Rising Food Costs Set to Buffet Restaurants
Food costs are a big deal in the restaurant world, and a new report from Wells Fargo analyst Jon Tower shows that many of the key restaurant inputs are getting more expensive in recent months, with trends suggesting that commodity prices are set to be a major factor in the coming year.
Tower’s report noted that he doesn’t expect much cost of goods pressure in aggregate during the second half of 2019, but that “2020 may represent the first time in over 3 years that the industry may experience COGS [cost of goods sold] pressure primarily due to lower global pork supply tied to African Swine Fever. This comes on the heels of a new report from the United Nations that said African Swine Fever is threatening the food security and livelihoods of millions of households in the region that rely on pig farming.
It’s not just pork prices that are under pressure. Ground beef, corn and chicken—the pillars of the modern food chain—are also seeing increased costs, as well as the all-important avocado, which is up 80 percent year over year.
With visibility into potentially higher protein prices over the next 12-24 months, we see many restaurant concepts managing through this by utilizing incremental pricing (with support from higher prices in the grocery channel), changing product mix and introducing new products,” the report noted.
Extrapolating these trends for specific brands and categories in the restaurant space, Tower said that the news is slightly negative for burger players including Red Robin, Jack in the Box, McDonald’s, Wingstop, Chipotle and Wendy’s, among others.
Of that cohort, Wingstop may have the most on the table as prices spike, given increases in chicken costs and, specifically, wing prices that have been volatile and stressed in recent years.
As the commodity outlook darkens, there’s also allegations of price-fixing collusion among major chicken producers. According to a report in USA Today, the Justice Department has begun an inquiry of numerous chicken processors, distributors and sellers representing a significant slice of the U.S. chicken industry. The story added that the judge in the case has been asked to halt “certain depositions and discovery” in an effort to protect the ongoing grand jury’s investigation.
What does this mean for the upcoming holiday weekend? Wings, beef and avocados all around—lest we not have the purchasing power we currently enjoy this time next year.