Consumers who buy groceries for home consumption tend to face higher price increases compared to what they pay for menu items at fast food and fast food restaurants, a trend that makes restaurants more attractive, according to Nick Cole, Head of Restaurant Finance at Mitsubishi UFJ Financial Group.
It’s one of several of Cole’s key mid-year viewpoints for the restaurant industry, which also includes reducing labor shortages, beef supply disruptions, high real estate occupancy, and the potential acceleration of mergers and acquisitions.
Low food inflation seen in restaurants
The Consumer Price Index showed that the CPI of food away from home (shopping in restaurants) rose by 7.4% in the year ended April 20221. year ended May 2022.
“Restaurant chains have been able to reduce food price increases and delay the impact of inflation due to a number of benefits they enjoy,” says Cole. Restaurant benefits include:
- Access to ingredients at wholesale prices and economies of scale.
- The ability to lock in lower prices through forward contracts and other hedging strategies.
- Flexibility in redistributing ingredients between menu items.
As Cole explains, many restaurants have also been able to maintain profitability by raising menu prices to manageable levels to offset higher labor, utility, building and food costs.
Labor shortages lessened
The labor shortage in restaurants has stabilized this year, Cole said, though it still persists and continues to cause disruptions. Food delivery drivers are particularly in short supply, affecting delivery-heavy restaurants such as pizza chains.
“During the pandemic, large online retailers have attracted a significant amount of workforce through restaurants, but many of the jobs they filled require little training and are designed for high turnover,” adds Cole. “Therefore, we believe that the restaurant industry will be able to bring back many workers with the right mix of incentives.”
Supply of beef, use of real estate and mergers and acquisitions
In addition, Cole notes the following major trends in the industry:
- Disruptions in the supply of beef put affected restaurants at risk due to the longer maturation, rearing and final cooking of beef, in contrast to commodities such as poultry and fish, which have a shorter supply cycle.
- Restaurants have returned to full capacity, but chains continue to benefit from retooling their properties and technology infrastructure to enable end-to-end traffic and online ordering.
- M&A activity slowed in the first quarter due to pressure on margins from rising commodity prices, labor shortages and the need to increase labor costs, as Cole and his team expected in November 2021, however they expect M&A activity to pick up as the year progresses.
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