The Producer Price Index showed a slight overall inflation in finished goods of .1%. Food in the three stages of processing behaved this way in January:

• Finished Food prices fell .3% for the month. 80% of the decline can be attributed to an 8.8% decline in prices for fresh and dry vegetables.
• Prices for food in the Intermediate stage of processing fell .4%. A cheese price decline of 5.4% accounted for all of the decline.
• Food in the Crude stage of processing rose 1.6% as Corn, Cattle and Soy prices drove most of the increase.

What we see in the PPI numbers is some inflation looming on the horizon – while the prices for some products have moderated during the last 90 days, we see reason to plan for higher prices in several key product categories and we are on-board with the major chains in predicting a full-year food inflation of 4.5%.

The January CPI rose .2%. Prices for food purchased at grocery stores remained flat while restaurant menu prices rose .4% for the month. Looking at the past twelve months, menu prices are up 3.1%.

The CPI for gasoline prices jumped .9%. We are getting increasingly concerned that gasoline pump prices will jump the $4 barrier in the coming weeks. We have heard some analysts suggest that we will paying over $4.50 a gallon before the end of the summer. We are not willing to go that far yet but our concern is that even a $4 gallon price will severely impact consumer discretionary spending and that our industry will suffer the most as consumer have less money to spend on meals and entertainment.

Another consideration of higher fuel prices is the effect on cost-of-goods both in the production and the transportation  of those goods. There is no single good reason for the run-up in gasoline prices but the higher prices are here and going higher.

P.F. Chang’s announced that their fourth quarter earnings fell 72%. Same-store-sales their Pei Wei concept fell 1.9% and 2.4% at the P.F. Chang’s Bistro flagship brand.

Food costs rose to 27.7% from last year’s fourth quarter number of 26%. The company expects food inflation of between 4% and 5% in 2012. Management will combat the rising input costs by attempting to engineer menu mix shifts and by implementing “slight” menu price increases in 2012.

P.F. Chang’s management is banking on a revamped lunch menu and marketing approach to re-start success for the company.

Red Robin had a stellar quarter four with 31.8% improved earnings. Same-store-sales increased 4.8% at company-owned stores – the “numbers behind the numbers” show that guest traffic actually fell .8% for the quarter but menu price increases of 5.6% drove the overall 4.8% increase.

The quarter’s 25.4% food cost is a full one point higher than last year’s 24.4%. Management is expecting food cost to rise to 26% for 2012.

At the company’s food production segment, sales rose .1% but profit fell by 33% due to higher commodity costs.

Famous Dave’s posted a fourth quarter same-store-sales increase of 3.6% at its company-owned locations and a 2.1% gain at franchise outlets. Food costs for the quarter came in at 30.8 as compared to last year’s same quarter 29.9%.

PPI and CPI numbers for January will be reviewed in our next post.

Dunkin’ Brands grew their fourth quarter U.S. same-store-sales 7.4% at flagship Dunkin’ Donuts stores and 5.8% at Baskin-Robins outlets.

Benihana experienced a 47% drop in Q3 income. The company did show nice same-store-sales growth in all 3 of their brands (8.2% at Benihana Teppanyaki, 4.8% at RA Sushi and 3.7% at Haru).Food costs increased from last year’s 24.1% to 24.6% in the recent quarter.

Kona Grill enjoyed a strong fourth quarter with a same-store-sales increase of 7.8%. Cost-of-sales declined from 28.3% in the prior year’s quarter to 26.9%. It is important to note that Kona raised menu prices during 2011 and in the fourth quarter they realized a menu price inflation of 4.8%; obviously, the price increases helped food cost results during the quarter.

Ruth’s Hospitality’s fourth quarter same-store-sales increased 7.7% at the Ruth’s Chris flagship brand and .4% at Mitchell’s Fish Market. Food costs rose from 30.5% last year to 31.6% in this year’s fourth quarter.

No better example exists, to prove the skeptics right, than the USDA’s projections on crop yields and stockpiles & inventories.

As a specific case-in-point, we need look no further than Corn. Because the U.S. produces 36% of the world’s Corn crop, whenever the USDA makes projections on Corn crop yields or stockpiles, commodity markets world-wide are immediately impacted.

You may remember that about three weeks ago, the USDA released projections that there was far more Corn in stockpiles than was expected by traders and farmers. The result was that Corn and other commodity prices fell immediately.

Since the report, traders and farmers have looked closely at other data to determine that the USDA number were likely way off so Corn prices are now sitting where they were before the USDA’s latest projection.

The USDA has blown the last 3 years of their projections of U.S. Corn production and farmer and trader frustration is at an all-time high.

We all need the USDA to tighten its ship. There are too many people who rely on their projections to  determine how much livestock to raise and put into production, what type and how much crop to produce, what type of menu to offer and what prices to charge.

