How Will Commodity Affect Restaurants

U.S.
RESTAURANTS: ORDERING FROM THE BERNSTEIN VALUE MENU 57
Changing the Recipe — How Will

Commodity Moves Affect
Restaurants?
Overview We see limited risk of input cost spikes in the near term; we expect commodity
prices to increase, but at a moderate pace. We believe concerns about inflation
persist, despite the more benign than expected trends reported thus far. Specifically,
with emerging market economies recovering and U.S. consumption trends
remaining sluggish, the specter of 2008 — when sales and cost trends went in
opposite directions — has risen. For our part, we think the evidence suggests that
some of the concerns we are hearing over supply dynamics (particularly around
proteins) are overdone, and that changes in supply are well within historical norms.
Moderate inflation is a positive for top-line trends; margins are likely to feel
some pressure but on net, profit dollars should benefit. We continue to view
moderate inflation (in the low single digits range) as the preferred scenario for
restaurants, which lack the ability to take price in deflationary environments. All
things equal, a 1% price increase leads to a less than 1% decline in traffic, meaning
that total revenue dollars are higher. Given fixed costs inherent in the business
(labor and occupancy), resulting leverage largely offsets gross margin declines and
total profit dollars are higher. From here, we expect pricing to trend up, with
increases in food-at-home raising the pricing umbrella for restaurants. While prices
generally lag cost increases, even absent 100% price pass through, the gross
margin-leverage trade-off is a good one for restaurants.
Menu mix and contract length dictate company risk; beef and dairy are likely
the wild cards, Burger King and Starbucks have the highest respective exposure,
though Starbucks uses swaps/futures to hedge. Supply dynamics currently look
fairly benign to us for dairy and milk, and companies are generally expecting price
increases for both to be offset by price declines elsewhere. If, however, supply and
demand dynamics play out differently, the anticipated prices could climb higher
than we expect. Among our coverage companies, Burger King has the highest
exposure to beef (~19% of the food basket) and Starbucks has the highest exposure
to dairy (~18% of the food basket). While Burger King does not hedge beef,
Starbucks has initiated a program to mitigate the price uncertainty of a portion of
dairy purchases.
We believe the commodity environment in 2010 will be generally favorable for
restaurants, but we view McDonald's as best positioned to smooth volatility given
its global scale and international exposure. With its global scale and high degree of
sophistication, we believe McDonald's is best positioned to mitigate commodity
volatility. Moreover, we view international exposure as a natural hedge against
rising commodity prices as part of the increase is likely to come from emerging
markets and currency fluctuations. The ability to buy and sell goods in a local
currency is critical then, to ensuring that costs and sales move together. The more
international businesses — led by McDonald's — are therefore likely to be best
positioned.
Restaurants Likely to See Food For the restaurant industry as a whole, food costs are in a virtual dead heat with
Cost Inflation by Year-End, But labor costs as the single most costly line item, account for nearly 40% of pretax
We Expect It to Be Moderate costs — equal to roughly one-third of sales (see Exhibit 103).
58 U.S. RESTAURANTS: ORDERING FROM THE BERNSTEIN VALUE MENU
Exhibit 103 Food Costs Account for One-Third of Total Expenses and Volatility Should Continue
to Affect Profits
Food Services and Drinking Places Industry P&L
($ millions)
Sales $437,798
Cost of Goods (E) 140,095 32%
Labor 142,357 33%
Equipment 21,462 5%
Services 23,704 5%
Occupancy 34,018 8%
Utilities 13,893 3%
Interest, Sales Taxes, and Other 40,174 9%
Net Profit (E) $22,095 5%
Source: U.S. Bureau of the Census and Bernstein analysis.
For the better part of three decades, restaurants could count on declining food
costs, which were then passed through to customers in the form of ever-increasing
portions and food-away-from-home (FAFH) inflation below the general price
levels (see Exhibit 104).
But that benevolent trend reversed itself in the middle of this decade,
expanding into a full-blown bubble by 2008; the IMF's global commodity food and
beverage index spiked 44% year-on-year that March. With the accelerating
recession, however, prices dropped precipitously — declining 26% in March 2009.
While much of the speculative excess has been squeezed out of agricultural
prices by the global recession, prices remain at historically high levels. As the
world climbs out of the worst economic downturn since the global depression, a
broad index of commodity food and beverages still hovers nearly 40% above the
long-term average (see Exhibit 104). We believe the failure to return to early 2000s
lows suggest there is also some structural change, reflecting the economic recovery
taking place and emerging markets will continue to push food price growth ahead
of the general inflation level.
U.S. RESTAURANTS: ORDERING FROM THE BERNSTEIN VALUE MENU 59
Exhibit 104 Commodity Prices Have Fallen Steeply from Their 2008 Peaks, But Are Headed
Higher and Likely to Remain Above the 1980-2006 Average in the Near Term
Commodity Food and Beverage Price Index
Price Index (2005=100)
200 177
175
150
125
100
75
50
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
1980 - 2006 Average Commodity Food and Beverage Price Index, 2005 = 100
Commodity Food and Beverage Price Index, 2005 = 100
Commodity Food and Beverage Price Index

Y/Y Change (2005=100)
60%
40%
20%
0%
-20%
-40%
1981 1982 1983 1984 1986 1987 1988 1989 1991 1992 1993 1994 1996 1997 1998 1999 2001 2002 2003 2004 2006 2007 2008 2009
Recession Y-o-Y Change Commodity Food and Beverage Price Index, 2005 = 100
Source: IMF and Bernstein analysis.
Longer Lead Times and Capital Despite the broadening of menus and trend toward healthier eating, beef remains
Intensity Make for Greater Beef critically important to restaurants — most notably to steakhouses and hamburger
and Dairy Supply Volatility, But fast food specialists, but also to Bar & Grill chains. Yet like any capital-intensive
We Think Inventories Are Well business, beef cycles tend to be exaggerated by the long lead times involved (nearly
Within Historical Ranges two-year life cycle and limited production capacity of one calf per cow) and
challenge of planning so far in advance of demand.
For example, during the double-dip recession of the early 1980s, prices for
beef increased — at first sharply and then less steeply as the recession progressed.
Price growth was actually positive for beef by the end of the slowdown. Yet by the
mid-1980s — long after the recovery had taken hold — prices declined again.
Likewise, prices troughed in the middle of the 1990s, and again in the mid-2000s,
rather than in the recessions that immediately preceded them. In both cases prices
fell by nearly 30% — in real terms. Beef has seen annualized real price declines of
3.6% (see Exhibit 105).
Exhibit 105 Historically, Beef Has Experienced Large Price Swings; the Spike in the Mid-2000s
Corresponded to Elevated Restaurant Demand, But Prices Are Lower Now in Real
Terms Than They Were 20 Years Ago
50%
Inflation Adjusted Beef Prices 300
40%
Year-Over-Year Change
250
30%
Cents per Pound

20% 200
10%
150
0%
-10% 100
-20%
50
-30%
-40% 0
1981 1982 1983 1985 1986 1987 1989 1990 1991 1993 1994 1995 1997 1998 1999 2001 2002 2003 2005 2006 2007 2009
Beef- cents per pound. (deflated) YoY Change Beef- cents per pound. (deflated)
Source: USDA, Bureau of Economic Analysis and Bernstein analysis.
In the United States during the current cycle, demand destruction brought on
by the recession has driven primal beef prices down considerably (see Exhibit 106).
Prices for choice rib cuts and strip loins — the types served by mid-price steak
restaurants like Darden’s Longhorn Steakhouse — declined to multi-year lows in
2009, according to CattleFax data. In contrast, prices for trimmings (the pieces of
the cow used for ground beef) remained well above their historical average —
having set a record high price in 2009 — as consumers traded down to cheaper cuts
of meat in their own homes and in their choices in food away from home. Just as
quick-service hamburger chains outperformed casual dining steakhouses, so too did
demand for the QSR mainstay, ground beef (see Exhibit 107).
Exhibit 106 Hamburger Meat Prices Were Bolstered by Exhibit 107 Steak Cuts Have Climbed Off Their Multi-
Trade Down, But Have Since Declined Year Lows
Weekly 81% Lean Beef & Beef Trimming Price Weekly Trimmed Tenderloin Prices
$160 $1,400
$140 2008
$1,200 2007
2009
$120 2007 $1,000
Price per 100 lb
2009
Price per 100 lb
$100
$800
2010 2008
$80
$600
$60
$400
$40
2010
$20 $200
$0 $0
Jan Jan Feb Mar Mar Apr May Jun Jun Jul Aug Aug Sep Oct Oct Nov Dec Dec Jan Jan Feb Mar Mar Apr May May Jun Jul Jul Aug Sep Oct Oct Nov Dec Dec
2007 2008 2009 2010 2007 2008 2009 2010
Source: USDA Market News Service and Bernstein analysis. Source: USDA Market News Service and Bernstein analysis.
With sputtering demand for most beef cuts weighing on retail prices, cattle
farmers' profitability has suffered (see Exhibit 108), and they have responded by
reducing inventory (see Exhibit 109).
Exhibit 108 Profitability Margins Have Narrowed for Cattle Producers Leading Them to Shrink
Inventory
U.S. Beef Operating Margins
30.0%
17%
20.0% 14%
6% 4%
10.0% 4% 4%
-3%
Operating Margins
0.0%
-13%
-10.0% -17% -5%
-8%
-20.0%
-21%
-30.0%
-40.0%
-50.0%
-50%
-60.0%
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
Source: USDA and Bernstein analysis.
Yet, importantly, we note that this trend toward declining inventories has been
in place for decades. So, while herd levels are indeed at their lowest levels in
decades, the same could have been said for 2004 and 2005, and before that, the
entire 1980s decade.
Exhibit 109 The Downward Trend Has Been in Place for Decades, Implying Current Levels Are
Less Dire Than They Initially Look
Cattle Inventory
Number of cows (mm heads)
150
140
130
120
110
100
90
80
1973 1975 1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009
Cattle & Calves - All Trailing Average
Looking back over an even longer period, we find that inventory declines are
not particularly large by historical standards. As with many agricultural
commodities, supply has become much less volatile over the ensuing decades since
the hyper-inflation of the 1970s. As of January 2010, inventories were down just
0.8% year-over-year (see Exhibit 110).
Exhibit 110 Inventory Declines Have Not Been as Sustained as During the Recessions in the
1970s and 1980s
Beef Inventory vs. Prices
10% 40%
Y/Y Change in Price

