INFLATION – YOGI TOLD US “YOU CAN OBSERVE A LOT BY JUST WATCHING” – SO:

 In just the last couple of weeks a large number of publicly held restaurant chains have reported on their most recent results. In the course of that, especially on their conference calls, they have brought us up to date on trends relative to Cost of Goods, Labor, and the resultant plans to raise menu prices. It’s not a question of “if”, just “when”.

We have provided below excerpts from the most recent conference calls. To save your time, we have underlined management’s commentary regarding cost trends and pricing expectations. Perhaps some of our national legislators, as well as their central bankers, should pay attention. It’s not so “transitory”. What goes up does not necessarily come down.

 Per McDonald’s:

“So, we’ll continue to keep an eye on it from a commodity perspective. Commodities were up roughly 2% or so through the first nine months, but we expect for the full year for those to be up roughly 3.5% to 4%, which will put a little bit of additional pressure on the fourth quarter, obviously. And then going into next year from a food and paper cost perspective, we would expect our cost to be up relatively in line with the industry right now. That expectation is roughly mid-single digits.

“Our franchisees are increasing wages, they are over 10% wage inflation year-to-date that we’re seeing in our McOpCo restaurants. We’re up over 15% on wages, and that is having some helpful benefits. Certainly, the higher wages that you pay, it allows you to stay competitive.”

Per Starbucks:

“And with the combination of logistics, labor, as well as commodities as we move into Q1 and Q2, we would expect that to increase, and then they’ll start to settle in Q3 and Q4. But we’ve included it as part of our guidance throughout the year because you really don’t know when these are going — when these inflationary pressures will subside.

“Strong ticket, and the benefit of Trade Area Transformation also offset the margin headwind of approximately 270 basis points over the past few years from sizable investments in wage and benefits, as well as supply chain inflationary pressures. Moving on to international.

“With these investments, we expect fiscal 2022 operating margin to be approximately 17% below our long-term target, driven by approximately 400 basis points of impact related to the wage investments, coupled with an additional headwind of approximately 200 basis points from a combination of inflationary pressures, other growth investments, and discontinuation of government subsidies.

“From a guidance stand point, as I talked about my prepared remarks, about 200 basis points of margin dilution related to a combination of the supply chain pressures, [Indiscernible] related to the supply chain pressures as well as our government subsidies from prior year investments. When we look at the past quarter Q4, we had about a 90-basis point impact from inflationary pressures across the globe.”

Per Chipotle:

“I would say the inflation in the quarter was not that bad. It was mid-single-digit type inflation, but you see the same kind of list that we have seen that there are forecast for some material, not necessarily what we’re buying, that are into the double-digit — sometimes well into the double-digits. Now, we’re not really seeing that.

“I mean, we’re seeing isolated spikes, but most of our ingredients are okay. They’re all pressured to the upside. And what we want to do is really take a look, be patient, and see how much of this is really because of things like shipping, like things that come in from outside this country. The freight is extra astronomically high.”

Per Yum Brands – not specific

“Before wrapping up, I’d like to take a moment to address both labor and cost inflation pressures and how a Yum! is well-positioned to navigate these challenges. U.S. labor availability remains tight across most industries, driving wage inflation and staffing challenges that have resulted in a small number of our stores limiting operating hours, particularly during the early morning and late-night day parks.

“While our franchisees are not immune to these market pressures, we believe the power of our scale and the larger average size of our franchisees, relative to those of our QSR peers, enables our system to manage the inflationary environment better than most. For example, while many small chains and independent restaurants experienced difficulties adapting to these market dynamics, our franchisees continue to invest through this environment, accelerating investments that helped widen their strategic advantage.”

Per Restaurant Brands – not specific

“We called out the impact specifically at Popeyes because it was where we felt it most acutely. We saw it in the context of reduced operating hours and services modes, especially around late night. And we also saw some impacts in our distribution centers in particular in the Northeast.

“On operating hours, we saw about an average of 1 hour reduction in operating hours at Popeyes during this quarter relative to pre -pandemic levels, which obviously has an impact and that was disproportionately impacting our late night business, which historically over-indexes in family and which comes along with a pretty high check.

Per Domino’s – not specific

“We also expect inflationary headwinds to continue impacting Domino’s and the broader restaurant industry over the coming quarters, but we will face all of these challenges and headwinds from a position of strength and with the unwavering commitment of our franchisees and team members who proudly wear the Domino’s logo.”

