Would you like fries with that? Far from a throw-away query, that question is about to become a costly proposition.
After swallowing months of cost increases that have eaten into their bottom lines throughout 2011, the nation's largest restaurant chains are positioning themselves to dish out incremental price increases to patrons over the next couple of months. The menu changes, some announced, others expected, come after a year where U.S. customers have seen the costs of food items consumed at home rise drastically faster than those for prepared dishes bought at restaurants.
Data from the federal Bureau of Labor Statistics shows the price of a benchmark basket of food products intended for home consumption has, on average, risen by 13.5 percent this year. In contrast, the price of meals at restaurant has risen much less, only 5.44 percent from December to September. The data, which is calculated based on what the federal agency considers to be an exemplary mix of products consumers might buy, shows price increases for at-home food products have outpaced those for restaurant servings every month except June.
Increases in consumer's supermarket bills generally serve to signal future increases in restaurant tabs, as consumers are less likely to fret over higher costs or stay at home if their dining-in alternatives are just as expensive.
Some Chains Already Raising Prices...
Indeed, some of the nation's most prominent chain restaurant operators have already announced or executed substantial price increases. Last month, the largest fast-food chain in the world, McDonald's (NYSE:MCD) said it would be implementing price increases on selected menu items, which would follow a 2.5 percent increase in pricing the company implemented between March and May.
The firm's Chief Financial Officer, Peter Bensen, said on the October 21 conference call following the firm's earnings announcement that the hikes would be done to offset the rising cost of commodities: the beef, wheat and milk McDonald's needs to produce its burgers, buns and cheese slices, for example.
Food-at-home inflation is rising faster than food away from home, which might allow for additional pricing actions in the near term, Bensen said.
Bensen also noted the atmosphere was right because previous rounds of pricing changes had not dissuaded clients, something that echoed comments made a day earlier by John Hartung, chief financial officer of competitor Chipotle Mexican Grill (NYSE:CMG). Price increases at Chipotle of some 3.5 percent during the quarter weren't met with any noticeable resistance, Hartung said.
Another large chain operator, Panera Bread Co., (NASDAQ:PNRA) also reported a substantial rise, 2.5 percent, when it announced quarterly results a few days later, on October 25.
...But It Hasn't Been Enough
As significant as those spikes might seem, restaurants haven't done nearly enough to offset the price increases they've been facing over the past year. An analysis by the International Business Times of the current quarter earnings reports for all publicly-traded restaurant companies with a market capitalization of over $1 billion shows, when compared to year-ago results, the companies' revenues from food sales have not been able to keep up with the increase in the cost of goods sold. The one exception, Domino's Pizza (NYSE:DPZ), is facing bigger issues: U.S.-based revenues for restaurants operated by the company dropped when compared to year-ago results.
|Company Name||Ticker Symbol||Revenue (Increase)||Cost of Sales (Increase)||Date reported|
|Chipotle Mexican Grill, Inc.||CMG||24.11%||34.39%||10/20|
|Darden Restaurants, Inc.||DRI||7.49%||16.95%||9/30|
|Panera Bread Company||PNRA||26.03%||32.99%||10/25|
|Domino's Pizza, Inc.||DPZ||-1.46%||-4.59%||10/18|
|The Cheesecake Factory Incorporated||CAKE||2.88%||7.05%||10/19|
|BJ's Restaurants Inc.||BJRI||17.58%||19.30%||10/20|
|Buffalo Wild Wings||BWLD||32.19%||35.10%||11/3|
|Cracker Barrel Old Country Store, Inc.||CBRL||0.08%||5.53%||9/13|
|Texas Roadhouse, Inc.||TXRH||9.64%||9.86%||11/1|
Out of the companies on that list, Darden Restaurants Inc. (NYSE:DRI), whose Red Lobster concept has been particularly affected by outsize increases in the price of seafood, seems most likely to begin raising prices steeply. It normally implements yearly price increases of 2 to 3 percent.
And it definitely won't be alone.
On its October 21 quarterly results conference call, BJ's Restaurant (NASDAQ:BJRI) said it planned to roll out price increases it had been holding back on since May. Chief Executive Officer Gerald Deitchle said they plan to prudently deploy some additional menu pricing with the rollout of our fall menu update.
Panera Bread plans to follow its 2.5 percent increase from last quarter with another increase of 3.5 percent in the current one.
The Ones to Come
Other price hikes are expected, if not yet announced.
YUM! Brands (NYSE:YUM), the parent company for KFC, Pizza Hut and Taco Bell, among other properties, has not yet announced across-the-board price increases in the U.S., but international media have reported increasing prices for those chains in China and India.
Starbucks (NASDAQ:SBUX), which did raise prices on bagged ground coffee in May of this year, is widely expected by analysts to announce new retail pricing soon: it last raised prices on beverages in September of last year.
Wendy's (NYSE:WEN), which reports earnings on Wednesday, could use the opportunity to make public new hikes: it already raised prices in March and announced earlier this year it would contemplate future price increases.
Option B Not Really An Option
Price increases do not have to be across the board. Restaurants are sometimes able to increase the amount spent by the average consumer by steering them toward options that deliver a fatter profit margin to the restaurant. Deploying limited-time promotions, re-engineering menus or limiting price hikes to peripheral items, like drinks, are all parts of the strategy. The one thing companies are not likely to do as an alternative to raising prices is reducing food portions.
While this strategy is a known trick of the trade in the retail packaged food sector, it has historically proved disastrous for restaurants, as patrons tend to quickly re-evaluate the value proposition.
Even The Cheesecake Factory (NASDAQ:CAKE), known for its unreasonably large individual servings, has taken the option off the menu.
We are known for our large portions and large selection. So that's just not something we're willing to fool around with, Chief Financial Officer Douglas Benn told the Dow Jones Newswires Tuesday.
Like the other restaurants, they'll instead be going big where it counts... in the check.