Restaurants Could Face A Brutal 2013


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We’re asking analysts to give us their 2013 stock picks for a story to run in the Monitor. Mark Smith, analyst at Feltl & Company, dithered for a while. “The problem is,” he confessed, “I just don’t like anybody right now.” He doesn’t see a lot of positive for the restaurant industry this year, and his pessimism isn’t unique.

A number of analysts we spoke with said the industry faces a tough 2013. A really tough 2013. “This is going to be one of the most challenging years for the industry in many, many moons,” said Northcoast Research analyst Bob Derrington.

The pessimism was highlighted by this morning’s downgrade of McDonald’s by Raymond James analyst Bryan Elliott—who downgraded the Chicago-based giant based largely on his bearish industry outlook. He noted that, “demand is weakening in many markets around the world with no visible catalysts to increase broad consumer spending power.”

Domestically, restaurants are facing a combination of rising costs and uncertain demand. To be sure, this isn’t 2009 when sales actually fell and restaurants close in bunches. But analysts are worried about commodity prices and health care costs, at a time when weak employment is yielding stagnant sales. In addition, many concepts lack pricing power now because they’ve been aggressively taking menu prices to meet previous commodity increases.

Proteins are a huge problem. Chicken wing prices are hitting records just as McDonald’s increases its test of “Mighty Wings.” Bacon is in such short supply that some buyers started hedging the product for the first time simply to ensure that restaurants have enough on hand this year. And beef supplies continue to dwindle, driving up prices. Beef production is expected to be down 5 percent in 2013, according to the University of Missouri Extension Service and Drovers Cattle Network. The per-capita beef supply is expected to be the lowest since 1952 and “cattle prices are expected to set more records in the coming year.” Lower supplies result in higher prices. A lot of restaurants sell beef products.

“When I look at commodities, I get really nervous,” Smith said. New health insurance rules, meanwhile, are akin to another commodity price increase—anywhere from $8,000 to $30,000 per restaurant, based on various industry estimates. And the political nature of Obamacare means that restaurants must tread carefully on their public statements, and their strategies for keeping those costs low. Darden’s restaurants are still dealing with the traffic declines that came after the company’s public discussion of cutting worker hours. Said Derrington: “That was probably a wake-up call to everybody to shut your mouth and figure out how to deal with it.”

 

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