Per Darden:

“We follow the same approach for calculating wage inflation rate in which we keep the hours and job mix constant and only look at change in wage. While we expect higher rates of inflation to persist for the remainder of the year versus what we initially planned, we believe our scale and recent enhancements to our business model enable us to deliver significant margin expansion, while still adhering to our strategy of pricing below inflation.

“Total inflation of approximately 4% with commodities inflation of 4.5% and total restaurant labor inflation of 5.5%, which includes hourly wage inflation of about 7%

 “I don’t think the problems for the industry go away just because we are going to – if we pay more.”

Per Wendy’s:

“Company restaurant margin decreased 250 basis points driven by higher-than-expected labor rate inflation of almost 9.5%, commodity inflation of almost 3%,

“This change in restaurant margin is being driven by the tightening of our sales outlook range and an increase in commodity and labor rates, which we’re expecting to be inflationary, approximately 4%, and 7 to 8%, respectively.”

Analyst:

“I think on the limited-service side food-away-from-home inflation was pushed at almost 7% in the Q3. So, is that a fairway to think about the menu pricing level that you have with the Company-owned restaurants right now, something close to 6 to 7%?”

Management:

“The numbers we’re tracking is the food-away-from-home inflation attracts around 4.5-4.7% and we are about in line with that — with those kind of pricing levels.

“We had previously thought that our commodity inflation would be 2% to 3%. We’re ending up dealing with 4%, which mainly was beef and some distribution cost. On the labor front, we thought it would be 5% to 6% inflation, we’re actually dealing now with about 7% to 8% inflation. “

Per Texas Roadhouse:

“This was 242 basis points higher than the prior year, as a higher than expected increase in beef prices during the back half of the quarter drove total commodity inflation to 13.9%. Commodity inflation was approximately 10%, 15% and 16% for our July, August and September periods, respectively.

“Labor shortages at the processing plants coupled with high consumer demand are the primary drivers of the higher beef prices and these cost pressures have been magnified for us as we need to buy even more beef our restaurants, so they can continue to serve a significantly higher number of guests. Based on our current outlook, we expect high-teens inflation for the fourth quarter, which would bring full year 2021 inflation to approximately 10%.

 “Looking ahead to next year, we expect commodity costs to remain elevated. With approximately 30% of our commodity basket locked for the first half of 2022, we currently expect high-teens inflation over that time period, with inflation likely above that range for the first quarter.

“With little of the basket locked for the back half of 2022 and given the level of volatility we are seeing, we currently do not have enough visibility to provide meaningful full year inflation guidance. At this time, we expect inflation in the back half of the year to moderate, given the prices — the beef prices that we will be lapping.

“This increase in labor dollars per store week was driven by wage and other inflation of 15.1% and growth in hours of 3.4%. 

“But for 2022, we are forecasting wage and other inflation of approximately 6%, with the first quarter above this level as wage rates did not begin to significantly increase until the second quarter of 2021.

“We always talked about that in terms of traffic and maybe we get back to more that 70%, 75% of traffic from an hours — labor hours perspective. That overtime shows up in the wages and that’s kind of helping to drive a little bit of that wage inflation right now. So maybe you get a little relief there, but you see the hours pick up a little bit more.

“Jeff, I don’t know if I could quantify any of those things as far as how we’re seeing them in the labor model. I mean, we’re seeing higher wage inflation. We know we’re paying higher wages, especially in the back of house, that’s become very competitive as, not just outside the industry, even just across the country.”

Per Cheesecake Factory:

“However, aggregate cost of sales inflation for the quarter of approximately 3% came in line with our expectations, given the efficiencies we drove.  We also saw slightly higher than anticipated wage inflation during the quarter by about 1%.

 “We’re anticipating fourth quarter cost of sales inflation to be approximately 3% higher than the third quarter or 6% versus prior year, as we expect to continue to need to purchase even more ingredients in the elevated spot market to meet volume needs that are expected to exceed our contracted levels. Similarly, the labor market remains tight. And as such, we would expect to continue to see elevated training and over time, and are dissipating some incremental group medical carryover from the large claims for our provider.

“Taking into account our wage rate trends, as well as anticipated normal seasonal sales trends and related leverage, we would expect labor as a percent of sales to be slightly better than in the third quarter,

“Specifically, if commodities were to remain at current spot pricing levels for the full year of 2022, it would require us to take an additional 1.5% to 2% of menu pricing for a total of 4.5% to 5% of menu pricing to support our margins.

