Washington Restaurant Market Watch: Restaurants See Lower Commodity Costs

Washington Restaurant Market Watch: Restaurants See Lower Commodity Costs https://wahospitality.org/wp-content/uploads/2016/09/cheese0916.jpg

By Paul Schlienz

The current environment is a tough one for restaurants. With rising labor costs and lower sales, restaurants struggled during the first half of 2016. The industry, however, has found relief in lower commodity costs.

“Commodity costs certainly helped out,” Dustin Minton of BDO, a consulting firm that produces benchmarking reports on the restaurant industry, told Nation’s Restaurant News. “It ebbs and flows between commodity costs and labor. When all these were going up a few years ago, labor was down. Now it’s going in the other direction.”

Prime costs — food and labor — were flat on the year at 59.2 percent of revenues, according to BDO’s report. Cost of sales, meaning food costs, however, dropped 0.7 percent to 28.8 percent of revenues on average. Lower beef costs, especially, are bringing down historically high costs that led to higher menu prices at many chains.

Currently, according to BDO, poultry is down by 3.2 percent, pork is down by 2.9 percent, cheese is down by 5.2 percent and wheat is down by 7.1 percent.

One produce item that is, however, unpredictable when it comes to cost is produce.

“[Produce is] the wild card for the industry,” Ric Scicchitano, food and supply chain chief at Corner Bakery, told Nation’s Restaurant News. “It can fluctuate with the weather and brings the biggest food-safety threats. It’s one of the hardest things for us to get our hands around. I buy as much produce as I do total protein so it’s a market I’m always watching.”

Nevertheless, the trend is clear.

“Restaurant operators can expect to see an overall general decline in wholesale food prices this year, especially in commodities like beef, pork and eggs, as herds and flocks are recovering from recent challenges,” Hudson Riehle, the National Restaurant Association’s head of research told Nation’s Restaurant News.

What is good news for restaurants is, however, bad news for grocers.

This month, Kroger reported a $383 million profit for the quarter, but an 11.5 percent decline from the same period in 2015, according to USA Today.

Although restaurants are seeing benefits to lower commodity costs, there is also a downside, according to the Motley Fool.

While lower commodity prices enable restaurants to save on costs, they also result in lost business to grocery stores, where consumers can benefit from those lower prices. Some analysts are even concerned that there could be a restaurant recession. Indeed, many fast-food chains already posted suddenly slowing comparable-sales growth in 2016’s last quarter.

There are several explanations for the underlying reasons behind the decrease in sales growth at restaurants. Among these possible causes are overexpansion and early warnings of a broader economic slowdown. Nevertheless, executives at such major chains as McDonald’s, Wendy’s and Jack in Box are on record for believing food deflation is a cause of slowing sales growth.