Restaurants may catch a break with falling costs

NEW YORK After suffering from cost inflation nearly all of last year, relief from sky-high commodity and energy costs is here, and restaurant bottom lines should stand to benefit from deflated prices by the second half of this year, said UBS Securities analyst David Palmer.

In a note to investors Wednesday, Palmer projected that most chains could see flat year-to-year cost levels by the June-ending second quarter and deflationary levels by the September-ending third quarter. Leading the commodity decrease is significantly lower year-to-year costs for seafood, produce and wheat, Palmer said. Milk and cheese prices are down about 40 percent year-to-year. Hamburger prices are about flat, Palmer noted, and market prices for chicken are slightly up from a year ago.

“Diminishing food costs should significantly help restaurant chains with company-operated units, and those that can maintain traffic without additional heavy discounting,” Palmer said.

Lower energy inflation also can help restaurants in the form of reduced energy, packaging and distribution costs, along with lower gas prices for consumers, which may spark discretionary spending. Natural gas is down about 10 percent year-to-year, Palmer said. Home heating is projected to drop 17 percent in 2009, and retail gas prices are projected to fall 39 percent, according to UBS research.

“Lapping gas price shocks of 2008 could help slow deterioration of consumer sentiment and restaurant spending, particularly during driving season,” Palmer said.

While restaurants stand to gain from the projected cost deflation, so do the industry’s competitors. Supermarkets and other retail brands can also take advantage of lower food and energy costs.

“If job losses continue at a rapid clip and food inflation turns to deflation, the lure of at-home eating could increase,” Palmer said. “In 2008, large fast-food chains provided a welcome oasis of non-inflation with dollar menus and $5 foot-long subs. By the second half of 2009, at-home food options could look more appealing, leading to a slip in fast-food traffic.”

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