Continued Impact of High Gas Prices and the Effect of “Pink Slime” on Beef Prices

According to the National Restaurant Associations chief economist Bruce Grindy,  a strong majority of restaurant operators said the recent increase in gas prices has negatively impacted their business, either on the sales or operational side.  A prolonged period of elevated gas prices could have a particular impact on restaurants with customers on the lower end of the income scale, as gas expenditures take up a higher proportion of their disposable income.

Seventy-six percent of limited-service operators said gas prices are negatively impacting their business, compared to 71 percent of their fullservice counterparts.  Corporate-owned chain (82%) and franchisee (79%) operators were also more likely than independent operators (70%) to say the recent rise in gas prices has negatively impacted their business.

Nearly three out of four respondents said the recent increase in gas prices has had an extremely negative impact (28%) or somewhat negative impact (45%) on their business.

What impact will the loss of the low-fat beef product called “finely textured beef” or “pink slime”  have on beef prices that already have risen 10 percent to 20 percent in the last year?  “Pink Slime” is a filler of up to 15 percent of total volume in ground beef products.

Products that contain the pink slime include fresh retail ground beef, low-fat hot dogs, lunch meats, beef sticks, pepperoni, frozen entrees, meatballs and canned foods.

It has not yet been determined what the impact will be on beef prices. The pink slime story has hit the cattle and beef markets just when prices were beginning to soften from all-time highs.  Commodity trader Dennis Smith of Archer Financial Services in Chicago suggested Monday that the cutback in the use of the beef trimmings will make beef supplies even tighter and thus prices even higher.

Earnings Results and More

Some earnings announced this week:

Sonic’s second quarter earnings fell to .03 from .07 a year ago. Systemwide same-store sales increased 3.5% in the second quarter.

Luby’s, owner of 93 cafeterias and 60 Fuddrucker’s and Koo Koo Roo locations announced an increase of 2.3% in sales and 2.2% in same-store sales. Sales at company owned Fuddrucker’s locations increased 6.8% confirming the continued success of burger restaurants.

Darden Restaurants announced Friday that third quarter profits increased 8.5%.  Darden earned $1.25 per share for the quarter beating analysts expectations of $1.24 by a penny.  Revenue at restaurants open at least a year increased by 2% for the quarter after consecutive quarters of flat and falling revenues.  Revenues at LongHorn Steakhouse rose 6.7% and Red Lobster rose 6% for the quarter.  Darden Executives told investors that shoppers remain cautious amid uncertain economic environment of spiking gas prices and weak job growth.

Kangaroo Holdings Inc. parent company to Outback, the operating company of OSI Restaurant Partners is considering an initial public offering of common stock within the next 60 days.  OSI has been reporting improving same-store sales trends. For the third quarter Outback Steakhouse sales rose 5.6%, Carabba’s rose 6.3%, Bonefish Grill rose 7.4% and Fleming’s rose 10.1%. OSI was a public company until 2007, when the casual-dining operator was taken  private.

Sales among the 500 largest restaurant chains in the United States rose 3.4  percent to $242 billion in 2011, compared with a 1.8-percent increase in annual  sales in 2010, according to new research from Chicago-based Technomic.  The fast-casual segment led the way with sales increases of over 15%, followed by limited service at 7.1%, and full service at 2.8%.

Restaurant Spending Growth and Consumer Spending Overall Spur Optimism

Over the 12 months through January, sales at what the government calls full-service restaurants were 8.7 percent higher than in the previous 12 months. That was the fastest pace of growth since the late 1990s, when the economy was booming. Moreover, that rate was much greater than the rate of growth in sales at limited-service restaurants.

Since those numbers became available 20 years ago, that difference has been a reliable indicator of how the economy is going. In tough times, people may still eat out, but they cut back.

“There are some good forward-looking economic indicators here in the U.S. that would help give all of us some optimism,”Ronald Hodge, chief executive officer of Delhaize’s U.S. business, said on a March 8 conference call with analysts.“Unemployment has started to decrease in every one of our major markets and that is a very, very key sign in our business.”

Gains in hiring and wages are also lifting Americans’moods. The Bloomberg Consumer Comfort Index, which has advanced in all except two weeks so far this year, rose to an almost four-year high in the period ended March 4.

As the surge in at-the-pump costs nears its fourth month, data shows people aren’t yet making the spending cuts they’ve been expected to make. One reason is that the mild winter and cheap natural gas prices are saving them money on heating bills. And that’s making some economists relax about the effect of gas prices on the recovery.

The latest indicator was Tuesday’s report on February retail sales, which rose 1.1% from January, matching the median forecast of economists surveyed by Bloomberg. That included an 8.2% year-over-year gain in restaurant sales, according to the U.S. Census Bureau.

Let’s hope that it continues to drive us to better times economically.

Top 2012 Restaurant Trends, Beef and Goodbye to Jocko

A forecast released by Mintel, a Chicago-based market research firm finds these top 2012 restaurant trends:

-American Regionalism; New York-style, Texas, Philly-style and New England tops the list of menu mentions;

-Menu labeling, offering something for everbody in terms of nutrition and price;

-Customization and fresh, unprocessed foods will drive more restaurants to offer and promote “handmade-just-for-you foods;

-Steak and Caesar salad remain the top menu offerings, cheeseburgers are climbing, sushi is losing ground to salmon, and quick-service operators are enhancing their breakfast sandwich offerings;

-Customers want to see lower prices, smaller portions and more healthful menu options.

