Six Restaurants and how a Food Inflation could hit them

Restaurants are value added downstream companies within the food segment. Most of the companies have a low gross margin which is in a range between 25 to 35 due to high precursors purchases. What happens if food commodity prices rises in the long-run? Will companies increase prices and push sales to keep income stable?

Here is a list of companies acting within the restaurant sector and affected by commodity prices.

Big Restaurants and Fundamentals (Click to enlarge)

At first, higher commodity prices lead to lower gross margins. Companies have to increase prices to keep net profit on stable levels. Here is the decisive factor hidden: Does the company have so much pricing power to establish new rates without losing volumes and at least market share? If volumes goes down, the profit margin follows if other cost factors couldn’t reduced.

Food is a product for that it is difficult to enforce high prices as for luxury products. It is tough to brand food because people always count in price per liter or kilo. A successful company within the sector has to organize its business in a way that allows the company to sell high volume or to offer an additional service. This is the only way to generate higher profit margins.

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Foods stabilize your Portfolio?

Food is a great sector for investors because of the dependency to customers. People have to eat and drink for surviving no matter what the economy is doing. But could stocks from the food sector stabilize our portfolio during financial turmoil’s?

If we regard the Beta of some companies acting within the food branch, we see that the average Beta is 0.48. This means, that an average stock correlated with the financial market in an amount of roughly a half. If financial markets fall 1 percent, food stocks fall a half percent and vice versa.

Here is a financial table about figures from the food branch sorted by revenues:



Especially for risk averse investors or leveraged portfolios, it could be interesting to buy food stocks in order to stabilize returns and to reduce volatility. The price an investor pays for this more security is a lower portfolio growth and at least a lower return.

Selected Articles:

· Colgate-Palmolive: Dividend Stock of the Month August 2010
· Kraft Foods: HY-Figures better as expected?
· Procter Gamble – Consumer Giant on Track?
· Best Dividend Paying Stock List as of 08/2010
· Davide Campari-Milano SpA – Value Stock with 19.7% EBIT-Margin