Dashboard: Unit Level

Jan 4, 2023 | Dashboard, Restaurant Research

After a ruinous 2022 in terms of food cost inflation, moderating 2023 inflationary prospects will still leave food input costs at extremely elevated levels. Fortunately, moderating labor costs suggest that restaurants will not have to pass along as much pricing in 2023 to restore margins. Also, it is notable that restaurant sales benefit from more discipline in terms of price increases relative to the grocery stores.

Unit Level Dashboard

While a moderating headline CPI of +7% y/y seems bearable, the devil is in the details. 2022 was a brutal year for food costs with all-time highs set for eggs which were up +141% y/y, vegetables (ex-potatoes) up +47% y/y, cheese up +21% y/y and coffee up +26% y/y. Notably, the bird flu killed millions of egg-laying hens but somehow spared chickens raised for meat consumption. All the same, chicken slaughter prices were up +53% y/y while wing prices fell -40% y/y. It’s been a hard year to understand…   

Key Cost Trends

With 2022 in our rear-view mirror, we can start to look at food cost inflation prospects. Darden’s handy table below provides the best estimate of what we should expect for 2023. As evident below, inflation expectations are all keeping to single digits (phew!) although these increases are on top of 2022 increases, so it is fair to say that food cost inflation has become embedded in the restaurant supply chain for the time being. Also, it is notable that global fertilizer production is off by an estimated -40% & crop yields are suffering due to water vapor in the atmosphere caused by the Tonga volcanic explosion in January 2022 which is acting to cool the earth. We need more supply, and it may be high time for the country to explore new tech like indoor farming which could provide a sensible addition to address shortages.  

Commodities Outlook Third and Forth Quarter

Fortunately, operators look like they are getting a break on the labor front with job openings and hours in leisure & hospitality dropping, tipping the balance away from employees towards employers. This is consistent with 3Q22 comments from many public restaurant companies that their labor prospects are improving.


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Lockdowns Tipped the Balance of Power to Employees in Low-Cost Cities

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What’s up with Egg Prices?

How does a -3% decline in table-egg production translate into December’s 2x+ egg price increase? That’s a good question for someone…

Could Retail Traffic Declines be Attributed to Excess Mortality Rates?

Traffic declines across the board in both restaurants and grocery stores suggest fewer people eating. The shocking statistic is that 2021 life insurance payouts were much higher for group plans typically associated with young, healthy corporate employees relative to individual policyholders. 

Farmers Need More of the Profit Pie to Fund Needed Capacity Increases

The farmer’s share of a $1 food purchase has been steadily decreasing to just 14.5% of the total, according to USDA data. This provides a compelling clue about why food production has been strained, and correspondingly, why food cost inflation is out of control.

Did Investors Forget about December’s Bomb Cyclone?

December’s preliminary retail sales release spooked investors who smell a recession. Normally, this would be a boost to stocks because of expectations that the Fed might start to adopt a more dovish stance. However, this represents the first time that investors have finally come to believe that Powell & company intend to keep interest rates inflated, even if hell freezes over. 

The Middle Class is Losing Share Post-Covid

A strong middle class is critical to a healthy economy as this cohort spends a larger portion of their income (relative to the rich) on goods & services that drive growth. 

Noblesse Oblige for the Masses

A healthy society is marked both by a reasonable distribution of wealth along with an investment focus on productive assets that can help all of society. An unhealthy society is marked by a concentration of wealth in the hands of a few who are focused on preserving their ability to purchase self-indulgent pleasures.

Potential New Home Buyers Seem to be Conserving Cash for Necessities

KB Home’s 4Q22 results exemplify the impact of depressed consumer confidence levels as evidenced by a sharp pull-back of potential new home orders from first-time buyers that largely have the financial means to complete the transactions (even with elevated mortgage rates). While KB is working hard not to discount its inventory to drive 1Q23 sales, this pullback certainly will have mid-term implications if confidence levels don’t begin to rebound soon.

Performance Food Group (PFG) Investor Presentation – January 2023

For some time, the market has been held captive to the Fed’s interest rate hikes and prospects about future actions to fight runaway inflation. Further, the Fed has been telling us that labor costs represent the main inflation culprit. However, comments from a recent PFG investor presentation reveal that the real cause of labor inflation is not something that interest rate hikes can solve.

Small Businesses Are the Lifeblood of Economic Growth

Policymakers need to protect and encourage small businesses because of the critical role they play in driving growth during tough economic times. While consolidation may sustain margins and large companies during downturns, the economy needs to grow its way out of our current problems.

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