Drought in the plains has forced ranchers to liquidate cattle which has driven U.S. cattle numbers to their lowest levels since 1952.  Beef prices are expected to rise well into 2013.

And now just what we need, more bad news on the beef front.  Reuters reports that dairy cows across the world are mourning the loss of “Jocko”, ranked as the world’s third most-potent breeding bull, who has died of natural causes leaving behind as many as 400,000 offspring.

Higher Costs Effect on Earnings and Guidance

Rising gas prices contributed to a weakening in same-store sales and guest traffic in February according to the latest Restaurant Industry snapshot from Black Box Intelligence.  Same-store sales increased 2.5 while guest traffic declined by .1%.  Both of these numbers are down from a strong February start.

McDonald’s on Thursday reported February global sales missed analyst’s targets.  The company also warned that economic uncertainty could have an impact on earnings growth.  The results show that the world’s biggest hamburger chain cannot escape less consumer spending in Europe and higher food and labor costs in the U.S.  McDonald’s does not give quarterly earnings guidance.

B.J.’s Restaurants, with one of the strongest growth stories in the U.S. Restaurant industry, has been downgraded due to a higher cost structure for 2012. These factors could put its growth on hold for the near future.  Unemployment and payroll taxes, higher recruiting and training costs, and medical costs are all factors.

Consumer Behavior and Where’s the Gas and Beef Going?

The Federal Reserve chairman, Ben Bernanke, told a House committee on Wednesday that rising global oil prices were “likely to push up inflation temporarily while reducing consumers’ purchasing power.

On Wednesday, the price of the benchmark American crude was at $107 a barrel and gas prices in California were averaging $4.32/gallon. Sharp increases could happen again as summer approaches.  That fear is tempered by optimism.  If tensions ease in the Middle East, experts predict that energy prices will fall and that gas at the pump could drop as much as .50/gallon.  Analysts say the world price of oil could fall to $80 a barrel.

Cracker Barrel has stated that it is appropriate to be cautious about their third and fourth quarter traffic outlook because of rising gasoline prices.  This comes on the heels of its recent successful traffic-building efforts.  Cracker Barrel’s statement about the potential for consumers to cut back on travel and dining as higher prices lower discretionary spending came as research suggested that sales at many restaurants has not yet been affected by consumer reaction to increases at the pump.

Some analysts think restaurants such as Chili’s Bar and Grill, Olive Garden and Red Lobster will the first to take the hit from higher gasoline prices as consumer’s buy more affordable fast food from chains such as McDonald’s and Burger King.  These same fast food chains can get hit also when their core customers, aged 18-30, do not have a lot of extra cash.

More than a third of respondents to a survey also say they have cut back on foodservice spending at lunch over the past year and are eating lunch at home more often. Lunch is an important daypart for the foodservice industry as 41% of consumers purchase lunch from a restaurant or other foodservice location at least once a week.

Cattle futures have reached record highs 10 times so far this year as rising demand for U.S. beef tightens and increases costs for restaurants.  Ruth’s Hospitality projects beef inflation ranging from 5% to 8% this year.  Burger King’s largest franchisee say that their sales cannot catch up to the rising cost of beef.

A lot of Optimism Among Much Uncertainty

Consumer Sentiment rose in February to the highest level in a year, achieving a sixth month of improvement. Consumers’ expectations also rose, while their view on current conditions declined. Consumers seem to have balanced concerns of rising gas prices, the crisis in Europe and the election year with the favorable impact of job growth.  It appears that although consumer spending may improve that is will happen slowly.  Consumers do not have such favorable opinions of their own personal finances as more households report declines in income than gains.

Millian Mulraine, a strategist at TD Securities says, “the strong gains in household confidence is encouraging , however we are somewhat concerned about the sustainability of this rebound as higher gasoline pricess play an important role in dampening confidence toward the economy.”

Likewise, Restaurant operators report positive sales for the 8th consecutive month and the outlook for the restaurant industry is positive for the coming months as the NRA’s Restaurant Performance Index (RPI) remained well above 100 in January.  Fifty-six percent of restaurant operators reported a same-store sales gain and higher customer traffic levels between January 2011 and January 2012.  Restaurant operators appear to be upbeat about sales growth and the improving economy and expect business to continue to improve in the months ahead.

Other good news; average wholesale food prices registered consecutive monthly declines for the first time in nearly three years, though they still remain 5.8% above their January 2011 levels.  Menu price growth accelerated somewhat, outpacing consumer prices for the fourth consecutive month.  Menu prices were up 3.1% in the 12 months ending January 2012, the first time in 2 1/2 years that the growth has been in excess of 3%.

According to the NPD Group, a leading market research company, U.S. restaruant industry visits declined from 62.7 billion in 2008 to 60.6 billion in 2011.  Independent restaurants accounted for 2 billion of these traffic losses.  Total visits for the year ending November 2011 were flat versus a year ago, according to NPD’s CREST.  Visits to chain restaurants were up 1% and visits to independent restaurants were down 4%.

The hope is that our optomism is rewarded with continued better times ahead for our industry.  Job growth and hopefully an easing of gas prices will go a long way in driving increased restaurant visits and consumer spending.