Commodity costs stable, but pricing power falls

Commodity costs stable, but pricing power falls

BOSTON Most of the largest chains in the restaurant industry say 2010 commodity costs are likely to remain flat from 2009 levels, or rise only slightly, according to a new report from restaurant securities analyst Jeff Farmer at Jefferies & Co.

While the stable commodity costs will continue to drive earnings improvement, companies will not benefit as much as they did this year because they hold less pricing power, or the ability to raise menu prices, as sales remain negative, Farmer contends.

“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,” Farmer said in his Oct. 16 report. “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 said.

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 when compared with the spikes experienced in 2008. As those benefits fade, restaurants will need more than ever to drive performance improvements through increased sales.

“[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.

Jefferies is a New York-based securities and investment banking firm. Farmer is the firm’s restaurant analyst and is based in Boston.

Contact Sarah E. Lockyer at [email protected] [3].