“The labor market is also dynamic. And inclusive of known minimum wage increases, we’re currently anticipating inflation could be around the 5% level we are experiencing at our restaurants this year so far.

“The commodities at the spot market and the labor inflation that’s about this year’s level of 5% is contemplated in that pricing level.”

Per Wingstop:

“Despite experiencing unprecedented inflation in the cost of bone-in wings.

Food, beverage, and packaging costs as a percentage of company-owned restaurant sales increased by 11.7 percentage points compared to the third quarter last year. The average spot price in the third quarter for bone-in wings set a new record high at $3.22 per pound, an increase of 84% versus the prior year.

“Thanks to the price mitigation strategy in place with our largest poultry suppliers, our restaurants were able to partially offset this inflation and saw an effective year-over-year increase in the price of wings of 49%.

“We also are pleased to see sequential improvement in the spot price for bone-in wings with the price now at $2.87 per pound, a $0.35 reduction from the record highs we saw in the third quarter.”

Per Brinker:

“We experienced commodity inflation in the mid-single-digit range, with significant price from pork and chicken driving the increase. As Wyman mentioned, with a greater-than-normal influx of new team members, we experienced outsized costs in training and overtime.

 “We were in that kind of 3.5-4.0% inflation range for the first quarter. And that’s going to move up into the higher single digits as we progress into the second half of the year. I think we’ve been talking about this year, we’ve been pretty clear that we expected more COGS inflation to hit the system in the second half as you roll through some of the contracts we have in place. And we’re very comfortable that is still the situation. The guidance we have provided you incorporates all that.”

Per Bloomin’ Brands:

“First, we now expect commodity inflation to be approximately 1.5% versus our previous guidance of approximately 1%. Although we are locked on beef, we are seeing pressures in some commodities that we are unable to lock into longer term arrangements. Second, we now expect labor inflation to be approximately 4.5% versus our prior guidance of 3% to 3.5%. This is largely driven by increased wage pressures given the competitive landscape as well as increased training and retention efforts.

“Finally, although it is early, I wanted to provide some initial thoughts on commodity and labor inflation for 2022. We will provide much more fulsome guidance on 2022 in February. We expect commodity inflation to be approximately 10% next year. The commodity market is currently seeing elevated levels of inflation across all proteins given strong consumer demand and product shortages due to supply chain disruptions. In addition, higher input costs across labor, fuel, freight and packaging are contributing to increases as well.

“Given the guidance that we provided on commodities and labor, you kind of have to think about it like this. If you start with 10% commodity inflation, that would represent for us about $100 million of cost headwind next year. And then if you add in mid-single-digit labor inflation that we talked about, that would be maybe another $45 million of inflation headwind.

“So all in all, if you look at next year in the construct of how we’re thinking about it, that’s about a $170 million of inflation headwinds that we would have to offset to keep that framework that we’ve been discussing. So then it’s just a question of the offsets, right? So we already told you guys that we’re taking 3% menu pricing and that’s going to get you, give or take, $100 million of upside to help offset the $170 million.

“I know you’re not doing that, John, but you just can’t translate the beef inflation into the entire basket of commodities. So there’s other aspects of the commodity baskets that are helping us out that’s muting that a bit. But we — what we know today, we think that that 10% guide is appropriate.  But there’s no question, beef is only 35 — it’s 1/3 of our overall commodity basket.

So commodities were 2.5% in Q3, and they would jump up to 4.5% in Q4.”

Per Shake Shack:

“Food and paper costs in the third quarter were 31% of total Shack sales as higher commodity inflation across chicken and beef resulted in approximately 130 basis point headwind to our Shack level operating margin. We are hopeful protein costs will continue to stabilize throughout the fourth quarter and at the same time, we do not anticipate cost returning to similar levels that we realized in 2019 and 2020.

“As just one example, beef, the largest part of our basket was up approximately 30% in the third quarter compared to the same period last year and up high single-digits from just the second quarter.

“We offer competitive pay with an average team member starting wage of about $15 per hour that is 13% higher than what we offered in 4Q last year.

“We also offer a generous bonus program, paid time off and flexible schedules in addition to healthcare, vision and dental insurance, as well as an opportunity for our team members to build on their retirement savings with our 401(k) plan.

“With up to 10 drive-thrus plan through 2022, as well as the material and labor inflation that we’ve discussed, we’re anticipating historical build-out costs to increase 10% to 15% on average for the class.”

