Retail

Restaurants Pass on Food Costs While Grocery Chains Swallow Them


There’s been plenty of sticker shock at grocery stores lately, as dry weather in the U.S. and elsewhere pushes up prices on everything from coffee to pork bellies (that’s “bacon,” to you).

According to federal data, U.S. food prices surged 0.4 percent in February alone, the biggest increase in more than two years. That’s bad news for households on a budget, but eating in still beats the cost of eating out, which is climbing at a far faster pace. The price of restaurant dining has steadily outpaced homecooked meals—at least on a relative basis—for more than two years now, according to federal consumer price indexes.

This all boils down to pricing power. For example, Chipotle Mexican Grill (CMG) has been whining about the price of the avocados that go into its guacamole, which are in short supply because of a drought in California. The fast-casual restaurant has warned that it might have to stop offering its delicious green goo entirely. But at the same time, Chipotle has said it probably will raise prices in the third quarter by about 4 percent.

“We want to keep our prices low, so that our customers … can continue to enjoy this very different way of eating,” Steve Ells, the company’s founder, chairman, and co-chief executive, said a few months ago. “But by the same token we want to still have a very strong unit economic model.”

Shrimp has also been a sore spot at Noodles & Co. (NDLS), as a bacterial disease sweeps through prawn farms in Southeast Asia. Although shrimp is in only some of the company’s dishes, Noodles raised prices in the fourth quarter to keep profits healthy.

The Cheesecake Factory (CAKE) aims to raise its prices at least 2 percent a year, regardless of what’s going on with inflation. “We try to balance our need for protecting margins with our desire to grow guest traffic,” Douglas Benn, Cheesecake’s chief financial officer, said on a February conference call.

Recently, Sonic (SONC) pulled a similar trick, rolling out a 2 percent increase in November to outpace “commodity cost inflation.”

Bloomberg Industries analyst Jennifer Bartashus says that restaurants have been raising prices more—and more frequently—than their retail counterparts. Why aren’t grocery stores doing the same?

In short, because restaurant meals aren’t commodities the way groceries are. One can’t buy a Chipotle burrito—or a Sonic coconut cream-pie milkshake—from a slew of different companies. But an Amy’s frozen burrito or a box of Wheaties can be found in virtually every Safeway or Kroger in the country.

Grocery stores also are insulated a bit from price spikes because of the sheer breadth of products they offer. “If beef goes up, they can either choose to raise the price some to offset it, or they can divert savings from other aspects of the operations to subsidize it,” Bartashus explains.

The grocery business has become even more cutthroat since Wal-Mart (WMT) and Costco (COST) got in the game. And now dollar stores are pushing into the business.

Restaurant chains love to grip about food costs, but as long as they have kitchens full of chefs who can cook better than you do at home, they won’t be starved for profit. Grocers, however, are a different story.

Kyle-stock-190
Stock is an associate editor for Businessweek.com. Twitter: @kylestock

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Companies Mentioned

  • CMG
    (Chipotle Mexican Grill Inc)
    • $653.03 USD
    • 11.31
    • 1.73%
  • NDLS
    (Noodles & Co)
    • $22.66 USD
    • 0.60
    • 2.65%
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