Industry News | June 6, 2001

Rising Cheese Costs Loom

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Salomon Smith Barney reports that rising cheese costs may be a problem for restaurants who rely on it as a primary ingredient. Pizza chains, for instance, may be negatively impacted by the 40% year-on-year increase in price since 1999. Salomon Smith Barney projects that rising cheese costs may be the biggest earnings risk for pizza chains in coming months.

The United States Department of Agriculture reports that the price of block American cheese in May 2001 was, on average, 160.28 cents per pound, the highes it has been since September 1999. There is a chance that this increase in price is the result of less milk-producing cows. In that case, a reduction of costs will be slow in coming, and there is a strong possibility of even higher per-pound costs.

Although analysts at Salomon Smith Barney maintain an "Outperform" (2H) rating for Tricon Global Restaurants, there may be some cause for concern about the effect of the cheese price on Tricon’s Pizza Hut subsidiary. Tricon reports that 15% to 20% of its food and paper costs are cheese related. With volatile commodity prices, earnings may be affected for other companies such as Chuck E. Cheese and California Pizza Kitchen, which announced lowered earnings estimates on June 5. Burger chains who rely less on cheese, such as Wendy’s and McDonald’s, may feel the effects on operating margins but no so severely.