30%
Y/Y Change in
Inventory
5% 20%
10%
0% 0%
-10%
-5% -20%
1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010
Inventory Price
Source: USDA and Bernstein estimates and analysis.
After declining nearly 20% in August 2009, cattle futures indicate moderate
price increases through most of 2010 (Exhibit 111). By the end of the year,
however, as prices lap two years of declines, futures point to beef prices as much as
14% higher year-over-year by December 2010.
Exhibit 111 Cattle Futures Imply Moderate Price Increases Accelerating Through 2010
YoY Changes in Commodity Prices

60%
40%
YoY Changes
20%
0%
-20%
-40%
-60%
M 9
Ap 9
Ju 9
Au 9
Se 9
O 9
D 9
Ja 9
M 0
Ap 0
Ju 0
Au 0
Se 0
O 0
D 0
Ja 0
M 1
1
09
M 9
09
N 9
Fe 0
M 0
10
N 0
Fe 1
-0
-1
0
-0
r-0
l-0
-0
-0
1
-1
r-1
l-1
-1
-1
1
-1
-0
-1
b-
b-
b-
n-
n-
g-
p-
n-
n-
g-
p-
n-
ay
ov
ay
ov
ar
ar
ar
ct
ec
ct
ec
Ju
Ju
Ja
Fe
Beef Dairy
Source: Bloomberg L.P. and Bernstein analysis.
As with beef supply, dairy supply reflects decisions made as much as two
years earlier, when demand and cost outlooks were very different from where they
are now. In the short term supply is virtually inelastic, such that even small demand
shifts lead to large swings in prices. The steep declines in exports and domestic
demand led to sharp price declines — the January 2009 Class III milk price, at
$9.45 per hundredweight, was at a five-and-a-half-year low — but milk prices have
since clawed their way back. By January, price had climbed back above $14,
though it remains below the peak of $20 that we saw in 2007 and 2008 (see Exhibit
112).
Exhibit 112 Smaller Herds and Improving Demand Point to Firmer Prices Ahead
Dollars per Pound
Dairy Prices
$2.5
$2.0
$1.5
$1.0
$0.5
Jan- Apr- Jul- Oct- Jan- Apr- Jul- Oct- Jan- Apr- Jul- Oct- Jan- Apr- Jul- Oct- Jan- Apr- Jul- Oct- Jan-
05 05 05 05 06 06 06 06 07 07 07 07 08 08 08 08 09 09 09 09 10
Nonfat Dry Milk Cheddar 40lb Butter
In response to plummeting prices, dairy farmers rapidly thinned their herds. Of

note, dairy cow beef tends to be directed to the ground beef market, further
augmenting supply and lowering prices in the current environment, but pointing to
a reversal ahead.
While prices were quite favorable for 2009, they have already strengthened
from 2009 lows, and we expect this to continue through 2010. For the restaurant
operators, who buy on a three- to six-month lag, we expect favorable year-over-
year compares through the first part of 2010 followed by steady increases (see
Exhibit 113).
Exhibit 113 Futures Prices Imply Significant Increases in Late 2010 Followed by a Steadier Rise
YoY Changes in Fluid Milk Prices

60%
40%
YoY Changes
20%
0%
-20%
-40%
-60%
May-08
May-09
May-10
May-11
Mar-08
Mar-09
Mar-10
Mar-11
Jan-08
Jul-08
Sep-08
Nov-08
Jan-09
Jul-09
Sep-09
Nov-09
Jan-10
Jul-10
Sep-10
Nov-10
Jan-11
Jul-11
Sep-11
Fluid Milk Nov-11
Source: Bloomberg L.P. and Bernstein research.
Chicken Prices Look to Be Despite vastly shorter lead times — chicken farmers can respond far more quickly
Favorable Through the Year, to changes in production profitability — chicken prices have also proved volatile.
Though Lower Inventories In 1Q:09, falling demand started to take a toll on prices; year-over-year price
Present Some Upside Risk in changes slipped from +9% in January to -2% in March and fell further through the
Our View year. Looking over a longer term, however, we find that chicken prices have been
essentially flat in real terms (see Exhibit 114).
Exhibit 114 In Real Terms, Chicken Prices Are Virtually Unchanged Since the 1980s, But Price
Changes Have Varied Widely
Inflation Adjusted Chicken Prices

30% 90
80
20%
Cents per Pound

70
Year-Over-Year
60
Change
10%
50
40
0%
30
-10% 20
10
-20% 0
1981 1982 1983 1985 1986 1987 1989 1990 1991 1993 1994 1995 1997 1998 1999 2001 2002 2003 2005 2006 2007 2009
Poultry (chicken)- cents per pound (deflated) YoY Change Poultry (chicken)- cents per pound (deflated)
Source: USDA, Bureau of Economic Analysis and Bernstein analysis.
On the supply side, chicken production declined sharply (year-over-year)

beginning at the end of 2008 and continuing through most of 2009 (see Exhibit 115
and Exhibit 116). These sharply reduced production levels suggest that even at
current lower demand levels, prices could firm up more quickly than in the prior
cycle. On December 1, 2008, Pilgrim's Pride, the largest U.S. chicken producer,
filed for bankruptcy, removing a significant amount of supply capacity from the
market.
Exhibit 115 Chick Placement Declined in 2008 and Most Exhibit 116 …Leading to Sharply Lower Chicken
of 2009… Production
19-City Chick Placements Chicken Production
185,000 3,500,000
180,000
175,000
Certified Pounds (000)
3,250,000
170,000
165,000
160,000 3,000,000
155,000
150,000
2,750,000
145,000
140,000
Jan Jan Feb Mar Apr Apr May Jun Jun Jul Aug Aug Sep Oct Oct Nov Dec Dec
2,500,000
Millions of Birds Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
2007 2008 2009 2010 2007 2008 2009 2010
Source: USDA and Bernstein analysis. Source: USDA and Bernstein analysis.
Shorter lead times allow for less volatility in production and price versus beef,
giving companies greater visibility into chicken costs (see Exhibit 117). For this
reason, contracts tend to be more widely available than for beef. As a result, we
expect chicken costs to remain favorable for restaurants in the near term. Brinker
has already announced that its chicken prices have reset lower.
Exhibit 117 However, Prices Remain Low and Inventories Are Back at Year-Ago-Levels
Suggesting Sufficient Supply…
Chicken Inventory vs. Price
Y/Y Change in Price

15% 50%
Y/Y Change in
10% 30%
Inventory
5% 10%
0%
-5% -10%
-10% -30%
-15% -50%
92
93
94
95
96
97
98
99
00
01
02
03
04
05
06
07
08
09
10
n-
n-
n-
n-
n-
n-
n-
n-
n-
n-
n-
n-
n-
n-
n-
n-
n-
n-
n-
Ja
Ja
Ja
Ja
Ja
Ja
Ja
Ja
Ja
Ja
Ja
Ja
Ja
Ja
Ja
Ja
Ja
Ja
Ja
Inventory Change Price Change
Despite falling throughout 2009, poultry prices are expected to continue

remaining favorable through the year, with prices expected to fall materially in late
2010 (see Exhibit 118).
Exhibit 118 Futures Imply Favorable Chicken Trends from Here

