Restaurants Hyping Chicken as Beef Prices Soar

October 21, 2003

CHICAGO — Where's the beef?

If you've been following the promotions of U.S. restaurant chains recently, you may be asking that question.

The conventional wisdom is that they are hyping fancy salads and lean chicken pieces to meet demand for healthier foods while protecting themselves from legal action by the obese.

But some believe it is no coincidence that the switch comes at a time when beef prices have been soaring.

"We'll do everything we can to drive consumers to products that have a more favorable commodity cost," said Todd Diener, chief operating officer for Brinker International Inc., parent of Chili's Grill & Bar restaurants, on a conference call Tuesday.

The company, which has been signing new contracts to buy more chicken and shrimp, forecast that earnings in its current quarter will fall well below Wall Street expectations, triggering a decline of up to 16 percent in its share price.

Brinker said its cost outlook will be difficult in the months ahead because some of its long-term beef supply contracts, which have protected it from price fluctuations, are expiring at the end of this calendar year.

It is far from alone. Lone Star Steakhouse & Saloon Inc. which buys its beef on the spot market, said in August that higher beef costs would pressure profits, and it does not expect relief for the rest of the year.

The U.S. Department of Agriculture's price estimate for lightweight carcasses on Oct. 16 was about $2.01 per pound, up more than 80 percent from year-ago levels.

The price increase has been partly caused by a ban on Canadian beef imports that began in May following a case of mad cow disease discovered in Alberta. The ban has since been partially eased.

"The challenge from a restaurateur's point of view is to continue to focus your customers on nonbeef menu items," said JMP Securities analyst Dean Haskell.

He said big chains like McDonald's Corp. and Wendy's International Inc. have put a greater emphasis on beef alternatives in recent months.

McDonald's has heavily promoted its meal-sized salads, crediting them in large part with helping reverse flagging sales. It is also preparing to launch an all-white-meat version of its well-known Chicken McNuggets nationally.

On Oct. 16, J.P Morgan analyst John Ivankoe downgraded Wendy's stock to "neutral" from "overweight," citing the pressure that higher beef prices are putting on the company's operating margins. Its shares have dropped about 3 percent since then.

While many believe the moves away from burgers mark the battle for slim waistlines rather than protection against an immediate hit to corporate bottom lines, all agree that the higher beef prices are becoming an industry problem.

The highly competitive nature of the restaurant business means there is little power to pass beef increases on to the public through higher menu prices, and the chains are instead using other strategies to manage the higher costs.

"What history demonstrates is that the volatility traditionally seen in producer price indexes ... doesn't reflect the way menu prices move," said Hudson Riehle, senior vice president of research for the National Restaurant Association.

Restaurant menu prices overall typically rise 1 to 3 percent annually, he said. Menu prices this year are up about 2 percent, in line with historical levels.

Higher prices at one chain would only serve to drive consumers to competitors, he said.

Industry experts expect more cost-cutting by restaurant companies to offset their rising food costs. As shown by the problems at Brinker's and Lone Star, a lot may also depend on what kind of long-term contracts companies have in place.

McDonald's declined to comment on beef prices and Wendy's did not return calls seeking comment.

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