Price elasticity of demand is a measure used in economics to show the responsiveness, or elasticity, of the quantity demanded of a good or service to a change in its price. We think there are a few companies within the restaurant industry that are depending on price inelasticity of demand among their consumers to hit FY13 guidance. There are some indications that, in casual dining at least, demand may be more elastic than operators would like.
The recent deterioration in same-restaurant sales growth can be attributed to many different factors like the payroll tax increase, delayed tax returns, and higher gas prices year-over-year. It seems that operators increasing prices may also be playing a role. Black Box Intelligence data, illustrated in the chart below, suggests that traffic growth in the lower-margin casual dining industry has been decelerating of late as prices have been moving higher.
Some points on specific companies:
- BWLD traffic is down mid-to-high single digits, depending on where mix is tracking, in the early innings of 1Q13. Is the company seeing a negative “multiplier effect” in its traffic trends as it takes price?
- CMG has indicated that it will likely raise prices later this year. We are skeptical of the concept’s ability to raise prices further in FY13
- PNRA has been increasingly dependent on price and mix to drive its comp. With traffic possibly negative in 2013, the company’s ability to push new menu items will be crucial to its success in 2013.
- Concepts that have heavy exposure to red meat prices may experience the most margin pressure if the consumer begins to push back on pricing. Insiders in the beef industry are anticipating another record year for beef prices in 2013 as the US herd has been cut to its smallest size since 1952.
While some management teams tell us that they are not feeling any pushback on price increases in their restaurants, is this chart indicating that operators within casual dining are seeing it?
Howard Penney
Managing Director
Rory Green
Senior Analyst
