Commodity Inflation a Growing Concern for Restaurants?

Oct. 07, 2010 4:25 AM ETCOST, SBUX, PNRA, CMG, DBC11 Comments
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Costco (COST) CFO Richard Galanti made the following statement on their Q4 earnings conference call yesterday:

Regarding inflation, while up to July and August most commodities were not very inflationary year-over-year, a little bit in June and July compared to a year ago. But, in the past two months we have seen big increases on various items. Corn and wheat are up 43% and 37%, respectively year-over-year. That of course down the food chain will affect your proteins, your beef, your pork, and your poultry. Hogs were up 69%, cattle up 16% so far. Sugar is up 52%, butter is up 35%. The only main commodity that showed some negative deflation was cocoa down about 9%.

Talking to our buyers, their feeling is while these high levels of inflation should subside a bit, still expecting some inflationary pressures to many of the food items over the next several months in part because of what I just mentioned.

Of course, Starbucks (SBUX) announced on September 22, 2010 that the price of green arabica coffee was close to a 13-year high. In addition, the company announced “significant volatility in the price of other key raw ingredients, including dairy, sugar, and cocoa.”

This is going to get interesting for Panera Bread (PNRA) and Chipotle Mexican Grill (CMG) and other restaurants that are trading near all-time highs. PNRA faces a double-whammy as fuel prices were heading higher yesterday and that is a key component of its Fresh Dough Facility (FDF) margins.

It may be time for investors in restaurants to head for the exits.

Disclosure: No positions

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