Rising Beef Prices Are Squeezing Restaurants, Narrowing Profits

Rising beef prices are pinching margins at restaurants including Burger King. (Courtesy Burger King)

Value deals—from $5 bundles to family packs to limited-time offers—proved effective at re-engaging fast-food customers during the second quarter. Still, soaring beef prices have kept profits in check. Chains that leaned hard into burgers and steaks bore much of the brunt.

Beef prices have been soaring in recent years as unusually dry weather and high input costs drove U.S. cattle inventory to the lowest level since 1951. There has been no reprieve this year. Average prices for uncooked beef steaks have increased from $8.25 per pound in January 2021 to a record high of $11.49 as of June, according the U.S. Bureau of Labor Statistics.

“Beef is about 25% of our cost basket and we’re seeing around 15% inflation year to date, so it leads to about mid-single-digit cost inflation,” said Sami Siddiqui, CFO of Burger King parent Restaurant Brands International, on an earnings call last week.

In the second quarter, Burger King’s U.S. same-restaurant sales improved 1.5% year over year, reversing the 1.1% decline in the first quarter.

Wendy’s increased its commodity inflation outlook for the year to 4% because of higher beef prices. U.S. same-restaurant sales continued to decline in the second quarter, down 3.6% from a year ago. Management noted that they need to strengthen relationships with franchisees, improve the marketing effectiveness, and elevate customer experience.

North America isn’t the only place feeling the commodity pressure. McDonald’s CEO Christopher Kempczinski said beef prices are up 20% in Europe and franchisees were hesitant to pass the costs to consumers. That means less impact on sales, but narrowing profits.

“Our franchisees recognize that even in the face of continuing high inflation on inputs and around labor, being disciplined and making sure that we’re leading on value and affordability is the foundation for what we’re seeing in our international business,” Kempczinski told investors.

At Shake Shack, food and paper costs made up 28.2% of its sales in the second quarter, up 40 basis points versus last year, led by a mid-single digit increase in beef costs. The burger chain said it’s able to mitigate a lot of the costs by increasing productivity in its operations and supply chains.

Casual dining restaurants didn’t dodge the bullet either. Texas Roadhouse, with beef making up more than half of its commodity costs, raised expectations for full-year inflation to 5%, citing higher-than-forecasted beef prices. Management said the company has about 80% of its beef supplies locked in for the third quarter, and 50% for the fourth quarter.

Although the steakhouse chain posted a strong second quarter with sales up 12.8% from a year ago, restaurant margins have slipped from 18.2% to 17.1%.

If beef prices plateau or decline, value wars among restaurants will likely intensify. Promotions could boost sales and royalty payments—often based on revenue—to the corporate parent, but they would cut into margins for franchisees. Fast-food companies will need to balance their strategy so that franchisees remain on board.

With beef prices up and margins squeezed, fast-food chains will likely offer more chicken on the menu, launch new products, or seek add-ons—such as high-margin beverages—to make up the lost profit from beef burgers. Many chains have recently announced plans to expand their beverage offerings this summer, which includes cold brews and energy drinks.

Write to Evie Liu at evie.liu@barrons.com