Be Very Afraid of Restaurant Stocks
As I mentioned in a post a couple of days ago (link: The Government Really Screwed Up This Time. Here's How You Can Profit From the Mistake), food prices are definitely headed higher in 2011 and this is likely bad news for restaurant stocks.
Perhaps the largest restaurant chain in the world, McDonalds (MCD) just confirmed the tough environment for restaurants in a statement this morning:
The company said its "grocery bill" -- what it pays for the 10 different commodities that account for around 75 percent of its food preparation costs -- is expected to rise this year 2 percent to 2.5 percent in the United States and 3.5 percent to 4.5 percent in Europe.
Europe and the United States are the two top markets for McDonald's.
Executives last year signaled that McDonald's could boost menu prices to offset higher food costs, and several analysts expect those to hit in 2011.
"They will certainly try to pass on those costs," said Peter Jankovskis, co-chief investment officer with OakBrook Investments, which owns shares in McDonald's.
All restaurant operators will be under pressure to raise prices, and analysts said McDonald's size could work to its advantage.
McDonald's sees costs climbing; shares down
This is much worse news for restaurants that aren't as large as Micky Ds. Not only that, but higher food costs, combined with higher fuel prices *, are going to put some pressure on consumers on 2011. I'm not exactly going to short any retail or restaurant stocks because it's quite possible that the improvement in the economy that I expect to see this year may offset some of this inflationary pressure, but higher food and energy prices certainly won't help things.
* While I'm on the subject of fuel prices, what's up with the spread between Cushing oil prices (the one that we mainly look at here in the U.S.) and Brent crude. When I looked this morning, Brent was over $97 and Cushing was something like $88. Playing a reversion to the mean arbitrage play might make a nice trade here. I'm sure that there's a lot of funds out there that are doing this right now. Of course, this is the sort of trade that Long Term Capital Management used to make all the time, and they eventually blew up :).