40%
30%
YoY Changes
20%
10%
0%
-10%
-20%
-30%
-40%
May-09
May-10
Mar-09
Mar-10
Mar-11
Jan-09
Feb-09
Apr-09
Jun-09
Jul-09
Aug-09
Sep-09
Oct-09
Nov-09
Dec-09
Jan-10
Feb-10
Apr-10
Jun-10
Jul-10
Aug-10
Sep-10
Oct-10
Nov-10
Dec-10
Jan-11
Feb-11
Poultry
Seafood Prices Are Generally As with agricultural commodities, demand destruction has placed downward
Tied to Demand Swings; We pressure on seafood prices (see Exhibit 119). Lobster, a highly discretionary luxury,
See Little Risk of Higher Prices is perhaps the clearest example. Cruise ships and casinos — the primary buyers for
Absent Stronger Demand much of the world's processed, frozen lobster — have pulled back sharply on their
orders as visitor traffic has fallen. Prices fell precipitously in the fall of 2008 and
remained low in 2009; in Florida, fishing boats that sold lobster at $7 a pound just a
few years ago were as recently as November getting only $3 per pound. Retail
prices in the region are also down to $6-$7 a pound, 35% lower than a year ago.
Going forward, we expect the reverse to be true, as firming demand drives prices
higher.
Exhibit 119 Demand Destruction Weighed Heavily on Lobster Prices
Maine Lobster Prices and Landings
80 $5.00
Millions of Pounds
Price per Pound

60 $4.00
$3.00
40
$2.00
20 $1.00
0 $0.00
2000 2001 2002 2003 2004 2005 2006 2007 2008
Millions of Pounds Price per Pound
Source: Department of Marine Resources and Bernstein analysis.
Despite a boom in demand from growing affluence in emerging economies and

increased health awareness in industrialized nations, fish prices have declined in
real terms. Improvement in farming techniques have contributed to a nearly 80%
decline in the real price of shrimp over the past 30 years (see Exhibit 120). But over
shorter periods of time — e.g., the late 1980s, early 2000s — prices can go higher;
as such, we are likely to see prices rise again in the near term.
Exhibit 120 In Real Terms, Shrimp Prices Have Grown Less Volatile as Aquaculture Has
Improved Supply Visibility; Prices Remain Down Year-on-Year But Should Rise With
Demand
Year-on-Year Change in Real Shrimp Prices

100%
75%
50%
25%
0%
-25%
-50% -32%
Feb-82
Aug-82
Feb-83
Aug-83
Feb-84
Aug-84
Feb-85
Aug-85
Feb-86
Aug-86
Feb-87
Aug-87
Feb-88
Aug-88
Feb-89
Aug-89
Feb-90
Aug-90
Feb-91
Aug-91
Feb-92
Aug-92
Feb-93
Aug-93
Feb-94
Aug-94
Feb-95
Aug-95
Feb-96
Aug-96
Feb-97
Aug-97
Feb-98
Aug-98
Feb-99
Aug-99
Feb-00
Aug-00
Feb-01
Aug-01
Feb-02
Aug-02
Feb-03
Aug-03
Feb-04
Aug-04
Feb-05
Aug-05
Feb-06
Aug-06
Feb-07
Aug-07
Feb-08
Aug-08
Feb-09
Aug-09
Feb-10
Year-on-Year Change Real Global Aggregate, Shrimp, Frozen Shell-On Head
Source: IMF and Bernstein analysis.
We Expect Wheat Price Wheat prices' near doubling between 2006 and 2008 also hit restaurant P&Ls.
Increases to Return in 2H, But Wholesale flour prices peaked in the three months ended February 2008, growing
Low Price-to-Volume Ratios 158% over the prior year. But correction was swift and severe; by mid-2009 flour
Limit the Impact of Grain Price prices had fallen back nearly to 2006 levels and remain 20% below year-ago levels
Fluctuations. (see Exhibit 121, Exhibit 122 and Exhibit 123).
Exhibit 121 Wheat Prices Increased 250% Between Exhibit 122 Flour Prices Remain Sharply Lower
2006 and 2008 Before Correcting Sharply
(But Not Fully)
Global Aggregate Wheat Price 30 Wholesale Flour Price 120%
100%
140% $500 25
120% $450 80%
100% $400
20 60%
Dollars per CWT
Y/Y Change %
80% $350
Price ($/MT)
60% $300 40%
15
40% $250 20%
20% $200
0% $150 10 0%
-20% $100 -20%

-40% $50 5
-60% $0 -40%
Oct-02
Oct-07
Jan-99
Jun-99
Nov-99
Apr-00
Sep-00
Feb-01
Jul-01
Dec-01
May-02
Mar-03
Aug-03
Jan-04
Jun-04
Nov-04
Apr-05
Sep-05
Feb-06
Jul-06
Dec-06
May-07
Mar-08
Aug-08
Jan-09
Jun-09
Nov-09
0 -60%
1Q99 4Q99 3Q00 2Q01 1Q02 4Q02 3Q03 2Q04 1Q05 4Q05 3Q06 2Q07 1Q08 4Q08
Global Aggregate, Wheat, No.1 Hard Red Winter Y/Y Growth Global Aggregate, Wheat, No.1 Hard Red Winter Wholesale price of bakery flour Y/Y change in bakery flour
Source: International Monetary Fund, Global Insight and Bernstein

analysis. Source: USDA Wheat Yearbook and Bernstein analysis.
Exhibit 123 Wheat Futures Imply Modest Spot Market Inflation in 1H, But More Material Increases
in 2H
20%
YoY Changes
0%
-20%
-40%
-60%
May-09
May-10
Mar-09
Mar-10
Mar-11
Jan-09
Feb-09
Apr-09
Jun-09
Jul-09
Aug-09
Sep-09
Oct-09
Nov-09
Dec-09
Jan-10
Feb-10
Apr-10
Jun-10
Jul-10
Aug-10
Sep-10
Oct-10
Nov-10
Dec-10
Jan-11
Feb-11
Wheat
Coffee Is the Largest For Starbucks, coffee is the single most important input. As with other
Commodity Input for commodities, in 2009, coffee futures were pummeled by the combination of
Starbucks; While Futures Point declining demand and a stronger dollar (see Exhibit 124). But recovery came
to Higher Prices Ahead, somewhat quicker than for other commodities, bolstered by production declines
Starbucks Purchases from cyclically slower planting period, draught conditions, and reduced investments
Selectively and for Longer by farmers in fertilizer and pruning (see Exhibit 125).
Term
Exhibit 124 Like Other Commodities, Coffee Prices Exhibit 125 …And the Longer Term History Is
Declined Through Most of 2009 But Have Characterized by Two- to Three-Year
Since Started Rising Again… Cycles, Suggesting Prices Will Continue
Trending Up from Here
Coffee Prices Coffee Prices
80% 250%
60%
200%
40%
150%
20%
100%
0%
50%
-20%
0%
-40%
-60% -50%
Jan-06
Mar-06
May-06
Jul-06
Sep-06
Nov-06
Jan-07
Mar-07
May-07
Jul-07
Sep-07
Nov-07
Jan-08
Mar-08
May-08
Jul-08
Sep-08
Nov-08
Jan-09
Mar-09
May-09
Jul-09
Sep-09
Nov-09
Jan-10
-100%
1981 1982 1984 1985 1987 1988 1990 1992 1993 1995 1996 1998 2000 2001 2003 2004 2006 2007 2009
Y/Y Growth Global Aggregate, Coffee, Other Mild Arabicas Y/Y Growth Global Aggregate, Coffee, Other Mild Arabicas
Y/Y Growth Global Aggregate, Coffee, Robusta, International Y/Y Growth Global Aggregate, Coffee, Robusta, International
Source: IMF and Bernstein analysis. Source: IMF and Bernstein analysis.
As a result, futures price project a steady increase in coffee prices ahead,

though we note that Starbucks buys selectively from growers with which is has
longer-term relationships, improving its visibility and limiting its exposure to rising
prices this year (see Exhibit 126).
Exhibit 126 Futures Prices Imply Rises in Coffee Prices, But Starbucks Buys Selectively and
With Longer Contracts
20%
YoY Changes
0%
-20%
-40%
-60%
May-09
May-10
Mar-09
Mar-10
Mar-11
Jan-09
Feb-09
Apr-09
Jun-09
Jul-09
Aug-09
Sep-09
Oct-09
Nov-09
Dec-09
Jan-10
Feb-10
Apr-10
Jun-10
Jul-10
Aug-10
Sep-10
Oct-10
Nov-10
Dec-10
Jan-11
Feb-11
Coffee
Of course over the long term, prices have repeatedly converged on a downward
sloping trend — reflecting the agricultural industry's ability to consistently extract
productivity gains (see Exhibit 127 and Exhibit 128). In the U.S alone, between
1950 and 2000, annual per cow milk production more than tripled, from 5,314
pounds to 18,201 pounds, while over the same time period, corn yields rose from
39 bushels to 153 bushels per acre. Even farmers grew more productive, producing
12 times as much farm output per hour worked as in 1950.
Exhibit 127 Over the Past Six Decades, Productivity Increases Have Driven Large Increased in
Output
Indexes of Farm Outputs, Inputs and Productivity

