Buffalo Wild Wings (BWLD)

actually am probably a little early on this call, so you don’t have to run out and sell your restaurant stocks immediately, but you probably should do so fairly soon. Restaurant earnings might be pretty decent for the next quarter or two, but this sector is headed for a lot of pain in the relatively near future. Why you ask? Because a huge spike in meat prices is coming and consumer spending is going to slow.





As everyone already knows, the prices of commodities, like corn and soybeans have exploded. There is always a significant lag between an increase in feed cost and the subsequent increase in meat prices. At least that is what happened the last time feed prices doubled in the 1970s. When feed costs increase significantly as a result of a rally in corn and soybean prices, the first reaction of individual livestock feeders is to try to tough it out with the hope their competitors down the road will reduce production first. It's sort of a game of chicken, so to speak. When the industry at large fails to reduce production, individual livestock feeders begin to lose massive amounts of money and they are forced to begin to cut production. This "cut back" means the livestock producers will cull their sow (that's a female pig) herd and/or their cow herd. In the short term, this will put more meat on the market, causing meat prices trade lower. This is exactly what we have been seeing lately with meat prices.





According to people in the industry who I have spoken with, there is currently a three-week wait to have sows slaughtered because the demand is so high and meat packers only have so much capacity. The lag period before we see higher pork prices is likely to be around 9 to 12 months. For beef it is a little longer, probably at least 12 months. Once the increase in meat prices begins, it will likely last for several years. This is how it has happened in the past. Smart meat futures traders have been “Bear Spreading” hog and cattle futures i.e. selling the nearby contracts and buying the deferred contracts for the reasons stated above.





I became intrigued by this whole phenomenon when a former holding of mine, Buffalo Wild Wings (BWLD) reported not that long ago that chicken wing prices were falling. When I heard that I said to myself, “how can this be…grain prices are through the roof?” I did some of research on the subject and I now understand the dynamics of the meat industry and why this happened. I can only hope for shareholders’ sakes that BWLD has recently or is able to sign a long-term contract for wings in the near future, as they have done in the past. Doing so would be a brilliant move. BWLD management has proven to be very capable in the past, so perhaps they will. I love this chain. The food, the atmosphere, and of course the beer are all great. I go there whenever I can, but I finally decided to sell my Buffalo Wild Wings shares and those of any other restaurants that I owned. I just don’t want to fight this powerful trend. This is a well-run company we’re talking about here, some of the less well run ones in the United States are going to be blindsided by this rise in prices and get absolutely crushed.





As you can see, on one hand it is very likely that U.S. restaurant margins are going to be squeezed by higher input costs. As if this wasn’t bad enough, I suspect that the massive increases in food and gas prices are going to force consumers to cut back on discretionary spending for fun things, such as going out to eat. Not to mention the fact that consumer confidence is currently sitting at its lowest level in fifteen years. Falling revenues caused by a drop in consumer spending combined with rising expenses spell disaster for restaurants.





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I have talked about the rapidly approaching spike in meat prices and a likely slowown in consumer spending cause by higher food and gas prices already. The article brought something to my attention that I hadn't thought of yet, the impending rise in the minimum wage.





Regardless of what you think about whether we should have a minimum wage or what it should be, there's no denying that raising it is going to cause pain for some industries. States are free to set their own minimum wage, but the federal government sets a floor that they cannot go below. For those of you who aren't familiar with the Fair Minimum Wage Act of 2007, officially signed on May 25, 2007 the law will raise the federal minimum wage from its current level of $5.85 to $6.55 on July 24, 2007 and to $7.25 on July 24, 2009. Twenty-seven of the fifty states currently have lower minimum wages than the new 2008 federal rate and 41 of the 50 are lower than new 2009 federal level.





According to some quick searches that I did on the web, supposedly two-thirds of all minimum wage workers are employed in the food services industry. This is not good news for restaurants. They are going to get bombarded from every possible angle by, increasing food input costs, slowing consumer demand, and rising wages for their employees. Ouch.





Deej


No position in BWLD