Per Dutch Bros:

“The basket is low-single-digits and inflation overall, it is very mild and tempered. And we don’t say that thinking we are immune to the struggles that could happen going forward, but we have been very fortunate, dairy is not really up that is a big component of our cost structure. We are forward out on coffee very long, and we have a three bean blend that we can pivot around and manage our costs. And so we feel we don’t see the kind of pressure others are seeing.

“And then, on the labor side, aside from wage changes related to minimum wage laws are out here West for example. We just have not felt the kind of wage inflation, we already were paying our people very well and we have not had to intervene at this stage.

“Turning to the outlook for commodity inflation and labor challenges. We’re seeing its effects on the cost of pork, eggs, poultry, paper and packaging products. And based on current conditions we now expect commodity inflation in the range of approximately 6% on average across both brands for 2021. This compares to our previous expectation for inflation of approximately 4% to 5% for the year.

“So look on inflation, generally speaking, I’d say it takes about 2 to 2.5 points of menu pricing to cover 10% of commodity inflation for our franchisees. We do provide pricing elasticity tools to our franchisee partners to help them with pricing decisions. And depending on the franchisee, they’ve been tracking anywhere between 1%, 2%, 3% of menu pricing increase per year in the past two years to cover inflation. Based on what we can see second half inflation is about 10%. “

Per Carrol’s (Burger King franchisee):

 “Given the competition to recruit and retain workers, we were required to increase average hourly wages of our team members by 13.3%, and pay shift premiums and overtime in order to meet customer demand.

“Our supply chain was constrained on numerous levels. We use a combination of frozen beef from overseas suppliers and fresh beef from domestic suppliers. Beef represents about one-fourth of our commodity basket; containerships carrying frozen beef were stranded off the coast of California, unable to unload their product in a timely manner during the third quarter. This supply constraint contributed to our beef costs increasing 15.5% compared to last year. Domestic food and paper producers and distributors supplying most of our commodity requirements faced labor constraints, along with higher fuel costs and many passed those increases on to us. The question we are struggling to answer are, what portion of the higher labor costs are transitory? And will commodity costs follow their traditional cyclical patterns and revert to the mean? We don’t have these answers but we do know that the inflationary cost pressures we experienced during the third quarter were not expected to the degree that they impacted our industry.

“The imbalance between the supply and demand for workers required us to quickly increase hourly wages to remain competitive and operational with adequate staffing levels. While the base numbers of hours worked by team members were about even with the same period last year, the dollar impact of the higher average hourly wages increased our labor cost by $6 million in the quarter, paying team members premiums to take on additional responsibilities such as opening and closing our restaurants in overtime added $4.8 million to the overall increase in labor. The need for overtime hours for our assistant managers that were restricted last year in response to pandemic, along with salary increases for retention, cost us an additional $3.7 million in the quarter.

“And then, I just don’t — we don’t see the kind of hourly wage; there will be — there will likely be hourly wage increase next year and certainly in the back half, but we don’t believe it could possibly be as strong as we — as high as it’s been this year, given that it’s — we probably got three or four years of wage increases in one quarter of this year. So, you know, our view is it’s unlikely that it will be that dramatic next year; so we’ll get some sales leverage based on that. Where we’re seeing the biggest part of the inflation in labor is we’re paying premium wages to keep the stores open past 9 o’clock at night; that’s where we seem to be struggling the most, and that’s true for the whole industry. We really don’t want our restaurants to close prior to 11 o’clock and 12 o’clock at night, and consequently, rather than increase the base wage, we pay a premium wage of $0.50 or $1 to get employees to work beyond that period of time. So in terms of a percent increase in wages in 2022, my sense is it should be much more — it will be much less of an increase than what we’re experiencing currently.”

 Per BJ’s Restaurants:

 “Cost of sales was pressured by food cost inflation of approximately ten percent, driven by our popular meats including ribs, prime rib and dry chip and salmon. We serve only fresh meats to maintain our quality standards, which have experienced some of the highest impacts from inflation. And because they are fresh, not frozen, many of these meat products cannot be contracted for long periods of time.

“Our training and overtime hours remained elevated in the quarter due to increased hiring. And compared to Q3 of twenty nineteen, our training and overtime hours impacted labor by seventy basis points.  We’ve got another dollar of minimum wage hitting here in California. And then, I think we’re going to be in a really good position from that standpoint on California going forward in regards just annual increases, which have been about five years in a row moving from about ten to fifteen from that perspective.

