Reporter's Notebook

Restaurant costs are up, but so are sales

A common theme has emerged among restaurant companies reporting earnings in recent weeks:

Costs are going up, both for food and for labor, but who cares because sales are ridiculous.

Two recent company reports illustrate this. Domino’s Pizza noted that it paid record prices for cheese in its fiscal fourth quarter, contributing to disappointing earnings. 

But it also said same-store sales rose 11.1 percent at U.S. restaurants, its best result in more than four years and 400 basis points higher than expectations.

Yesterday, Texas Roadhouse said its same-store sales rose 7 percent in the fourth quarter and are up 12 percent in the first seven weeks of 2015. But that, too, hid cost increases including 4.5 percent food cost inflation and higher labor and health care costs.

“Challenges like these will always exist to some degree,” CEO Kent Taylor said on the company’s earnings call. “We will continue to tackle them head on.”

Other chains have previously reported similar results. Earlier this month, Buffalo Wild Wings’ reports of its early 2015 sales offset the company’s news on higher food and labor costs.

To be sure, not everybody has been suffering the same fate — Cracker Barrel said that it lowered labor and other expenses and its same-store sales rose 7.9 percent in the company’s fiscal second quarter. That included 11.4 percent sales in January. As a side note, Cracker Barrel’s results are proof positive that gas price savings are flowing into eateries.

And it’s not like restaurants are only now starting to show higher food costs. Beef prices have been going up forever, and most commodities experts are predicting moderate food price inflation, and perhaps even deflation, this year if you just ignore the price of cows.

Labor costs are another matter. Restaurants have largely blamed minimum wage prices for higher labor costs. But there are some indications that restaurant companies are paying higher wages to attract good workers.

That’s inevitable as employment continues to grow. The economy added 257,000 jobs in January. Retailers and restaurants that compete for lower-end labor are adding a huge percentage of those jobs — restaurants have added an average of 33,000 a month. At least part of the reason that Wal-Mart is increasing wages for 500,000 of its employees is due to competition for quality labor.

Restaurant executives don’t seem fazed by the idea that they might have to pay higher wages as a result. “Employed people buy more pizza than unemployed people,” Domino’s CEO Patrick Doyle said on that company’s earnings call this morning. “I love the fact that the labor market is strengthening.”

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