Spike in Food Prices Eats Up Profits for Restaurant Chains CORPORATE FOCUS By SHELLY GARCIA, Senior Reporter The jury is still out on the question of whether high-protein diets will slim you down, but one thing for sure is getting thinner restaurant profit margins. As millions gobble up the Atkins diet and others like it, the prices for meat, poultry, eggs and cheese are soaring, and as they do, restaurants are feeling the squeeze. How badly depends on the type of restaurant. Some have locked in prices for these commodities well in advance and needn’t take action until their contracts expire. But others have had to take additional menu price increases and for still others, signs of trouble are already showing on their operating statements. “All restaurant companies are pretty much in the same boat when it comes to this,” said Tony Brenner, an analyst with Roth Capital Partners in Newport Beach. “Many have over the past six months taken some action to pass on some of these increases in the form of their own price increases.” Shares in The Cheesecake Factory tumbled after the Calabasas-based restaurant chain reported that its food costs had risen to 24.9 percent of restaurant sales in the first quarter of 2004, up from 23.5 percent for the comparable period a year ago. Cheesecake, which was trading at $46.52 a share on April 19, before the first quarter report was released, on Thursday closed down about 6.5 percent at $43.45, and, believing that the price increases are going to continue, analysts have begun to revise their estimates downward. “I’ve still got it rated ‘sell,’ and part of it is fears of margin pressures and quality of earnings declining,” said Eric Wold, managing director at Merriman Curham Ford & Co. in San Francisco. Thanks to the Atkins Diet and others like it, it’s estimated that anywhere from 10 million and 34 million Americans are happily slapping a stick of butter onto the skillet and cooking up pork chops, beef and chicken in place of pasta and potatoes. Their hunger for these high protein, low carbohydrate diets, coupled with some feed shortages and the recent outbreaks of avian flu and mad cow diseases is testing the supply side so much that The Washington Post recently reported a thriving business in cattle rustling in places like the San Joaquin Valley, as a new breed of thieves in pickup trucks rushes to cash in on the high commodity prices. Meat prices rise Wholesale beef prices for the first three months of the year were up by about 5.5 percent over last year, wholesale prices for chicken rose about 47 percent in recent weeks, compared to last year and hog prices rose about 24 percent. In one week late in April alone the price of butter soared nearly 11 cents per pound over the previous week and cheddar cheese cost $0.065 more per pound in the same week as it did a week earlier. Some restaurant chains, like Sherman Oaks-based Worldwide Restaurant Concepts Inc., operators of the Sizzler and Pat & Oscar’s chains, have locked in beef prices for a year, and have taken only a nominal menu increase, typical of their yearly price increases, as a result. “We lock in our contracts on an annual basis, so we are not much affected by the beef crisis,” said Keith Wall, vice president and CFO at Worldwide. “If the prices continue up, when it comes time to renegotiate we’ll have to look at it.” Others, however, were caught short as they bellied up to their suppliers, and they have had to take menu price increases over and above their typical annual raises. “It is going to be impactful to a lot of companies,” said Wold. “What you’re seeing now is a lot of companies are really scrambling to raise menu prices if they can.” Raising prices on menu Wold said P.F. Chang’s China Bistro announced a 2 percent menu price increase in February, and the company is still expected to report lower profit margins. Chicago Pizza & Brewery Inc., operators of BJ’s, raised menu prices twice last year. And El Pollo Loco Inc. just moved to close a one-year contract for chicken to try to head off any further menu price increases. “Although the new contract prices for chicken are higher than our previous contract prices, we will offset some of the impact with a price increase that took effect in January,” the company said in announcing its first quarter results. Other restaurants, like Cheesecake, with a far more diversified menu, lock in prices for their poultry, fresh produce and dairy, about one-third of their food supplies, for only a 30-day period, leaving them far more vulnerable to rising commodity prices. In the first quarter of the year the company took a 2 percent menu price increase, twice the hike it took in the year earlier period, and Cheesecake officials said in a recent conference call that they plan to review operating margins again shortly and consider taking additional price hikes for their summer menu. Restaurants often need deal with food commodity increases, but in the past they have been able to minimize the effects by offering menus that avoid the pricier commodities and by steering customers to these other alternatives. That strategy has proved difficult in the current environment. “You name it and it’s going up,” said Wold. “In other years wait staff could recommend something else. When it’s everything, it gets tough.”
