second quarter, a level of “meaningful deflation” in the company’s central entrée. “We are experiencing meaningful deflation in our business as the price of wings has normalized from unusually high levels in 2021,” CEO Michael Skipworth told investors, according to a transcript on the financial services site Sentieo.

Not everyone has seen inflation moderate, at least yet. At Texas Roadhouse, beef costs moderated somewhat last quarter but the company expects them to increase toward the end of the year, for instance.

But in general, executives believe costs will moderate as the year goes on.

Kevin Ozan, CFO with McDonald’s, said the company expects food inflation to range from 12% to 14% this year. That rate was “a little higher” in the second quarter and higher still in the third. But, he said, “we expect to see it moderate some in the fourth quarter.”

Indications that food costs are beginning to moderate have sent restaurant stocks higher this week. Food costs have increased for a wide range of reasons, including high labor costs among processors and distributors, record gas prices, the war in Ukraine and specific issues such as the Avian Flu, which led many processors to get rid of flocks of chickens.

Various factors appear to be easing this problem. The price of a gallon of gas has come down about 12%, for instance. Increased production of chickens has also eased prices, as has lower demand for things like chicken wings.

For restaurants, easing prices for food come as it appears wage rates have stabilized at 10% higher than they were a year ago. The potential that inflation may have peaked and is starting to work its way down could be coming at a good time, given growing concerns about the state of the economy overall.

The inflationary environment has taken a hatchet to many chains’ profit margins. At Texas Roadhouse, for instance, restaurant margins were 16.6% in the second quarter, which was down 116 basis points compared with the same period a year ago despite a 14% increase in revenues.

At Noodles, restaurant margin was 15.5% in the second quarter. That was an improvement from the 9.7% in the first quarter, but it was still down 340 basis points compared with the same period a year ago, even though same-store sales rose 5.1%.

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