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.
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…
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.
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.