“I think you’re starting to see inflation probably or labor inflation probably kind of still and then mid- to high-single digits even though it does seem to be abating a little bit, I think what we’re seeing differently is, we’re seeing people show up for interviews and then show up for their jobs for the first day.”

Per Denny’s:

“We experienced commodity inflation of approximately 10% during the quarter, which was primarily offset by favorable mix shifts driven by lower value incidents along with pricing. This resulted in a 90 basis point improvement in our product cost line. We expect similar commodity inflation during the fourth quarter as inflationary pressures are likely to remain in the near term.

“We ultimately do see it see it abating at some point in 2022. That’s the vision that we have. We will give that guidance as we get into February. But we don’t ultimately see this existing permanently. We do see it peaking at some point likely in the first half.

“And to cover a commodity inflation of 10% would require about a quarter of that in pricing. So 2%, 2.5% to get there.”

Per Ruth’s Chris:

“Food and beverage costs for the quarter were 34.2% as beef prices during the quarter increased approximately 65% compared to last year and were up 47% compared to 2019. Our market basket experienced inflation of approximately 29% compared to Q3 2019 with most of this increase being in proteins, particularly beef, crab and lobster. While this inflation is historically high, we remain committed to serving our guests, fresh Prime aged beef. Given the volatile within the supply chain and our inability to precisely predict cost of goods sold, we will not be providing further guidance for the fourth quarter or next year at this time.”

Per Chuy’s:

“While all of our restaurants operated at 100% capacity during the third quarter, we were only able to reach between 80% to 85% staffing levels system wide. And in some cases, we’ve been forced to limit the number of tables we can make available in order to ensure a quality guest experience.

To combat this near-term challenge, we are focusing our efforts in recruiting and training our employees to ensure that our restaurants are properly staffed and stay ahead of the curve. This included our $1.6 million manager retention bonus program paid out in the second and third quarters of 2021.

“Labor cost as a percentage of revenue increased approximately 10 basis points to 29.2%, largely as a result of hourly labor rate inflation of approximately 8.3% in part due to increased overtime. This was mostly offset by sales leverage on management labor costs. We also incurred $0.8 million of incremental manager bonuses in conjunction with our $1.6 million manager retention program that we started in the second quarter. As labor challenges persist, we expect hourly labor inflation to increase approximately 10% to 11% for the fourth quarter of 2021.

“Currently, we’re probably at – from an hourly perspective, we’re at about 70 – in the low 70s, 70%, 72% of the hourly employees that we had in 2019. And we basically said that we think we’re 80% to 85% staff. So based upon that, I think you can see that our targets are a lot lower. Our par levels are a lot lower. So that 80 to 85, so we’re talking another 15% to get fully staffed up. Now I will say that about third, maybe third or fourth of our inflation this quarter was related to overtime. So as we get staffed up, that premium will go down. And so you kind of have a net-net cost as we increase staffing as well, if that makes sense. But right now, our turnover, as I’ve already mentioned earlier, it was right around 89%, which is a very good number for us.

“primarily due to overall commodity inflation of approximately 3.6%,

Based on current trends, we expect commodity inflation of 7% to 9% for the fourth quarter of 2021.”

Per Red Robin:

“At the end of the third quarter, hourly wage increases were in the mid-single-digits driven by both rates in front of house hour mix.

“Guidance for 2021 is as follows: Mid-single-digit commodity and wage inflation, We saw – I think mid-single digit wage inflation. In fact, it was probably a little bit mid-single digit plus in wages at about 7% in the third quarter. And then from a commodity standpoint, we were at about almost 9% inflation for the third quarter. Fourth quarter commodity inflation should be around 15%. And then in the fourth quarter wage inflation should be between 7% and 8%.”

THE BOTTOM LINE:

The trends are crystal clear. Every restaurant operator will (or should) raise prices, because they don’t like shrinking profit margins and have to generate a return on investment. The customers will ultimately tolerate it, because they know prices are going up everywhere, from the supermarket to cell phone service to housing expenses, healthcare and education. Don’t be the first to raise prices but there is no reason to be the last. Be careful, though, because the consumer continues to be financially stretched. As discussed here tomorrow, the reported inflation numbers continue to be materially understated, as they have for decades and purchasing power, adjusted for real inflation, continues to erode.

Roger Lipton