US fast-food chains report fatter margins as costs fall

Costs for cheese, chicken decline
calendar icon 28 July 2023
clock icon 2 minute read

Major US restaurant chains including burger giant McDonald's saw lower ingredient costs, especially for chicken, cheese and avocado, drive profit margins in the second quarter, reported Reuters.

Domino's, McDonald's and Chipotle said they were starting to benefit from easing costs after red-hot inflation forced them to raise menu prices a few quarters ago.

Wholesale prices have been falling sharply in recent months, according to US federal data. Cost inputs for food for final demand grew at a year-over-year rate of 0.3% in June, down from a peak of 15% in late 2022.

The change could prompt some fast-food chains to lower prices later this year.

"As we head into the back half of the year ... (and) as inflation begins to come down, I would certainly expect our pricing levels to also start to come down," McDonald's CFO Ian Borden said on a post-earnings call on Thursday.

McDonald's sharply raised prices on its burgers and fries in 2021, pushing it up by about 6% versus 2020. That compares to an industry average of an annual 2% increase for prior years.

A Big Mac Meal now costs $10.43 at a New York location, while a chicken burrito bowl at Chipotle is priced at$10.95, and a medium cheese pizza at Domino's costs $12.49.

Lower cheese prices helped pizza giant Domino's to report a better-than-expected quarterly profit on Monday.

"If the current level of food basket deflation that happened in Q2 continues ... we should continue to see material upside on the food basket as we go through the balance of the year," Domino's CFO Sandeep Reddy said on a post-earnings call on Monday.

"This makes a huge difference to profitability of our franchisee. And I think that helps repair some of the pressure that they took last year in their profitability," Reddy said.

Chipotle benefited from more customers choosing chicken over beef. Chicken, which is typically cheaper than beef, is more profitable for the chain, at a time when beef inflation has remained stubborn. Avocado prices also fell in the second quarter.

Overall, its cost of sales in the quarter was 29.4%, a drop of about 100 basis points from last year, Chipotle said.

If ingredient costs come down, chains might put the brakes on their price hikes and "still maintain margins," M Science Senior Research analyst Matthew Goodman said.

Chipotle's restaurant-level margin was 27.5% an increase of about 230 basis points. BTIG analyst Peter Saleh said this was the highest second-quarter restaurant margin since 2015.

While the company expects costs to be elevated in the current quarter compared to the prior quarter, Chipotle expects to see less volatility in food prices, it said.

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