Chicken and beef face very different road ahead, expert says
BTIG analyst Peter Saleh recently held a call with Robert Wright, an independent consultant with more than 30 years of experience in the poultry and beef industries. There are a bevy of factors driving inflation, but commodity instability has surely been a lead one.
Wright had some interesting takes on chicken and beef, and why the categories might pull in different directions as the year progresses.
Firstly, Wright feels this summer’s drought across the southern and western U.S. led many cattle ranchers to sell their herd for slaughter early. It’s a dynamic that created an artificial over-supply of beef on the market, Wright said. It also helped keep a lid on the price of some steaks and other beef cuts over the past several months.
Yet Wright expects this to reverse course in December with the onset of colder weather and for prices to push about 15 percent higher in 2023 given fewer cattle for slaughter. Steak prices will bear the brunt of the increase (ground beef not as much). With that said, though, Wright noted one of the few cases for softer prices next year would be a result of significant demand destruction from a recession and/or reduction in consumer income.
Wright said prices will rise in 2024 as well once ranchers hold back cattle to increase herd size before moderating in 2025 as the increase materializes.
There’s a more apparent case for deflation on the chicken side, however. Wright projected an increase in poultry supply would lead to lower prices in 2023. He added the industry appears to have solved an egg fertility issue that weighed on production the past two years. Chick placements, he said, increased to 185–190 million per week from 175 million previously. Greater supply should translate into lower prices beginning in Q1 2023, Wright said, followed by normal price seasonality in the spring and a sharp decline next fall. The only potential roadblock would he a spread of Avian Flu (there’s some evidence of this in Canada).
“We believe the potential for higher beef prices in 2023 and again in 2024 will have broad implications across our sector from quick-service operators to higher-end distributors,” Saleh wrote in a note, highlighting Texas Roadhouse as a brand to watch. The casual chain typically doesn’t raise menu prices to fully offset commodity inflation near-term—a traffic-shielding approach that’s worked in the past. Its cost of sales ran about 200 basis points higher this year compared to 2022, despite roughly 10 percent of price over the past two years, Saleh pointed out. “We expect the elevated cost of sales to continue into 2023, with margins under pressure until beef prices moderate from these record levels,” he said. “We expect the company to continue to raise menu prices to offset higher labor costs, but believe they are unlikely to raise menu prices to offset rising steak prices as well. “
Indeed, Texas Roadhouse execs said in Q3 management expected beef prices to soften in the back half of the year before accelerating again into 2023. “This call confirms that this dynamic is well underway,” Saleh said.
On the flip side, he views Wright’s forecast as a friendly one for Wingstop. And it’s underway already, too. Bone-in wing prices declined substantially from more than $3 per pound last year to under $1.50 per pound recently. Wingstop noted it expects about an 800-basis point improvement in franchisee restaurant margins in the second half of 2022 versus the back end of 2021, thanks to lower wing costs. “Given the dramatic decline in wing prices so far in 2022, we don't expect additional price deflation in 2023,” Saleh said. “However, we believe the increase in supply associated with improved fertility should keep prices from migrating much higher, and in-turn, continue to benefit Wingstop at least through the first half of 2023. We believe this dynamic could allow Wingstop to ease off on additional menu price hikes, as margins will expand regardless.”
Chipotle is another brand Saleh said will appreciate the windfall. Chicken represents some 60 percent of entrée sales at the brand and about 20 percent of food costs (the company purchases naturally raised chicken whose market dynamics tend to differ from conventional chicken). The brand’s cost of sales in Q2 2022 was 30.4 percent, flat to last year and the lowest level in nearly a decade despite record inflation in Chipotle’s commodity basket.
“We believe that any deflation in the company's commodity basket would flow through immediately to the bottom line, as the brand is unlikely to roll back menu pricing or discount its product,” Saleh said