Last month we discussed the increasing frequency of global black swan events  (consider 2001 (9-11); 2008/2009, (Great Recession) 2020-2021 (COVID), 2022 (Ukraine War) that are making life difficult for us. The results are cumulative and spillover to our sector. Fortunately, there will always be a food fulfillment need, social need, and business case for restaurants, and restaurants are always investible. There are few easy ways outs out of these problems. But surely, we must keep up with the developments of the day to help build our plans.
Menu Price and Food and Labor Cost Inflation Locked in for FY-22
There was some hope earlier that food and paper inflation were to moderate later in 2022. The war in Ukraine and its impact on grains, oils, and gasoline has ended those hopes. Jonathan Maze reported on Bank of America’s Sara Senatore survey of publicly reported chain restaurants’ food commodity cost inflation for 2022. QSR chains such as McDonald’s expect 8% in the US, Dominos 8-10%, and Wendy’s 8-10%. Fast-casual El Pollo Loco expects 18% in Q1, while Portillo’s expects 13-15% in 2022. Full-service operator Texas Roadhouse is expected to rise 12 to 14 %, while IHOP and Applebees are expected up north of 10% . Keep in mind these are the rate variances only of the raw material; the total food cost percentage of sales change will be less.
Restaurant operators routinely work with changing commodity conditions as well as consumer preferences to arrive at attractive, penny profitable menus. Much more of that is needed going forward. From my own corporate staff experience, you have heard me speak about the critical value of restaurant product and concept development staff…and the management systems that feed their work.
It’s all about price and inflation right now
There are many indications now that restaurants just can’t take unlimited price increases, especially with both the current consumer food and gasoline price inflation shock underway. A March 2022 Technomic survey identified cutting back spending potential on limited-service and full-service restaurants were identified. However, the negative sales impact is more seen in full-service restaurants.  Restaurant Research Journal the same, especially, trade down from full service to QSR eventually. 
However, on the positive side: grocery store inflation (CPI food at home) exceeded restaurant price inflation (CPI food away from home) by over 200 pts in the last BLS report, for March 2022.  That gives us cover to take some price, and let’s hope that trend continues.
The BLS reported restaurant menu inflation took a 40 year high in March, with full-service restaurant prices up 8.0% and limited-service up 7.2%. Grocery store prices rose 10%.
How much longer is this sustainable? I tell my operating clients there is nothing more complicated than sales/menu mix/gross profit planning and even if you think you are optimized, you are not. One issue is despite 50 years of evolution, the POS system is giving store operators or corporate analysts what they need. What is needed is a “tiger team”—an old concept with a big ROI—to get the required systems and tools into the right places.
Waste in SKUs, waste in discounting, and overly complex controls can be found in many places that reduce effective revenue yield. For example, there are three national restaurant chains, all franchisors, that do not allow variable pricing by unit. Many consider DMA level pricing. What about pricing by geo cluster? In Chicago, isn’t the North Shore suburban market different than the Southwest suburbs? You see my point.
Howard v. 3.0 and what it says about management succession
As we all know, Starbucks is lucky in time and sequence to be able to have an enthusiastic Howard Schultz ready to come back to work. And in a little over a week, he has halted cash buybacks (to some on Wall Street’s displease—stock down 6%), fired his General Counsel, hired a Strategy Director with an employee communications background, began listening tours, and fired back at the unions. What occurred to me however is that he has had to come back two times as CEO in Residence. Starbucks is a wonderful global brand and they have plenty of G&A resources. Why is it that they cannot grow waves of CEO internally? Recall in 2004, McDonald’s (MCD) had three new CEOs in a year, with two of them dying in 7 months in April 2004-February 2005. Jim Skinner emerged as the healthy CEO and served until 2017. The point is they had then the bench strength to recover from two CEOs dying. In March and April 2022 to date, we have seen a slew of restaurant CEO turnover, we can see the strategic importance of the management succession issue.
So here is yet another thing for the to-do list. Truth be told, it has been there for some time.
McDonald’s Global Earnings Issue Forthcoming
With quarterly earnings approaching, an unfortunate reckoning will happen sometime soon: given the developments in the Ukraine War to date, McDonald’s will announce large losses from both Russia (850 units) and Ukraine, 111 units) divisions. Earlier, McDonald’s provided guidance on the Russian division loss of $50M per month, but no guidance on the Ukrainian loss. The Russian units are virtually all company-owned and the Ukrainian units are 100% company-owned. No doubt we will hear more.
The question going forward is given the Dictator Putin’s attitude and the souring of the US/Russian relations, what will happen to the Russian McDonalds units and commerce. Looking forward, some of the Ukrainian McDonalds units could reopen but on very good belief are not anywhere close to Russian AUVs and store margins. Given the MCD $50M/month number, net income for the year would decline somewhere around $600M or 8% on a 2021 base. We’ll see how MCD and the sell-side analysts treat this. The loss is as extraordinary as it gets but is a real cash loss.
About the author: John A. Gordon is a long-time restaurant analyst and management consultant, with 45 years experience; 5 years plus in units, 20 years in restaurant corporate staff roles, and 20 years via his founded restaurant analysis and consultancy, Pacific Management Consulting Group. He does complex analysis and projects, and his website describes him and his background. Email: firstname.lastname@example.org, office 858 874-6626, website: www.pacificmanagementconsultinggroup.com.
 Those infrequent events that cause great difficulty in society and business going forward.
 Technomic’s Take, Skyrocketing Gas Prices, March 17 2022.
 RR Insignts Journal March 2022, https://chainrestaurantdata.com/rr-insights-journal-march-2022/
 BLS, CPI Summary for March 2022, released April 12 2022.
 Of course, the Board’s due diligence bet on Steve Easterbrook didn’t work out so well later, when it discovered he did have a tendency for fraternization before promotion to CEO. Per Wall Street Journal, and BusinessWeek press reports.
 McDonald’s Corp. Datasheet provided, March 2022.