3.0
2.5
Index (1948=1)
2.0
1.5
1.0
0.5
0.0
1948 1951 1954 1957 1960 1963 1966 1969 1972 1975 1978 1981 1984 1987 1990 1993 1996 1999 2002 2005 2008
Total Farm Output Total Farm Input Total Factor Productivity (TFP)
Source: USDA.
Exhibit 128 But Agricultural Science Takes Time to Catch Up With Secular Shifts in Demand,
Supporting Above Trend Prices for Years
$30 Real Crop Prices

$25
Price per Bushel
$20
$15
$10
$5
$0
1929 1933 1937 1941 1945 1949 1953 1957 1961 1965 1969 1973 1977 1981 1985 1989 1993 1997 2001 2005
Soybeans — Real Wheat All — Real Corn For Grain — Real
Moderate Inflation Is a Good While food margins have benefitted substanitally from the decline in commodity
Thing for Restaurants Though prices in 2009, top line has been hard hit by the same phenonmenon. Deflation is
We See More Margin Volatility passed through to consumers in the form of widespread discounting and couponing,
Ahead with particular damand to quick service, which tends to be a closer substitute to
food-away-from-home (FAH).
Likewise, restaurant prices tend to be far more stable than retail prices —
FAFH's higher value-added components and higher menu costs — causing the
relative value proposition to ebb and flow with commodity costs (see Exhibit 129).
When commodity costs are low, food-at-home becomes relatively more attractive.
With consumers earning less, the opportunity cost around shopping for and
preparing food at home also declines.
Our expectation for rising commodity prices, as well as the possibility of
economic recovery, suggests the relative value proposition will improve for
restaurants.
Exhibit 129 Food-Away-from-Home Prices Are Stickier Than Food-at-Home Prices; Foodservice
Operators Absorb More of the Gains and Losses from Changing Commodity Prices
CPI — Food-at-Home vs. Food-Away-from-Home
CPI — At-Home Y/Y

CPI — Away-from-
Home Y/Y Change
6% 10%
5% 8%
6%
Change
4%
4%
3% 2%
2% 0%
1% -2%
0% -4%
Jan-04
Apr-04
Jul-04
Oct-04
Jan-05
Apr-05
Jul-05
Oct-05
Jan-06
Apr-06
Jul-06
Oct-06
Jan-07
Apr-07
Jul-07
Oct-07
Jan-08
Apr-08
Jul-08
Oct-08
Jan-09
Apr-09
Jul-09
Oct-09
Jan-10
CPI — Food-Away-From-Home CPI —- Food-at-Home
Source: Bureau of Labor Statistics and Bernstein analysis.
The corrollary is that pricing and top-line growth are more moderate even
when commodity prices spike. The spread between commodity cost and end price
tends to widen when prices are falling and narrow when prices are rising (see
Exhibit 130 and Exhibit 131).
Exhibit 130 Restaurants Tend to Raise Prices Steadily, Rather Than in Response to Commodity
Price Swings, Creating Gross Margin Swings
Food-Away-from-Home CPI vs. Crude Foodstuffs PPI

40%
30%
PPI — YOY Change
20%
10%
0%
-10%
-20%
-30%
1981 1982 1983 1985 1986 1987 1989 1990 1991 1993 1994 1995 1997 1998 1999 2001 2002 2003 2005 2006 2007 2009
PPI — Crude Foodstuffs CPI — Food-Away-from-Home

Exhibit 131 There Is Generally a 1-2 Quarter Lag Between Shifts in Spot Markets and Changes in
Menu Prices
Changes in Price Indices
2003 2004 2005 2006 2007 2008 2009 2010E 2011E 2012E
Palm Oil 17% -1% -4% 30% 53% -3% -23% 5% 6% 5%
Wheat 10% -2% 6% 18% 47% 15% -20% -13% 1% 2%
Milk 3% 29% -6% -15% 48% -5% -29% 10% 12% 3%
Cheese 8% 41% 15% -11% 57% 17% -50% -5% 11% 5%
Beef 26% 0% 3% -2% 8% 0% -3% 6% 4% 2%
Chicken 12% 20% -4% -9% 19% 4% 1% 0% 2% 1%
Average 13% 14% 1% 2% 38% 5% -21% 1% 6% 3%
PPI - Fin. Cons. Foods -4% 8% 6% 5% 10% 10% -11% -10% 3% 5%

CPI - FAFH 2.2% 2.7% 3.2% 3.1% 3.4% 4.2% 4.5% 1.5% 3.0% 3.0%
Note: Grains and oilseeds data are calculated using the average of consecutive marketing years (ending May).
Source: Food and Agricultural Policy Research Institute, Bureau of Labor Statistics and Bernstein analysis.
In light of this expectation for volatile inputs, we think margins are likely to
swing more widely in the near term. As commodity prices have declined in the past
six months, the gap between growth in input costs and growth in end prices has
gone from significantly positive — implying margin pressure — to sharply
negative — implying margin support (see Exhibit 132). From here, we expect year-
over-year benefits through 1H:10 to turn to headwinds in 2H:10.
Exhibit 132 The Prices Restaurants Set Are Far More Stable Than the Input Costs They Pay,
Helping Margins in 2009 and Early 2010, But Adding Pressure in 2H10
Food-Away-from-Home CPI vs. Crude Foodstuffs PPI

6% 0.4
0.3
CPI YOY Change
PPI YOY Change

5%
4% 0.2
0.1
3%
0
2% -0.1
1% -0.2
0% -0.3
May-
May-
May-
May-
May-
May-
Feb-04
Aug-04
Nov-04
Feb-05
Aug-05
Nov-05
Feb-06
Aug-06
Nov-06
Feb-07
Aug-07
Nov-07
Feb-08
Aug-08
Nov-08
Feb-09
Aug-09
Nov-09
Feb-10
CPI — Food-Away-from-Home PPI — Crude Foodstuffs
Note: Crude foodstuffs are defined as "basic agricultural products that will undergo some processing prior to becoming completed food
products, as well agricultural products consumed directly by the agricultural sector. Examples include fresh fruit that will be canned or
raw corn consumed by livestock as animal feed. Other examples would be cattle, hogs, or chickens intended for slaughter, or raw cane
sugar that will be refined."
On net, though, the pressure on the top-line comps has generally offset the
benefit of lower commodities as fixed costs deleverage on the lower sales.
While price pass-through is not 100%, an analysis of what the industry looks
like under different inflation scenarios is illustrative. At this pass-through rate, we
estimate that the difference between 2% of inflation and 2% of deflation is upwards
of 80 bp of net margin (see Exhibit 133).
Exhibit 133 At 100% Price Pass-Through, Moderate Inflation Generates Higher Profit Dollars and
Higher Profit Margin
Industry Margins with 100% Price Pass Through
Base Case Deflation (-2.0%) Inflation (+2.0%)
Sales $437,798 $435,049 $440,302
Cost of Goods (E) $140,095 32.0% $139,216 32.0% $140,897 32.0%
Labor $142,357 32.5% $142,357 32.7% $142,357 32.3%
Equipment $21,462 4.9% $21,462 4.9% $21,462 4.9%
Services $23,704 5.4% $23,704 5.4% $23,704 5.4%
Occupancy $34,018 7.8% $34,018 7.8% $34,018 7.7%
Utilities $13,893 3.2% $13,893 3.2% $13,893 3.2%
Interest, Sales Taxes, and Other $40,174 9.2% $40,174 9.2% $40,174 9.1%
Net Profit (E) $22,095 5.0% $20,225 4.6% $23,797 5.4%
Note: Assumes 1% move in pricing drives a 0.7% move in traffic in the opposite direction.
Source: U.S. Bureau of the Census and Bernstein analysis.
Menu Differences and Based on futures prices and management commentary we are forecasting, on
Contracting Dictate Company- average, food & paper expenses as a percentage of revenue will expand modestly in
Specific Risk 2010 (12 bp), as many commodity contracts still are in place (see Exhibit 134).
Commodity benefits should still exist in the beginning half of the year, but we
expect spot prices in most commodities to trend up throughout the year. The lagged
effect of contracts leads us to expect modest decreases in food & paper expenses in
the first half of the year, and higher costs in the back half of the year.
Exhibit 134 Going Forward, Growth in Food Costs Should Be More Muted Than in 07-08
∆ in U.S. Food & Paper
Expense as a % of Revenues 2006 2007 2008 2009 2010E
BKC* 33 bp 715 bp -310 bp 80 bp 40 bp
DRI -295 bp 186 bp 519 bp -513 bp 75 bp
EAT -202 bp 242 bp 232 bp -152 bp 5 bp
MCD -160 bp -106 bp -29 bp -60 bp -49 bp
YUM -152 bp 90 bp 112 bp -165 bp -10 bp
Average -155 bp 225 bp 105 bp -162 bp 12 bp
Note: Burger King, Starbucks and Yum! figures are for the U.S. only. McDonald's figures represent the entire system. In calendar years.
Source: Corporate reports and Bernstein estimates and analysis.
Unsurprisingly, beef is the largest expense for the Burger Restaurants

