Distributors like US Foods have been hit hard by diesel prices. | Photo courtesy of US Foods.
High gas prices have intensified inflation, damaged consumer confidence, and likely hurt traffic at restaurants.
But chains are also seeing the impact on their own costs, as more suppliers start asking for fuel surcharges.
Nick Scarpino, the CEO of the Chicago-based pizza chain Giordano’s, noted that he worries about the cost of gas, not simply because of what it does to the consumer. “We feel it on both ends,” he said in the most recent episode of the Restaurant Business podcast A Deeper Dive. “The consumer might pull back on their spending. And our suppliers might want to pass along gas surcharges.
“Some supplier partners have asked for that. In general we don’t want to pay them. It’s a push and pull.”
The Iran War led to a spike in fuel prices in March and April, which took the price of a gallon of gas up past $4.50 at one point. It has come down since then and is now at $4.10—which is still high, but lower than it had been.
Diesel fuel, however, drives much of the distribution network. And while that has fallen slightly over the past couple of weeks, it remains well over $5 per gallon. The average price on Friday was $5.26, lower than the month-ago peak of $5.64. But it’s nearly $2 higher than it was a year ago.
That cost has hit distributors hard. Dirk Locascio, CFO of US Foods, told analysts earlier this month that diesel prices have risen 60% this year. “That’s an area where we in the industry mitigate a portion of that through fuel surcharges, in our case about 30% to 40%,” he said, according to a transcript on the financial services site AlphaSense.
But the charges represent one of the quieter areas where profit margins at restaurants are taking a hit.
Food and labor make up the bulk of the industry’s cost structure, but several other cost increases have conspired to make life more difficult to operators big and small. Rising interchange fees from credit card companies now represent a major cost for restaurants, for instance. Technology also costs money. Construction costs are up, along with insurance.
Utility costs have also increased. The Producer Price Index rose 1.1% in May, according to new federal data, and is up 6.5% over the past year—the largest gain in well over three years. Energy costs alone rose 10.7% and are up 36.6% year-over-year. Unsurprisingly, the consumer price index is up more than 4%.
Restaurant companies can’t necessarily pass these costs onto consumers, because those consumers are worried about their own spending. The fast-casual chain Cava kept its own guidance for profit margins down, in part because of concerns about fuel surcharges, CEO Brett Schulman told investors this month.
At Shake Shack, which is dealing with the record cost of beef, fuel surcharges have contributed to weaker profitability. “We are seeing some short-to-mid-term challenges on the cost side,” CEO Rob Lynch told investors, according to AlphaSense. “Everyone is aware of the beef prices we’re battling. They’ve continued to escalate. And we are also seeing fuel surcharges on some of our distribution and some of the other input costs.”
Shake Shack as a result lowered its profitability guidance for the quarter and the year. Its stock took a massive hit as a result.
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