Commodity Costs Stable, But Pricing Power Falls

According to Nation’s Restaurant News, “most of the largest chains in the restaurant industry say 2010 commodity costs are likely to remain flat from 2009 levels, or rise only slightly, according to a new report from restaurant securities analyst Jeff Farmer at Jefferies & Co.”

“While the stable commodity costs will continue to drive earnings improvement, companies will not benefit as much as they did this year because they hold less pricing power, or the ability to raise menu prices, as sales remain negative, Farmer contends. ‘Determining a restaurant concept’s pricing power is difficult, but we note that virtually every publicly traded restaurant concept is currently delivering negative traffic trends,’ Farmer said in his Oct. 16 report. ‘Combine this with negative check trends over the last several months and it is clear that most restaurants have little, if any, pricing power.’ In 2009, earnings were driven by a favorable year-over-year cost environment, as companies cut corporate expenses and benefited from reduced commodity and operating costs when compared with the spikes experienced in 2008. As those benefits fade, restaurants will need more than ever to drive performance improvements through increased sales.”

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