Wednesday, June 8, 2011

Restaurants feel the cost pinch

Cost pinch is hard to ignore. Whether we are at an isle of supermarket, a clothing store, a gas pump, or sitting down at a restaurant table, trying to enjoy a meal after a day of hard work, signs of inflation are everywhere. Some of us may have noticed a few percent price hikes have been sneaking into restaurant menus here and there.

As discussed in my previous post, rising commodity prices not only have weighed heavily on  retailers, but also many other sectors such as restaurants and food manufacturers. Many low-mid end restaurants may find difficulty in throwing a few percentage into the menu without deterring customers. Meanwhile, rising price tags at the gas pump have kept some households eating at home.

Shares of Cracker Barrel Old Country Store (CBRL)have been on a downward trend since May on the company’s weaker-than-expected third-quarter profit, as an only meager improvement in sales could not offset higher commodity costs.

“We are disappointed in our results for the third quarter, as both restaurant and retail sales were below our forecast,” Cracker Barrel CEO Michael Woodhouse said in a statement. “Since many of our customers continue to feel the negative impact of economic conditions, we need to continue to focus our efforts on providing the great food, service, atmosphere and shopping experience that differentiates our brand.”
CRBL is not alone. Shares of fushion-concept restaurant chain, PF Chang (PFCB) shedded more than 10% on its earnings report in which the management warned about higher costs eating into its profits.
McDonald's(MCD) and Starbucks(SBUX) also said in March that rising commodity costs were eating into their bottom lines.

I expect more of these announcement to come in summer. Lower end restaurants and those that have less-than-spectacular brand names and sales will get hit the hardest. Off the top of my head, Dine Equity (DIN) that runs Applebees and IHOP will see its bottomline eroded due to IHOP's relatively low income customer demographic despite relatively strong results from Applebees. Brinker's (EAT) that runs Chilli's and Maggiono's should see itself being dragged down by Chilli's who may not be able to turnaround its brand strong enough to have loyal customers who do not mind paying a few more bucks.

For related posts on cost pinch, please see the following:
Retailers feeling the cost pinch
A shorts list of retailers
Retailers the next leg to fall

Disclosure: The author does not have any of the above mentioned positions as of June 9, 2011

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