The Steakhouse Index Options

[dauss]

What Steakhouses Reveal about the Weakness of the US Economy

If you want to understand how high energy prices are impacting the economy, you could spend your days reading the Wall Street Journal or consulting with economists. Or you could go have a really expensive New York strip steak at the Palm or Morton's.

High-end steakhouses have expanded rapidly in recent years thanks to an economic expansion, the popularity of cholesterol-reducing statins such as Lipitor, and the low-carb/high-protein Atkins/South Beach diet crazes. You'll now find outposts of Morton's, Ruth's Chris, and several competitors in all the best suburban strip malls, edge-city shopping districts, and gentrified downtowns.

The financial results of these testosterone-filled cow palaces reveal much about several trends affecting the U.S. economy. First, they are a neat case study in the unexpected collateral effects of high energy prices. The high price of oil has spurred demand for ethanol, which in turn has boosted the price of corn. Corn is a primary "input"—or as we say in English, "food"—for beef cattle. The combination of higher grain and energy prices has led to burgeoning inflation in food. In the first quarter of 2007, food prices rose at an annualized rate of 7.1 percent, according to the Bureau of Labor Statistics. Like many businesses, steakhouses face the classic choice of swallowing the higher costs—and accepting lower margins—or raising prices.

Some beef boîtes are boosting prices. The New York Times recently reported that "The Palm steakhouse chain has raised the price of its steaks by $2, and side dishes have gone up 50 cents to help compensate for the price of the beef." The company's chief operating officer told the paper: "I don't think our customers have noticed." (Note: If customers haven't noticed a sly price increase, you might want to refrain from broadcasting it to the New York Times' readers.) At Peter Luger, the Brooklyn landmark whose very name causes this writer to salivate, the price of the iconic porterhouse for two has risen from $79.90 to $81.

But most of the big meat chains seem to be eating the costs, as shown by their falling margins. At Morton's margins fell from 9.8 percent to 9 percent in the first quarter, thanks in part to rising costs. Ruth's Chris reported that first quarter 2007 operating income fell from 13.8 percent of revenues to 10.1 percent of revenues. Rare Hospitality, which owns 280 Longhorn Steakhouse outlets, saw first quarter 2007 operating income fall to 8.6 percent of revenues, down from 9.8 percent in the first quarter of 2006.

To aggravate matters, the rising cost of beef appears to be accompanied by slowing demand. At Morton's steakhouses, same-restaurant sales rose by a meager 0.5 percent in the first quarter of 2007. For the year, Morton's expects same-restaurant revenue growth of between 1.5 percent and 3 percent. When Ruth's Chris reported first-quarter sales in April, it reduced expectations of same-store sales growth substantially. At Rare Hospitality, same-store sales actually fell 1 percent in the most recent quarter. For the remaining three quarters of fiscal 2007, the company sees same-store revenue growth of between 0 percent and 2 percent for its Longhorn Steakhouse outlets. In each instance, same-store growth is rising at a rate slower than inflation.

Not surprisingly, given the shrinking margins and slowing revenue growth, the stocks of the major public steakhouse companies have done poorly in recent months. Here's a three-month chart of Morton's, Ruth's Chris, and Rare Hospitality compared with the S&P 500.

A look at the six-month chart of the same stock and the S&P 500 shows how the steakhouses could function as economic indicators. Note the outperformance in the first quarter and the underperformance in the second quarter. Steakhouses thrive on expense accounts. Their sales are tied to the exuberance of (mostly) men in the corporate world, and their business is largely discretionary. (It's easy to lose sight of just how expensive steakhouses are. At the Michael Jordan steakhouse in New York, for example, a dinner of shrimp cocktail [$16.50], New York Strip [$38.50], hash browns [$7.50], and creamed spinach [$8.50], plus dessert, wine, tax, and tip easily tops $100 per person.) Their outsized sales and stock performance in the early part of the year are lagging indicators, as bonuses are paid out and entertainment budgets are set based on the prior year's performance.

But as the year unfolds, steak stocks become more like leading indicators. If profits are humming, M&E budgets are in rude health, and prospects look good, you'd expect businesspeople to use steakhouses for meetings, deal-closing dinners, and recruitment lunches. When business slows down a lot—as it has in many sectors of the economy—it becomes much harder to justify a $250 lunch for three. Wall Streeters and hedge-fund guys may still be splurging for Kobe, but think about all those real estate and mortgage brokers, car dealers and consumer products salesmen, retailers and contractors who may be nibbling on takeout burritos because of slowing demand.

