February’s data showed a continuation of the narrowing of the spread between CPI for Food at Home and CPI for Food Away from Home.
This is a trend that we called out in Wednesday’s WEEKLY COMMODITY CHARTBOOK; the advantage that restaurants have enjoyed in terms of lower prices increases year-over-year as compared to grocery stores is fading. In 2011, restaurant margins were impacted by inflation but, due to strong top line trends, rising food costs did not have as severe an impact on earnings as some were anticipating. Grocers were forced to raise prices to protect margins and we believe that restaurants’ traffic levels benefitted from that.
McDonald’s COO Don Thompson said this week that inflation in the grocery aisle outstripping price gains at McDonald’s is good for his company and that the projection is for Food at Home and Food Away from Home CPI are projected to be between 4-5% and 2-3%, respectively. It’s difficult to know how the year will shake out but it seems that the current trend is for the spread to be negative (higher inflation for food away from home than food at home) by May. Obviously, this estimate pertains to the overall restaurant industry and not just McDonald’s. The ability of restaurant companies to lap the strong comps of last year may be negatively impacted by this year-over-year change in the food value spread.
We will continue to monitor this data point going forward; we continue to believe that it will matter in 2012. As we know from executives like Jerry Reibel at Jack in the Box, management teams in the restaurant industry pay close attention to this data when thinking about pricing.