Restaurants are tempted to increase pricesBy ANNA-LOUISE JACKSON and ANTHONY FELD
June 16. 2014 8:39PM
NEW YORK — Restaurants could see an opportunity for additional price increases, as Americans encounter more expensive food at grocery stores.
The cost of eating at home rose 1.7 percent in April from a year ago, the largest increase in almost two years, while consumers paid 2.2 percent more at U.S. eateries, according to the Bureau of Labor Statistics’ monthly consumer-price index. Food-at-home inflation has been accelerating, reaching its narrowest gap relative to dining out since June 2012. May data on retail prices will be released Tuesday.
“People who have to predict things like inflation or pricing power should be watching this differential very closely,” said John Manley, chief equity strategist at Wells Fargo Funds Management in New York. That’s because, amid concerns about disinflation, investors and Federal Reserve watchers are looking for signs that companies are able to pass along higher costs to their customers, he said.
While central-bank policymakers have said price pressures are “contained,” some districts reported rising food costs, particularly for meat and dairy products, according to the June 4 Beige Book business survey. With commodities such as beef and pork now more expensive at grocery stores, restaurant operators may see room to boost prices of certain menu items, Manley said.
McDonald’s, the world’s largest restaurant chain, monitors this relationship because the company has said “your refrigerator is a big competitor,” according to Sara Senatore, a New York-based analyst at Sanford C. Bernstein & Co.
As food at grocery stores becomes more expensive, this gives the Oak Brook, Ill.-based operator “a little more breathing room” to make menu changes, she said. “The more that price is a decision factor in dining out, the more people are going to compare it directly to eating at home.”
Amid “more significant increases” in food-at-home inflation recently, McDonald’s is expecting higher commodity costs — particularly for protein — in the second quarter, Peter Bensen, chief financial officer, said on an April 22 conference call. “We watch these indices closely yet are also mindful of cost pressures, not only in 2014, but next year as well, when making our pricing decisions.”
Sales at McDonald’s U.S. locations open at least 13 months fell 1.7 percent in the first quarter, the second consecutive period of declines, based on company data.
The industry is grappling with excess capacity and declines in foot traffic — trends that make operators wary about raising prices at the risk of losing customers. In addition, the primary driver of consumer spending — disposable income growth — hasn’t improved in this lackluster economic recovery, said Larry Miller, founder of MillerPulse.com in Atlanta, a restaurant-industry benchmarking service.
This money — left over after taxes and adjusted for inflation — rose an average of 2.3 percent in January-April from a year ago, compared with an average of 3 percent in the two years before the recession that began in December 2007, based on figures from the Commerce Department.
So even though higher food-at-home inflation should in theory help the dining industry, it also could leave Americans with less money to spend on eating out, Senatore said. “It’s a little bit of a confounding factor for restaurants.”