Yum announced that their fourth quarter earnings rose 30% on incredible growth in China.

In the U.S., same-store-sales rose 6% at Pizza Hut but fell 2% at Taco Bell and 1% at KFC. Food costs in the U.S. rose to 30.5% from last year’s 29.1% result.

Buffalo Wild Wings enjoyed a 34% profit increase in their fourth quarter. Same-store-sales for company stores rose 8.9% while franchisee same-store-sales growth came in at 5.9% for the quarter. Cost-of-sales rose to 29.4% vs. last year’s same quarter of 28.8%.

Panera’s fourth quarter net profit grew by 5.8%. Food costs rose to 29.3% from last year’s 28%. Company-owned stores grew same-store-sales 5.9% while franchisees grew theirs by 3.2%.

Let’s take a closer look at Panera’s company same-store-sales increase: of the 5.9% in increase, 5.7% of it came from higher prices and only .2% from increased customer counts. Of the 5.7% increase in prices, 75% of that portion of the increase was realized from menu price increases while the remainder can be attributed to menu mix change.

This is a great example of the true impact of higher commodity prices – Panera raised prices 4.3% and their food costs still rose by 1.3%.

The  January jobs number, when couple with December’s +203,000 number is very positive and we are hopeful that the momentum can continue. We are not drawing any conclusions from the fact that Congress and the President have not come to any agreement in passing the administration’s jobs program and the employment numbers have improved anyway…just thinking that maybe business has figured out how to improve things without interference (Oh, I meant “help”)  from the government.

Tyson reported its first quarter results that showed sales up 9.4% but EPS down 46.2%.

Sales were up due to inflation on commodity products and profit plunged due to higher costs of  raw  ingredients, operations and production. To give you an idea of how increased costs affected margins, Chicken margins fell from 6.9% (from last year’s first quarter) to 1.2% this year; Beef margins fell from 3.6% to .9%.

As our normal readers know, with each Tyson earnings report, the company gives us a look at inflation in each of their major product categories. For the first quarter, when we compare Tyson sell prices this year vs. the first quarter of last year, we see the following price inflation:

• Chicken: +11.3%
• Beef: +19%
• Pork: +16.1%
• Prepared Foods: +8.4%

The company attributed much of its success to their new Dave’s Hot ‘N Juicy cheeseburger line. Management expects 2012 commodity costs to increase by 1.15 to 1.45 percent over 2011′s inflation – much of the increase can be blamed on ground beef prices.

Chipotle crushed it again in their fourth quarter. Earnings were up 24% and same-store-sales grew by 11%.

The company’s food cost rose to 32.2% from last year’s 31% and they expect commodity input costs to rise in “mid-single digits from the fourth quarter food cost level”.

To combat rising commodity costs in 2011, the company raised menu prices and is planning another immediate 1% increase in its Pacific Region – which encompasses California. It is obvious from looking at their results that customers did not react negatively to prior menu price increases and there is no reason to think that this next round of price hikes will create consumer backlash for the company. Chipotle is proof positive that continuing to offer great product while strategically  implementing price increases is a winner for top and bottom-line results.

Since the Super Bowl is Sunday, we thought it would be interesting to look at how costs have risen:

• Since the last time the Giants and Patriots met in the Super Bowl (in 2008), Ground Beef prices are up 60% and Tortilla Chips are higher by 43%. Since just last Super Bowl, Chicken Wing prices have risen 52%!

Enjoy the game, do lots of good business this weekend and we’ll talk to you on Monday.

Starbucks’ first quarter same-store sales increase of 9% in the U.S. helped the company increase profits by 10%. The K-Cup introductions seems to be a success as the company shipped  100 million cups during the quarter.

Starbucks disclosed that their operating income fell by .8% because of higher commodity costs – to help stabilize its coffee costs, the company contracted its coffee supplies through mid-2013.

AFC Enterprises, the Popeyes restaurant operator, announced that its fourth quarter same-store-sales were up 5.9% in the U.S. (6.2% for franchise operators but down 1.5% for company owned locations).

During their earnings call, management spoke about new product intros for 2012 which will include a Cherry Berry Chiller frozen beverage, Blueberry Banana Nut Oatmeal and Chicken McBites – a promo that began this past Monday.

Management also spoke about their plans to “strategically raise prices” to offset the food cost inflation they expect to face in 2012. The company experienced a 5% input cost inflation in 2011 and concurs with our projection that inflation will continue in the first-half of 2012. McDonald’s expects a 4.5 to 5.5 percent food cost inflation during the first half of the year and expects a “mid-teens” uptick in beef costs during the same time period.

