Fast Food’s Commodity Inflation Conundrum: Raise Prices vs. "Where’s the Beef?"

With commodity price inflation forecast to hit food commodities ranging from hogs to ground beef, the restaurant business may soon find itself faced with the dilemma of either raising prices or skimping on portions. A recent WSJ article that I came across highlights the particular challenge the fast food business faces. The story begins by noting, "Ground-beef prices are nearing a record after a sharp rise in recent months, potentially eating into burger-chain profits. Wholesale prices for 90% lean boneless beef were about $1.63 a pound in the week ended April 9, up more than 32% from last year's low in November, according to Agriculture Department data, and near highs hit in 2008." Compounding the challenge is the timing of inflationary pressure with their customer's ability to spend: "With consumer demand for fast-food meals damped by continued high unemployment, chains have found themselves with less leeway to raise prices to compensate for increases in ingredients prices."

In Spend Matters view, rather than raise prices, fast food restaurants would be well served to take advantage of higher prices much as CPG providers and retailers have been able to latch onto "green" as a way of providing inferior packaging that increases margin. Much like new water packaging formats that cost the same (for the consumer) as previous plastic bottles, but use up to 25% or more less resin -- and happen to more easily spill at all stages of the opening and drinking process -- fast food chains should go on the offensive. Now is a time for their customers to take off a few pounds: they should offer new versions of their menu that maintains legacy price points while skimping on portion size. If fast food companies pull this off right, they'll be able to take advantage the situation just as others have taken advantage of green, delivering an inferior (and/or smaller) product while getting consumers to go along with the new offering.

Rising meat prices won't just impact fast food restaurants. This brings me to another Spend Management observation and recommendation, for consumers this time. To wit, when perusing the aisle at your favorite grocer or warehouse store, look for a shrinking delta between premium cuts of meat and those that have been historically cheaper. Given that the average Joe is still very much treating his pocket book like we're still in a recession, he's more likely to buy what he believes to be the cheapest cut of meat (even if it doubles in price). This could cause the space between those and premium cuts -- which may offer greater value on a total cost basis either because they're leaner or less time intensive to work with -- to shrink. And don't forget, if you're cooking for your family or company, cut back on portions as well -- all under the guise of being healthy. Use the same argument as companies do when standing behind green as what's right for the environment, when more appropriately, it's what's right for the bottom line.

Jason Busch

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