This post is part of the On the Margin blog.
Among the new items Smashburger introduced this year was Tater Tots, which is great because tots are trendy and they travel well.
Most importantly, they’re not French fries.
Higher demand for fries, CEO Tom Ryan said, has put many suppliers at production capacity and has driven up prices. Almost on cue, Del Taco Restaurants Inc. on Thursday said fries are among the more inflationary items it sells.
It’s not the only thing. Earlier this year, Buffalo Wild Wings Inc. said chicken wing costs are increasing. Del Taco said cheese prices are on the upswing, along with avocados and the aforementioned fries, which hurt its margins in the third quarter and sent its stock plunging Friday.
Piper Jaffray Analyst Nicole Miller Regan said in a note this week that beef trimmings and coffee in particular have been inflationary through September.
This is all bad news from a profit perspective.
Labor costs are going up, thanks to a combination of rising minimum wages and labor shortages in many parts of the country.
Couple that with weak overall sales and you have a recipe for trouble.
Consider Del Taco. Its same-store sales have been strong, thanks to sales of more premium items, price increases and more customers. And its restaurant margins were down 170 basis points in the period. Imagine what it’d be like if its same-store sales were down.
Restaurants are used to food costs, and they can do things to control them, such as marketing items that don’t cost as much. Buffalo Wild Wings changed its Wing Tuesdays promotion to sell boneless wings instead, for instance. Smashburger developed those tots, which Ryan said has helped the company overcome higher fry prices.
And there’s at least one school of thought that suggests the industry could actually see higher demand, even with higher commodity costs.
As we spoke about frequently in the past two years, divergent pricing between restaurants and grocers could be hurting restaurant sales. If commodities start increasing again, grocers will be less likely to discount and then could return some of the industry traffic lost the past two years.
And, it could get all those discounts off the table. Those discounts could be hurting Del Taco, which suggested that its traffic slowed in the first five weeks of the current quarter in part because many chains are selling value items.
“The trend could help to minimize heavy discounting tactics and/or help promote the return to a more normalized pricing environment across the restaurant industry,” Miller Regan wrote.
Jonathan Maze, Nation’s Restaurant News senior financial editor, does not directly own stock or interest in a restaurant company.
Contact Jonathan Maze at [email protected]
Follow him on Twitter: @jonathanmaze
