Inflation in the grocery aisle is decelerating rapidly. We continue to see this as an impediment for restaurant companies seeking to protect margins via raising prices. The Bureau of Labor Statistics released CPI data for the month of July this morning. The negative spread between CPI for Food Away from Home and Food at Home continues to grow.
In 2011, grocers were forced to raise prices in line with inflation to protect margins. We believe that the restaurant industry benefitted greatly from the relatively benign level of inflation for Food Away From Home versus Food at Home.
Looking ahead, we believe that several companies in the restaurant industry will find it increasingly difficult to lap difficult compares over the summer months if the “food value spread” continues to widen. Management teams at McDonald’s and Jack in the Box, among others, have highlighted this metric as being instrumental in their pricing strategies. MCD, for instance, is running price in the U.S. at roughly 3%. With Food at Home CPI decelerating, we believe the consumer may be less willing this year, as compared to 2011, to absorb additional price increases.