This Week in Summary 9/23/2022

Sep 23, 2022 | Bubble Monitor, No Bull Economics

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Let’s talk inflation! Wholesale chicken whole wing prices increased +57% y/y during 2021 before declining -31% y/y for the YTD period ending 8/31/22. Basically, the problem is that demand for wings during 2021 was much higher than the demand for whole chickens and, unfortunately, there are only 4 wing pieces available per bird. Well, that’s a problem for a company like Wingstop which can’t just increase their menu prices by +57% to match their food cost inflation. So Wingstop got busy doing what American industry does best, they considered how to actually solve the problem of high wing prices. Their first step was to introduce new menu items which used other parts of the chicken besides the wings. Today, we see Wingstop selling Thigh Bites (dark meat) and now chicken sandwiches (breast meat) which allows them to buy whole birds, thus providing suppliers with the incentive to produce more chickens (which are now more profitable since the producers can sell all the parts of the bird, not just wings). But Wingstop did not stop there. Management is currently exploring the possibility of co-investing in a poultry production plant to learn the supply-side of the business. After that, management will consider building its own poultry production plant which could consistently provide ~20% of its system with wings at a cost ranging from $1.60 to $1.80 per pound (which looks pretty good when compared to the record cost of $3.22 reached during 2021). In other words, Wingstop has figured out that the way to lower wing prices is to increase supply. In our humble opinion, this is the best way to beat inflation as opposed to the commonly held belief that inflation can only be tamed by Fed rate hikes, ensuing recessions and higher unemployment. Rather, Wingstop’s new poultry plants would put people to work – that is, if they can afford to finance the project at these higher interest rates! For more information on Restaurant Research’s comprehensive report on Wingstop, please inquire here.


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Telecommuting’s Economic Impact

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Traffic as a Gauge of Consumer Strength

Investors should be struggling to decide whether the economy is entering a recession, consistent with the base case for McDonald’s 2023 business plan. However, judging by the market’s recent performance, it appears that investors are already celebrating a soft landing. But before drawing that conclusion, we need better insight into retail traffic trends which, at first blush, have been depressingly negative.

Why are Builders Focused on Developing Multi-Family Apartments?

While traditional homeownership has long been a staple of the US economy, shrinking household size & long-term economic pressures are changing housing preferences. This trend has important implications for the future spending patterns of consumers who are less likely to be house poor. 

Flat to Modest Rent Growth is Expected for 2023

It appears that more Americans are moving back in with family or roommates (or delaying striking out on their own) after a prolonged period of skyrocketing rent growth aggravated by broad-based inflation, according to Now rents are falling fast.

Have Delivery Fees Taken a Bite Out of Restaurant Industry Sales?

Delivery fees are not cheap & can represent multiples of the menu item price. Although there is an argument to be made that delivery marketplaces can expand a restaurant’s marketing reach, there is a price to be paid in terms of industry sales cannibalization

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

Why has consumer spending held up so well during a period of huge and punishing inflation? As it turns out, the long-term impact of the covid lockdowns was most notable for the lowest income demo who saw their hourly wages increase the most relative to all other earners. While this momentum is slowing, this development continues to have important implications for inflation prospects and the start of the 4Q22 corporate earnings season.

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. 

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