(approaching 20% at Burger King and JACK) and Bar & Grill specialist, Brinker.
For Yum! the main commodity is chicken, for Darden its seafood and for Starbucks
coffee (see Exhibit 135). While McDonald's is grouped with the other burger
players, its broader menu offering dictates that beef accounts for ~15% of its
grocery basket.
Interestingly, for Darden, whose biggest concept is the pasta-centric Olive
Garden Italian restaurant brand, pasta and bread account for only 8% of total food
spend, behind seafood (the specialty at Red Lobster) and beef (the specialty at
Longhorn Steakhouse) owing to wheat's low price to volume ratio.
Exhibit 135 Beef Is the Largest Commodity for the Hamburger Restaurants But Is a Major
Contributor for All But Starbucks
BKC YUM DRI EAT SBUX JACK
Beef 19% 15% 14% 15% 20%
Cheese 5% 15% 5%
Chicken 11% 18% 6% 15% 11%
Coffee 36%
Dairy 6% 5% 11% 10% 18% 6%
Cocoa 3%
Other 28% 20% 18% 43% 42% 40%
Pork 5% 5% 5% 5%
Potatoes 8% 3% 8%
Produce 5% 7% 13% 10% 5%
Seafood 30% 2%
Soft Drinks 13%
Wheat 12% 8%
Total 100% 100% 100% 100% 100% 100%
Note: Estimates in bold, JACK is not covered by Bernstein.

Source: Corporate reports and Bernstein estimates and analysis.
Exhibit 136 Companies Generally Expect Commodity Benefits to Continue for Several Quarters,
Though the Length Depends on the Nature of Contracting
Commodities Chicken Beef Dairy
Weighted avg. food Index decreased
Company restaurant margins 5% YoY, largely driven by 21% decline
BKC pressured by food cost inflation in beef costs YoY. Beef represents
19% of COGS
75% of food commodity costs for the
DRI remainder of the FY have been locked
in at favorable rates
Minor sequential disinflation through Significant favorability for CY10

EAT FY:10. 80% of commodities under (annual price resets; new contract for a
contract thru 06/10, 70% thru 12/10 portion of supply)
U.S.: Grocery bill (commodity costs)

fell 4% in Q, Europe: Local currency
MCD grocery bill (commodity costs) fell 3%
in Q
Commodities — expect the balance of
Significant improvement in U.S. COGS
the year to be flat YoY, with
SBUX driven by lower food costs and
unfavorable dairy costs offset by
elimination of dairy waste
favorable coffee costs
Rest. margins up 100 bp YoY due to

lower commodity costs. Commodity
tailwinds in 4Q — net both brands
WEN should see 6% to 8% commodity cost
reduction. Modest commodity
increases expected in 2010
YRI — expect commodity deflation in

China — margins returned to 2007 Benefited from very low cheese cost
4Q as contracts renewed. FY:10
YUM limited visibility, will depend on two big
levels (after initial chicken commodity so far this year (especially in 2Q and
cost inflation in 3Q:07) 3Q). See that ticking up a bit in 4Q
swing factors (cheese and beef)
Source: Corporate reports and Bernstein analysis.
McDonald's McDonald's does not disclose details of its commodity basket, but beef accounts for
15% of the basket, and chicken and dairy are next in importance (see Exhibit 137).
There was no proxy for future produce or "other" prices, so they were left out of
our estimated indices. By lagging each component by 0-6 months, to adjust for the
hedging contracts, we created a regression that correlates well the estimated
commodity index against McDonald's' reported food & paper expense growth, with
an R-square of 47% (see Exhibit 138).
Exhibit 137 McDonald's Estimated Commodity Index Exhibit 138 McDonald's's Estimated Commodity Index
Consists of Mostly Beef, Chicken, and Correlates Well With McDonald's's
Dairy, and We Adjust for Hedging by Reported Food & Paper Expense Growth
Lagging Commodity Prices by 0-6 Months (R-Square: 47%)
McDonald's Commodity Basket
MCD
Estimated/ Index Time Lag
Input Reported % Weight (Months)
Beef 15% 25% 3 20% y = 0.5746x + 0.0133
Y/Y Change in Reported Food & Paper

Chicken 15% 25% 3 R2 = 0.4746
Pork 5% 8% 6 15%
Dairy/Oil 15% 25% 0
Pasta/Bread 10% 17% 3
10%
Produce 10% na
Other 30% na
Expense
5%
Total 100% 100%
0%
-5%
-10%
-15%
-20% -10% 0% 10% 20%
Y/Y Change in Commodity Cost (Lagged)
Note: Estimates in bold.

Source: Bloomberg L.P., corporate reports and Bernstein estimates Source: Bloomberg L.P., corporate reports and Bernstein estimates
and analysis. and analysis.
Based on futures prices for the main components in our estimate of

McDonald's commodity basket, our regression would forecast that McDonald's
food & paper expense should rise in the low to mid-single digits in 2010 (see
Exhibit 139). However, McDonald's has indicated that it expects commodities to be
just flat this year. Chicken futures indicate prices falling as much as 30% in 4Q:10,
but the higher dairy prices (+43% in 2Q:10) offset some of that deflation. Beef
futures indicate price inflation in the mid- to high single digits, and our sensitivity
analysis shows a higher sensitivity to beef prices than dairy prices, as it is likely the
largest component of McDonald's's basket (see Exhibit 140). However, with
McDonald's's sophisticated supply chain management, a 10% increase in both beef
and dairy prices would increase McDonald's's food and paper costs by just 3.0%.
Exhibit 139 Our McDonald's Commodity Model Projects Food & Paper Expense Growth in the
Low to Mid-Single Digits in 2010
McDonald's: Food & Paper Expense
20%
15%
10%
5%
0%
-5%
-10%
2Q 0E
3Q 0E
4Q 0E
1Q 0E
2Q 1E
1E
2Q 4
3Q 4
4Q 4
1Q 4
2Q 5
3Q 5
4Q 5
1Q 5
2Q 6
3Q 6
4Q 6
1Q 6
2Q 7
3Q 7
4Q 7
1Q 7
2Q 8
3Q 8
4Q 8
1Q 8
2Q 9
3Q 9
4Q 9
1Q 9
:0
:0
:0
:0
:0
:0
:0
:0
:0
:0
:0
:0
:0
:0
:0
:0
:0
:0
:0
:0
:0
:0
:0
:0
:1
:1
:1
:1
:1
:1
1Q
Reported Y/Y Change Projected Y/Y Change
Source: Bloomberg L.P., corporate reports and Bernstein estimates and analysis.
Exhibit 140 McDonald's Sensitivity: Change in Food & Paper Expense; a 10% Increase in Both
Beef and Dairy Prices Would Increase McDonald's's Food & Paper Costs by 3.0%
Beef
-20% -10% 0% 10% 20%
-40% -9.0% -7.5% -6.0% -4.5% -3.0%
-30% -7.5% -6.0% -4.5% -3.0% -1.5%
-20% -6.0% -4.5% -3.0% -1.5% 0.0%
-10% -4.5% -3.0% -1.5% 0.0% 1.5%
Dairy 0% -3.0% -1.5% 0.0% 1.5% 3.0%
10% -1.5% 0.0% 1.5% 3.0% 4.5%
20% 0.0% 1.5% 3.0% 4.5% 6.0%
30% 1.5% 3.0% 4.5% 6.0% 7.5%
40% 3.0% 4.5% 6.0% 7.5% 9.0%
Burger King With its narrower menu, Burger King's commodity basket is somewhat more
indexed to beef than McDonald's is. Beef, chicken, and dairy are more than three-
quarters of its total food cost (see Exhibit 141). By lagging each component by
three to nine months, to adjust for the hedging contracts, we created a regression
that correlates well against Burger King's reported U.S. food, paper, and product
expense growth, with an R-square of 85% (see Exhibit 142).
Exhibit 141 Burger King's Estimated Commodity Index Exhibit 142 Burger King's Estimated Commodity Index
Consists of Mostly Beef, Chicken, and Correlates Well With Burger King's
Dairy, and We Adjust for Hedging by Reported US Food, Paper, & Product
Lagging Commodity Prices by 3-9 Months Expense Growth (R-Square: 85%)
Burger King Commodity Basket
Burger King
y = 1.002x + 0.0382
2
Beef 19% 32% 3 30% R = 0.8457
YoY Change in Reported Food, Paper,
Chicken 11% 19% 3