Right now, the steakhouse damage seems confined to the chains. The next trouble spot, however, could be the highest quality, most—um—rarefied steak joints. For decades, Peter Luger has been the epitome of high-end, high-quality, consumer-unfriendly steak: no credit cards, brusque waiters, and a remote location. So long as the economics of the steak business were friendly, the restaurant could afford to be standoffish. If the portly waiters in Williamsburg start wishing you a nice day and loudly tout the fact that Luger's proudly accepts the American Express card, start praying.

Chains will only eat the cost for so much longer, then the prices will start to rise fast.

[impala454]

you're still not understanding, and just grasping for any number you can find that sounds ok to you. let me explain one more time and make it simpler:

let's say I drive a big semi truck on a 500 mile route to a wal mart to drop off goods for them to sell. it costs me $x amount of gas to make the trip. the worth of those goods in the truck (what wal mart eventually sells them for i.e. revenue) is $y. in every case, $x will be insignificant compared to $y. profit makes no sense to compare to in this case, because it's including every cost of the company, not just gas.

and just because I don't see it doesn't mean it's not happening? how am I supposed to get all up in arms over this issue if I'm still paying $0.50 for the same can of corn I paid $0.50 for ten years ago? Why would I get all gung ho about gas prices when, according to inflation, they're in the same place they've been the past couple years. I have a hard time taking the doomsday view of it when I don't even see the effects.

which leads to my final point. when you see the prices of consumer goods (and services) all rise simultaneously by small amounts over the period of a couple years, what is the more likely explanation:
1. inflation
2. an extremely nested web of goods depending on other goods depending on other goods all leading back to oil and omg /cry /cry it must be bush and global warming and war

yeah oil is important. yeah it sucks when it gets expensive during the summer, but we go through this every year. prices go way up at the beginning of the summer, people go insane and think it's the end of life as we know it, then when it goes back down in the fall people shuttup about it. so I suppose this thread is just business as usual.

[dauss]

Why would I get all gung ho about gas prices

No clue, but maybe it's because you're not reading the article. The article posted was talking about the ethanol demand, increased consumption of corn for the production of ethanol, reduction in supply for animal feeds, increased costs in animal feed, reduction in the farm land for other crops, and increased food prices from the above factors.

Why you would rant on about how much it costs a truck to deliver food and post prices of gasoline doesn't make any sense to me.

For these steak houses, $2 increase on top of what they're probably charging for a steak, >$35, it doesn't seem that much. These are prime steaks, and prime cuts of meat have more fat, which means the cows were fattened up longer and ate more. So it's a slightly higher percentage increase, but what else do you expect for a premium product?

$0.09 increase for a $2 box of cereal, 4.5%.
$2 increase for a $35 steak, 5.7%.

[impala454]

Why you would rant on about how much it costs a truck to deliver food and post prices of gasoline doesn't make any sense to me.

because you were talking about how gas prices would drive up delivery costs which would drive up food costs, which makes no sense because the delivery prices are minscule in comparison to the cost of the food being delivered.

For these steak houses, $2 increase on top of what they're probably charging for a steak, >$35

no, it's $3 increase from a $15 steak. that's a 20% increase. they increase the prices because they can. not because oil and corn prices are up. their stock prices have been skyrocketing as much as oil has.

I know what you're saying, you think food prices will increase because corn prices increase because corn demand increases because of ethanol demand because of gas prices, well that last, immensly important link doesn't exist. gas prices are high because of the lack of refining capacity, not because of a lack of oil, or lack of ethanol. this means the demand for ethanol doesn't change until the refining capacity changes. you think there's an enormous demand for corn and ethanol so it can sit in a bunch of tanks and not get refined and blended with gasoline that doesn't exist??

Irregardless, it is still a good excuse to raise prices.

Perhaps, but I'd say the fact that you can't get into the joints without an hour wait at dinner time would probably have much more impact on them raising prices. I'll tell you what will really raise prices at restaurants will be these minimum wage increases coming.

In other news, the locally owned hamburger joint that I work at just raised their prices because suppliers raised their prices.

how much was the increase?