| Commodity costs may pressure chains in ’10
By SARAH
E.
LOCKYER
“The items that we buy the most of—and that would be our meats and cheese, in particular—there continues to be pressure on those items,” Chipotle’s chief financial officer John Hartung said during an October conference call with investors. “We’ve seen pressure—pressure on the business model, especially on the chicken, the beef and the pork, throughout this year, but there hasn’t been really the pricing power.” Denver-based Chipotle, while one of few restaurant brands posting positive sales trends, took a 6-percent menu price increase at this time last year to help it shore up unit-level margins. For its latest quarter ended Sept. 30, margins rose 4.1 percent from a year ago to 25.5 percent. Officials noted that another menu price increase would be tough to implement in today’s environment of reduced consumer spending, but it has not been ruled out. Chipotle is not alone. The ability for restaurant operations to raise prices in order to offset escalating costs is debatable at this juncture, said restaurant analyst Jeff Farmer at Jefferies & Co. “Determining a restaurant concept’s pricing power is difficult, but we note that virtually every publicly traded restaurant concept is currently delivering negative traffic trends,” he said in a report last month. “Combine this with negative check trends over the last several months and it is clear that most restaurants have little, if any, pricing power. “Our bottom line is that even if commodity costs are stable in 2010, restaurants have far less pricing power and will see far less [cost of goods sold] favorability,” he continued. In 2009, earnings were driven by a favorable year-over-year cost environment, as companies cut corporate expenses and benefited from reduced commodity and operating costs compared to the spikes experienced in 2008. As those benefits fade, restaurants will need more than ever to drive performance improvements through increased sales, observers said. “[Cost of goods] favorability has been the biggest driver of margin and earning-per-share upside in 2009, but our research suggests that a repeat performance is unlikely in 2010,” Farmer said. In his analysis, Farmer looked at the commodity cost guidance from 35 publicly traded restaurant companies as well as the Oct. 14 prices for eight key commodities: chicken, cheese, corn, wheat, milk, beef, live cattle and butter. At Buffalo Wild Wings Inc., a move to more margin-friendly menu items, like boneless wings made of breast meat, will help the company offset spiking chicken wing costs. In the September-ended third quarter, the cost of 1 pound of traditional chicken wings was 43-percent higher than it was a year ago, the company reported. Traditional bone-in chicken wings account for 21 percent of Buffalo Wild Wings’ sales. So far in the fourth quarter, chicken wing prices have spiked 39 percent from the same time last year. The Minneapolis-based company, which operates or franchises the 633-unit chain, has promoted other items to help offset the traditional wing costs, such as boneless wings; “Wild Flatbreads,” which are flatbreads topped with varying flavors of chicken, sauce and cheese; and “Slammers,” or bite-sized sandwiches. “As our results to date this year attest, the significance of the volatility in [chicken wing] cost and the importance of isolating this factor continues to lose relevance,” said Buffalo Wild Wings chief financial officer Mary Twinem. “For the first nine months of 2009, the cost of traditional wings has been substantially higher than prior years, yet we have improved restaurant-level performance and should achieve our net earnings growth goal for the year.” The company also will explore a menu price increase when it begins its new menu rollout in the first quarter, she said.—slockyer@nrn.com | 
