According to Gene Lee, CEO of Darden Restaurants, the massive price increase of one ingredient is already crushing bottom lines: beef.
“I will say and I think it’s important for everybody to know this, is that the middle meats continue to be strong,” said Lee in a quarterly conference call Tuesday.
“And we have seen a lot of relief in ground beef, but we have not seen a lot of relief in the middle meats, your tenderloins, your short loins and your ribs. And so I believe that beef in ’17 will be less than it was in ’16, but I also believe beef is still going to be historically expensive.”
Lee, whose group includes restaurants such as Longhorn Steakhouse and Olive Garden, is right that beef prices have in fact shot up in recent years. For instance, the price of retail ground beef peaked in February 2015 at $4.24 a pound, according to the Bureau of Labour Statistics, nearly double the average price between 2006 and 2011. Same for USDA choice steaks, which peaked at $9.18 per pound in July 2015 after lingering around $6 per pound from 2006-2011.
Supply has been constrained by drought conditions in large cattle-producing states like Texas as it has been expensive for ranchers to feed and maintain herds. This has pushed the prices well above long-term historical averages and that is hurting restaurants like Darden.
There is, however, some good news on the horizon.
“The futures market looks very positive as we move forward,” said Lee. “We at Darden have been short through this last cycle and we expect it to be a tailwind as we move into next year.”
It’s true that prices have been sliding, retail ground beef is a few cents under $4 per pound, but according to Lee the continued higher prices of the meat should still impact food retailers and restaurants for the foreseeable future.