Speaking of higher beef costs, cattle prices are surging higher – reaching its sixth all-time high in just the first 14 trading days of 2012. The rise is a result of lower cattle counts on feedlots and higher world-wide demand for protein. As we have discussed before, herds were drawn down in 2011 due to higher feed costs and the herd replenishment process takes time, so higher beef prices will be with us for a while.

To give us an idea of how feed prices affect protein prices, consider this: for every dime change in a bushel price of corn, boneless chicken prices are impacted by a penny-and-a-half. So if Corn rises by 40 cents a bushel, boneless chicken breasts rise by 6 cents a pound.

As anticipated, on Wednesday,  the USDA released its latest projections of food inflation for 2012 – they kept their previous for projection for overall 2012 food inflation steady at 2.5% to 3.5% while lowering their projection for the food-at-home segment of consumer spending to an inflation rate of between 2.5 and 3.5%.

The USDA sees restaurant menu price inflation coming in at between 2 and 3 percent. This seems reasonable as operators will need to raise prices to combat the higher input costs we experienced at the end of  2011 and that will continue in the first half of 2012.

Brinker announced second quarter results of an increase in same-store-sales of 1.4% at Chili’s and 1.1% at Maggiano’s. The impact of Brinker’s previous menu price increases resulted in higher sales of 1.1% at Chili’s and 1.8% at Maggiano’s. Food costs for the entire chain rose to 27.2% from last year’s 26.7%.

The latest news in the Orange Juice “crisis” is that the FDA testing for the fungicide may go on into July – which is not good news for low orange juice prices. In the meantime, Tropicana has decided to only use only Florida juice in its  Pure Premium brand until the matter is put to bed.

Inflation for food purchased at grocery stores was 6% with restaurant menu inflation for the year at 2.9%. The restaurant inflation was in line with  how much the largest public restaurant companies had disclosed (early in 2011) they would raise menu prices during the year in an attempt to combat rising input costs.

As we have noted recently, some positive crop estimates have helped to ease specific commodity prices and those prices are being reflected in the Producer Price Index for the intermediate and crude stages of processing (as we reviewed during our last blog post) but there are pent-up prices increases that have just begun to raise their ugly heads. One source of the price increase are manufacturers who had delayed rasing prices previously or those who have input costs that are still rising  (see the Sara Lee price increase info from the last post). Market conditions are causing other prices to increase – we have talked about the shortage of Aribica coffee production and we are seeing increased prices for better coffee blends. Keep an eye on potato prices in general and french fry prices in particular as exports are rising faster (up 18.1% in November) than the most recent crop (+6.1%) would suggest is wise. It is expected that supply shortages will continue until next harvest and, of course, higher prices will be the result. Chicken Wing prices for football playoff and Super Bowl consumption are at record highs.

As we wrote  in September, we still feel that food inflation in the first half of this year will be relatively high as we work the higher finished product through the supply chain system and the second half of 2012 will bring moderate inflation – more in line with what we see in a “normal” year.  After we review some more data, we may be in a position to lower our second half inflation projection but the current commodity markets are too unstable to allow us to make a firm projection today.

The USDA will give us their outlook for 2012 food prices on Wednesday and it is expected that they will lower their current 2.5% to 3.5% inflation rate in their new projection. It is important to know that 57% of the USDA projection is based on retail prices and 43% on food “away-from-home”. We will give you the USDA outlook in our next post.

The Orange Juice saga continues as the FDA has cleared a number of samples from importing countries as free from the fungicide Carbendazim but the FDA has yet to clear our largest importer – Brazil. We will keep you posted as we learn anything new from the FDA.

For the Finished Goods, energy and food prices fell .8% while the core rate (all goods minus foods and inflation) rose .3%.

Seventy percent of the fall in finished food can be attributed to an 11% drop in prices for fresh and dry vegetables.

Prices for food that was in the intermediate stage of processing declined .6% – about half of that decrease was due to a fall in animal feed costs.

At the crude stage of processing, prices were down a substantial 2.6%. Lower prices for slaughter steers and hogs were partially the cause for the decline with lower prices of corn causing half of the monthly decline all on its own.

Our take on the results: the December numbers are a welcome relief from rising prices but we need to see several months of steady lower numbers in order to believe that real and “permanent” relief will be seen in the industry’s cost-of-goods line on the P&L.

To provide proof that we are not yet clear from manufacturers passing on their increased costs of production, we offer the following facts that were included in a letter we received from Heinz in which they were announcing a price increase of 5% for their frozen dessert product line. To explain the rationale for the increase, Heinz showed how much certain ingredient/input/production costs had risen in price over two years:

• Milk: +48%
• Eggs: +42%
• Butter: +16%
• Sugar +16%
• Packaging: 17%
• Crude Oil +17%

On Monday, we will review the December Consumer Price Index.

Have a great weekend.