Pork 4% 7% 6 25%
Dairy/Oil 15% 25% 9
20%
& Product Expense
Produce 10% n/a 15%

Other 31% n/a
Total 100% 100% 10%
5%
0%
-5%
-10%
-15%
-20% -10% 0% 10% 20% 30%
YoY Change in Commodity Cost (Lagged)

Based on futures prices for the main components in our estimate of Burger
King's commodity basket, we forecast that Burger King U.S. food, paper and
product expense growth should decline in the single digits in the first half of the
year, but the benefit will be offset by the increases in the latter half of the year (see
Exhibit 143). Similar to McDonald's, the sharp declines in chicken prices will
likely be modestly offset by the higher dairy prices, and Burger King's large
exposure to beef's price inflation may bring its food costs up. Our sensitivity
analysis indicates a 5.8% increase in food costs if beef and dairy prices were to
each rise 10% (see Exhibit 144).
Exhibit 143 Our Burger King Commodity Model Projects US Food, Paper and Product Expense
Growth Will Accelerate from Negative-Single Digits to High-Single Digits in 2010
Burger King US: Food, Paper and Product Costs
30%
20%
10%
0%
-10%
-20%
0E
0E
0E
0E
1E
1E
1E
1E
6
9
:0
:0
:0
:0
:0
:0
:0
:0
:0
:0
:0
:0
:0
:0
:1
:1
:1
:1
:1
:1
:1
:1
3Q
4Q
1Q
2Q
3Q
4Q
1Q
2Q
3Q
4Q
1Q
2Q
3Q
4Q
1Q
2Q
3Q
4Q
1Q
2Q
3Q
4Q
Reported Y/Y Change Projected Y/Y Change Calendar Quarter
Exhibit 144 Burger King Sensitivity: Change in U.S. Food, Paper and Product Costs; a 10%
Increase in Both Beef and Dairy Prices Would Increase Burger King's U.S. Food &
Paper Costs by 5.8%
Beef
-20% -10% 0% 10% 20%
-40% -16.6% -13.4% -10.2% -6.9% -3.7%
-30% -14.1% -10.8% -7.6% -4.4% -1.2%
-20% -11.5% -8.3% -5.1% -1.9% 1.4%
-10% -9.0% -5.8% -2.5% 0.7% 3.9%
0% -6.4% -3.2% 0.0% 3.2% 6.4%
Dairy
10% -3.9% -0.7% 2.5% 5.8% 9.0%

20% -1.4% 1.9% 5.1% 8.3% 11.5%
30% 1.2% 4.4% 7.6% 10.8% 14.1%
40% 3.7% 6.9% 10.2% 13.4% 16.6%
Wendy's/Arby's Our estimated commodity basket for Wendy's is in line with that of other fast food
hamburger restaurants. The majority of Wendy's's costs should come from beef,
chicken, and dairy (Exhibit 145).
Exhibit 145 Wendy's Estimated Commodity Index Consists of Mostly Beef, Chicken and Dairy,
and We Adjust for Hedging by Lagging Commodity Prices by Six to Nine Months
Wendy's Arby's Commodity Basket

Beef 20% 31% 9
Chicken 15% 23% 6
Pork 5% 8% 9
Dairy/Oil 15% 23% 6
Produce 10% na
Other 25% na
Total 100% 100%

Wendy's decision to report aggregated restaurant expenses confounds any

regression of cost changes against margins; changes in margins reflect not only
commodity swings but also changes in occupancy and labor costs as well as sales
leverage/deleverage. As a result, we cannot reliably estimate an equation. We
therefore rely on a sensitivity analysis to provide a range of possible outcomes
under various scenarios for beef and dairy prices (see Exhibit 146).
Exhibit 146 Wendy's Sensitivity: Change in Cost of Sales; a 10% Increase in Both Beef and Dairy
Prices Would Increase Wendy's Cost of Sales by 3.5%
Beef
-20% -10% 0% 10% 20%
-40% -10.0% -8.0% -6.0% -4.0% -2.0%
-30% -8.5% -6.5% -4.5% -2.5% -0.5%
-20% -7.0% -5.0% -3.0% -1.0% 1.0%
-10% -5.5% -3.5% -1.5% 0.5% 2.5%
0% -4.0% -2.0% 0.0% 2.0% 4.0%
Dairy
10% -2.5% -0.5% 1.5% 3.5% 5.5%

20% -1.0% 1.0% 3.0% 5.0% 7.0%
30% 0.5% 2.5% 4.5% 6.5% 8.5%
40% 2.0% 4.0% 6.0% 8.0% 10.0%
Yum! Brands Yum!'s commodity basket is skewed more towards chicken than the other QSRs
due to KFC (see Exhibit 147). Besides poultry, dairy and beef also are large
components of Yum!'s food costs. After lagging each cost by 0-12 months, we
created a regression that correlates our estimated commodity index very well with
Yum!'s food and paper expense, with an R-square of 65% (see Exhibit 148).
Exhibit 147 Yum!'s Estimated Commodity Index Exhibit 148 Yum!'s Estimated Commodity Index
Consists of Mostly Beef, Chicken and Correlates Well With Yum!'s Reported Food
Dairy, and We Adjust for Hedging by & Paper Expense Growth (R-Square: 65%)
Lagging Commodity Prices by 0-12 Months
Yum! Brands Commodity Basket
YUM
Input Reported % Weight (Months) y = 0.5714x - 0.072
Beef 15% 22% 6 15% R2 = 0.6512
Y/Y Change in Reported Food & Paper

Chicken 18% 26% 0
Pork 5% 7% 12 10%
Dairy/Oil 18% 26% 3
5%
Produce 15% na 0%
Other 17% na
Expense
Total 100% 100% -5%
-10%
-15%
-20%
-25%
-30%
-40% -20% 0% 20% 40%

Source Bloomberg L.P., corporate reports and Bernstein estimates and Source: Bloomberg L.P., corporate reports and Bernstein estimates
analysis. and analysis.
Commodity futures prices indicate that Yum!'s food and paper expense should
fall in the low single digits in 2010. After what we estimate to be a ~15% decline in
the first quarter, the benefits of lower commodity costs should lessen throughout
the year, averaging to a 7-8% decline in 2010, according to our regression (see
Exhibit 149). According to our sensitivity analysis, Yum!'s food and paper costs
would increase 3.3% with 10% higher beef and dairy costs (see Exhibit 150).
Exhibit 149 Our Yum! Commodity Model Projects Food & Paper Expense Will Decline in the Low
Single Digits in 2010
Yum!: Food and Paper Expense
15%
10%
5%
0%
-5%
-10%
-15%
-20%
-25%
1Q:04 3Q:04 1Q:05 3Q:05 1Q:06 3Q:06 1Q:07 3Q:07 1Q:08 3Q:08 1Q:09 3Q:09 1Q:10E 3Q:10E 1Q:11E
Reported Y/Y Change Projected Y/Y Change
Exhibit 150 Yum! Sensitivity: Change in Food & Paper Costs; a 10% Increase in Both Beef and
Dairy Prices Would Increase Yum!'s Food & Paper Costs by 3.3%
Beef
-20% -10% 0% 10% 20%
-40% -10.2% -8.7% -7.2% -5.7% -4.2%
-30% -8.4% -6.9% -5.4% -3.9% -2.4%
-20% -6.6% -5.1% -3.6% -2.1% -0.6%
-10% -4.8% -3.3% -1.8% -0.3% 1.2%
Dairy 0% -3.0% -1.5% 0.0% 1.5% 3.0%
10% -1.2% 0.3% 1.8% 3.3% 4.8%
20% 0.6% 2.1% 3.6% 5.1% 6.6%
30% 2.4% 3.9% 5.4% 6.9% 8.4%
40% 4.2% 5.7% 7.2% 8.7% 10.2%
Darden Restaurants As mentioned above, although Darden's concept, Olive Garden, is centered around
pasta and bread, Darden's largest food expense is seafood (30%), due to Red
Lobster, followed by beef due to LongHorn Steakhouse (14%) (see Exhibit 151).
After lagging dairy and wheat by six months each, our estimated commodity index
for Darden correlates well (R-square: 62%) with the company's food and beverage
expense (see Exhibit 152).
Exhibit 151 Darden's Estimated Commodity Index Exhibit 152 Darden's Estimated Commodity Index
Consists of Mostly Seafood and Beef, and Correlates Well With Darden's Reported
We Adjust for Hedging by Lagging Food & Beverage Expense Growth (R-
Commodity Prices by 0-6 Months Square: 62%)
Darden Commodity Basket
DRI
Input Reported % Weight (Months) y = 1.178x + 0.0301
Seafood (Shrimp, Lobster 30% 43% 0 35% R2 = 0.6156
Beef 14% 20% 0
Y/Y Change in Reported Food and
30%
Chicken 6% 9% 0
Pork 0% 0% 0 25%
Dairy/Oil 11% 16% 6
Beverage Expense
20%
Produce 13% na 15%
Non-Perishables/Other 18% na
10%
Total 100% 100%
5%
0%
-5%
-10%
-15%
-20% -10% 0% 10% 20%

Using futures prices with Darden's estimated commodity index, our regression
projects an 8% increase in food costs in the latter half of calendar 2010 for Darden.
The cost deflation that Darden saw in 2009 should still remain in the first quarter
but the benefits should lessen by mid-2010 (see Exhibit 153). Meanwhile, a 10%
increase in both beef and dairy prices could mean a 2.5% increase in food and
beverage expense (Exhibit 154).
Exhibit 153 Our Darden Commodity Model Projects Food & Beverage Expense Growth in
the Mid-Single Digits in 2010
Darden: Food and Beverage Expense
40%
30%
20%
10%
0%
-10%
-20%
2Q 0E
3Q 0E
4Q 0E
1Q 0E
2Q 1E
1E
2Q 4
3Q 4
4Q 4
1Q 4
2Q 5
3Q 5
4Q 5
1Q 5
2Q 6
3Q 6
4Q 6
1Q 6
2Q 7
3Q 7
4Q 7
1Q 7
2Q 8
3Q 8
8
1Q 8
2Q 9
3Q 9
4Q 9
1Q 09
:0
:0
:0
:0
:0
:0
:0
:0
:0
:0
:0
:0
:0
:0
:0
:0
:0
:0
:0
:0
:0
:0
:0
:
:1
:1
:1
:1
:1
:1
1Q
4Q
Exhibit 154 Darden Sensitivity: Change in Food & Beverage Costs; a 10% Increase in Both Beef
and Dairy Prices Would Increase Darden's Food & Beverage Costs by 2.5%
Beef
-20% -10% 0% 10% 20%
-40% -7.2% -5.8% -4.4% -3.0% -1.6%
-30% -6.1% -4.7% -3.3% -1.9% -0.5%
-20% -5.0% -3.6% -2.2% -0.8% 0.6%
-10% -3.9% -2.5% -1.1% 0.3% 1.7%
0% -2.8% -1.4% 0.0% 1.4% 2.8%
Dairy
10% -1.7% -0.3% 1.1% 2.5% 3.9%

20% -0.6% 0.8% 2.2% 3.6% 5.0%
30% 0.5% 1.9% 3.3% 4.7% 6.1%
40% 1.6% 3.0% 4.4% 5.8% 7.2%
Brinker International Without the seafood component that Darden has with the Red Lobster concept,
Brinker's commodity basket looks a lot more like that of a hamburger QSR. The
majority of costs come from proteins like beef and chicken, followed by dairy and
bread products. The best regression was created by lagging only dairy by three
months, while the other commodities fit with either no lag or a six-month lag (see
Exhibit 155). Brinker's food costs were the most difficult to predict with an R-
square of 0.34 when regressed against Brinker's actual cost of sales growth (see
Exhibit 156).
Exhibit 155 Brinker's Estimated Commodity Index Exhibit 156 Brinker's Estimated Commodity Index
Consists of Mostly Beef and Chicken, and Correlates Well With Brinker's Reported
We Adjust for Hedging by Lagging COGS Growth (R-square: 34%)
Commodity Prices by 0-6 Months
Brinker Commodity Basket

Brinker y = 1.0339x - 0.0149
Input Reported % Weight (Months) R2 = 0.339
Seafood (Shrimp, Lobster, Crab) 2% 4% 0
Beef 15% 26% 6 30%
Y/Y Change in Reported Cost of Sales

Chicken 15% 26% 6
Pork 5% 9% 0
Dairy/Oil 10% 18% 3 20%
Produce 10% na
10%
Other 33% na
Total 100% 100%
0%
-10%
-20%
-30%
-20% -10% 0% 10% 20%

Based on our regression, futures prices point to low-single-digit growth in

Brinker COGS, averaging to about flat for calendar 2010 (though we note that
Brinker has implied some benefits from reset contracts) — see Exhibit 157. For the
following year, our regression would imply a 1-2% decline in 2011. A 10%
increase in both beef and dairy prices would create a 2.5% growth in Brinker's
COGS, according to our sensitivity analysis (see Exhibit 158).
Exhibit 157 Our Brinker Commodity Model Projects Cost of Sales Growth in the Low Single
Digits in 2010
Brinker: Cost of Sales
30%
20%
10%
0%
-10%
-20%
-30%
:9
2Q 0E
3Q 0E
4Q 0E
1Q 0E
2Q 1E
3Q 1E
4Q 1E
1E
2Q 4
3Q 4
4Q 4
1Q 4
2Q 5
3Q 5
4Q 5
1Q 5
2Q 6
3Q 6
4Q 6
1Q 6
2Q 7
3Q 7
4Q 7
1Q 7
2Q 8
3Q 8
4Q 8
1Q 8
2Q 9
9
1Q :09
:0
:0
:0
:0
:0
:0
:0
:0
:0
:0
:0
:0
:0
:0
:0
:0
:0
:0
:0
:0
:0
:0
3Q
:1
:1
:1
:1
:1
:1
:1
:1
1Q
4Q
Exhibit 158 Brinker Sensitivity: Change in Cost of Sales; a 10% Increase in Both Beef and Dairy
Prices Would Increase Brinker's Food & Paper Costs by 2.5%
Beef
-20% -10% 0% 10% 20%
-40% -7.0% -5.5% -4.0% -2.5% -1.0%
-30% -6.0% -4.5% -3.0% -1.5% 0.0%
-20% -5.0% -3.5% -2.0% -0.5% 1.0%
-10% -4.0% -2.5% -1.0% 0.5% 2.0%
Dairy 0% -3.0% -1.5% 0.0% 1.5% 3.0%
10% -2.0% -0.5% 1.0% 2.5% 4.0%
20% -1.0% 0.5% 2.0% 3.5% 5.0%
30% 0.0% 1.5% 3.0% 4.5% 6.0%
40% 1.0% 2.5% 4.0% 5.5% 7.0%
Source: Bloomb Bloomberg L.P., corporate reports and Bernstein estimates and analysis.
Starbucks Coffee Co. Unlike the other restaurants, Starbucks' commodity basket is dominated by coffee,
which accounts for 15% of Starbucks cost of sales and dairy, which is 8% (se
Exhibit 159). In our best-fit regression, each of those commodities is lagged by
three months. The resulting commodity index is well-correlated with Starbucks
COGS, which also includes occupancy (we assume occupancy remains the same in
our projection). With an R-square of 0.52, dairy and coffee costs are a fairly good
predictor of future COGS growth (see Exhibit 160).
Exhibit 159 Starbucks's Estimated Commodity Index Exhibit 160 Starbucks's Estimated Commodity Index
Consists of Mostly Coffee and Dairy, and Correlates Well With Starbucks's Reported
We Adjust for Hedging by Lagging COGS Growth (R-Square: 53%)
Commodity Prices by Three Months
Starbucks Cost of Goods Sold

Starbucks
Input Reported % Weight (Months) y = 1.4939x + 0.0799
Dairy 10% 33% 3 R2 = 0.5228
40%
Y/Y Change in Reported Cost of Sales
Coffee 19% 67% 3

Food 23% na
Freight/Distribution 14% na
30%
Other 34% na
Total 100% 100%
20%
10%
0%
-10%
-20%
-10% -5% 0% 5% 10% 15%

Source Bloomberg L.P., corporate reports and Bernstein estimates and Source: Bloomberg L.P., corporate reports and Bernstein estimates
analysis. and analysis.
Because of the large increases in dairy prices in 2010, our regression indicates
a dramatic food-cost inflation for Starbucks — averaging 15% for calendar 2010
(see Exhibit 161). Our estimates, however, are more muted, as Starbucks' cost of
sales includes occupancy, which should be down year-over-year due to more

favorable real estate pricing. Additionally, Starbucks has hedging contracts in place
for both coffee and dairy, which should lessen the impact of rising commodity
costs. Starbucks COGS are modestly sensitive to changes in coffee and dairy
prices; a 10% increase in dairy and coffee prices would raise COGS by 2.9% (see
Exhibit 162).
Exhibit 161 Our Starbucks Commodity Model Projects COGS Growth (Including Occupancy) in
the Mid-Teens in 2010
Starbucks: Cost of Sales Including Occupancy
40%
20%
0%
-20%
0E
0E
1E
1E
2E
4
9
:0
:0
:0
:0
:0
:0
:0
:0
:0
:0
:0
:0
:1
:1
:1
:1
:1
1Q
3Q
1Q
3Q
1Q
3Q
1Q
3Q
1Q
3Q
1Q
3Q
1Q
3Q
1Q
3Q
1Q
Exhibit 162 Starbucks Sensitivity: Change in Cost of Sales Including Occupancy; a 10% Increase
in Both Coffee and Dairy Prices Would Increase Starbucks's COGS by 2.9%
Coffee
-20% -10% 0% 10% 20%
-40% -7.7% -5.8% -3.9% -1.9% 0.0%
-30% -6.8% -4.8% -2.9% -1.0% 1.0%
-20% -5.8% -3.9% -1.9% 0.0% 1.9%
-10% -4.8% -2.9% -1.0% 1.0% 2.9%
0% -3.9% -1.9% 0.0% 1.9% 3.9%
Dairy
10% -2.9% -1.0% 1.0% 2.9% 4.8%

20% -1.9% 0.0% 1.9% 3.9% 5.8%
30% -1.0% 1.0% 2.9% 4.8% 6.8%
40% 0.0% 1.9% 3.9% 5.8% 7.7%
The most recent commodity run-up served as a reminder that exchange rates
influence the demand for farm exports (which are traded in dollars) and
consequently global farm commodity prices. The U.S. dollar declined steadily from
2002 through mid-2008, the same period during which commodity prices followed
a steady upward trajectory. The recent sharp pullback in commodity prices
coincided with a rapid dollar appreciation (see Exhibit 163 and Exhibit 164).
Here we see a parallel with the 1970s (one of many), when rising commodity
prices reflected increased demand for U.S. farm exports, triggered by the declining
U.S. dollar. As the dollar appreciated in the subsequent decade, commodity prices
came crashing back down.
Going forward, if the dollar weakens, globally traded goods (including food
commodities) will become more expensive to American consumers.
Exhibit 163 Lower Nominal Commodity Prices Partly Exhibit 164 Real Global Demand for U.S. Agricultural
Reflect a Stronger Dollar Products Moves Opposite USD Prices
U.S. Agricultural-Trade Weighted Exchange Rates Real Agricultural Trade
120 $6
110
$5
100
90
$4
Billions
80
70 $3
60
$2
50
40 $1
1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 1975 1977 1979 1981 1982 1984 1986 1988 1989 1991 1993 1995 1996 1998 2000 2002 2003 2005 2007 2008
Monthly Commodity Trade Weighted Exchange Rates: U.S. Markets Agricultural Trade Real Exports Real Imports
Source: USDA Economic Research Service and Bernstein analysis. Source: USDA Economic Research Service and Bernstein analysis.
As a result, we think that international exposure offers a natural offset to dollar

weakness.
Exhibit 165 For Burger King and Yum!, Margins Moved in Opposite Directions for U.S. and Non-
U.S. Regions, Reflecting the Impact of Dollar Strength/Weakness
Restaurant Margins by Company and Sector
YUM BKC
U.S. 2008 2009 2008 2009
Sales $4,410.0 $3,738.0 $1,271.0 $1,315.8
Food and Beverage $1,335.0 30.3% $1,070.0 28.6% $423.7 33.3% $426.0 32.4%
Restaurant Labor 1,329 30.1% 1,121 30.0% 390 30.7% 412 31.3%
Restaurant Expenses 1,195 27.1% 1,028 27.5% 298 23.4% 298 22.7%
Total Cost of Sales $3,859.0 87.5% $3,219.0 86.1% $1,111.6 87.5% $1,136.5 86.4%
Restaurant Margin 12.5% 13.9% 12.5% 13.6%
International
Sales $2,375.0 $2,053.0 $536.0 $483.7
Food and Beverage $752.0 31.7% $656.0 32.0% $152.6 28.5% $142.0 29.4%
Restaurant Labor 618 26.0% 533 26.0% 169 31.6% 159 32.9%
Restaurant Expenses 742 31.2% 635 30.9% 145 27.0% 136 28.2%
Total Cost of Sales $2,112.0 88.9% $1,824.0 88.8% $466.9 87.1% $437.2 90.4%
Restaurant Margin 11.1% 11.2% 12.9% 9.6%
Source: Corporate reports and Bernstein analysis.
see Exhibit 166 McDonald's Has the Most International Exposure in Our Coverage
2008 Global Revenue Mix by Region 2008 EBIT Mix by Region
MCD YUM BKC SBUX EAT WEN MCD YUM BKC SBUX EAT WEN
APMEA 18% 41% 3% 18% 0% 2% APMEA 12% 48% 3% 1% 1% 1%
Europe 42% 18% 24% 8% 0% 0% Europe 38% 8% 15% 0% 0% 0%
L. America 1% 1% 4% 1% 0% 1% L. America 2% 2% 8% 0% 0% 1%
N. America 39% 41% 69% 74% 100% 97% N. America 48% 41% 74% 99% 99% 99%
Source: Bureau of Labor Statistics, corporate reports and Bernstein analysis.

Copyright of Black Book - U.S. Restaurants: Ordering from the Bernstein Value Menu is the property of
Bernstein Global Wealth Management and its content may not be copied or emailed to multiple sites or posted
to a listserv without the copyright holder's express written permission. However, users may print, download, or
email articles for individual use.

How Will Commodity Affect Restaurants

Diunggah oleh

Informasi Dokumen

Deskripsi Asli:

Hak Cipta

Format Tersedia

Bagikan dokumen Ini

Bagikan atau Tanam Dokumen

Opsi Berbagi

Apakah menurut Anda dokumen ini bermanfaat?

Apakah konten ini tidak pantas?

Hak Cipta:

Format Tersedia

How Will Commodity Affect Restaurants

Diunggah oleh

Hak Cipta:

Format Tersedia

U.S.

RESTAURANTS: ORDERING FROM THE BERNSTEIN VALUE MENU 57

Changing the Recipe — How Will

Source: U.S. Bureau of the Census and Bernstein analysis.

Commodity Food and Beverage Price Index

Source: IMF and Bernstein analysis.

Cents per Pound

Source: USDA, Bureau of Economic Analysis and Bernstein analysis.

2007 2008 2009 2010 2007 2008 2009 2010

U.S. Beef Operating Margins

Source: USDA and Bernstein analysis.

Cattle & Calves - All Trailing Average

Source: USDA and Bernstein analysis.

Beef Inventory vs. Prices

Y/Y Change in Price

Source: USDA and Bernstein estimates and analysis.

YoY Changes in Commodity Prices

Source: Bloomberg L.P. and Bernstein analysis.

Nonfat Dry Milk Cheddar 40lb Butter

Source: USDA and Bernstein analysis.

In response to plummeting prices, dairy farmers rapidly thinned their herds. Of

YoY Changes in Fluid Milk Prices

Fluid Milk Nov-11

Source: Bloomberg L.P. and Bernstein research.

Inflation Adjusted Chicken Prices

Cents per Pound

Source: USDA, Bureau of Economic Analysis and Bernstein analysis.

On the supply side, chicken production declined sharply (year-over-year)

2007 2008 2009 2010 2007 2008 2009 2010

Chicken Inventory vs. Price

Y/Y Change in Price

Source: USDA and Bernstein analysis.

Despite falling throughout 2009, poultry prices are expected to continue

Exhibit 118 Futures Imply Favorable Chicken Trends from Here

YoY Changes in Commodity Prices

Source: Bloomberg L.P. and Bernstein analysis.

Exhibit 119 Demand Destruction Weighed Heavily on Lobster Prices

Maine Lobster Prices and Landings

Price per Pound

Millions of Pounds Price per Pound

Source: Department of Marine Resources and Bernstein analysis.

Despite a boom in demand from growing affluence in emerging economies and

Year-on-Year Change in Real Shrimp Prices

Source: IMF and Bernstein analysis.

Dollars per CWT

-20% $100 -20%

Source: International Monetary Fund, Global Insight and Bernstein

YoY Changes in Commodity Prices

Source: Bloomberg L.P. and Bernstein analysis.

As a result, futures price project a steady increase in coffee prices ahead,

YoY Changes in Commodity Prices

Source: Bloomberg L.P. and Bernstein analysis.

Indexes of Farm Outputs, Inputs and Productivity

$30 Real Crop Prices

Soybeans — Real Wheat All — Real Corn For Grain — Real

Source: USDA and Bernstein analysis.

CPI — Food-at-Home vs. Food-Away-from-Home

CPI — At-Home Y/Y

Source: Bureau of Labor Statistics and Bernstein analysis.

Food-Away-from-Home CPI vs. Crude Foodstuffs PPI

PPI — Crude Foodstuffs CPI — Food-Away-from-Home

Source: Bureau of Labor Statistics and Bernstein analysis.

Average 13% 14% 1% 2% 38% 5% -21% 1% 6% 3%