Falling costs may boost McDonald's, other restaurant profits in 2023

With the cost of butter plunging nearly 16% in a month and wholesale broiler chickens getting cheaper, some big restaurant chains including McDonald's and Starbucks are likely to tell investors that their restaurants will be more profitable this year.

When it reports fourth quarter earnings on Tuesday, McDonald's Corp is expected to provide its 2023 outlook, which could be rosier because of falling commodities costs, as well as China's easing lockdowns and persistent demand for Big Macs and fries.

"There will be more focus on margins than usual this year, given the hole many are digging out of and potentially a wide range of outcomes," Morgan Stanley analysts wrote in a note on Friday.

In 2023, restaurants are expected to be more profitable - though not back to pre-pandemic levels - at McDonald's Corp, Taco Bell parent Yum Brands Inc, Burger King owner Restaurant Brands International Inc, Domino's Pizza Inc, Starbucks Corp and Olive Garden parent Darden Restaurants Inc, according to Wells Fargo research.

Projected margins are highest for Chipotle Mexican Grill Inc at 25.7% in 2023, well above its 20.5% in 2019, Wells Fargo said.

Chipotle's menu prices were up about 13% in the third quarter. Those steep increases could drive restaurant margins 500 basis points higher when the burrito chain reports fourth quarter earnings on Feb. 7, according to BTIG analyst Peter Saleh.

"Some consumers are likely to reduce or eliminate their visits given the above-average price hikes," Saleh wrote. But investors should tolerate a slight drop off in transactions because margins will still be "significantly higher."

Record inflation last year forced restaurants to hike prices multiple times. Now, with costs falling, higher menu prices are catching up.

An order of 20 bone-in wings at a Wingstop in Newark, New Jersey now costs $28.69 - $10 more than in 2019.

Meanwhile, average wholesale prices for chicken wings in December had fallen to 89 cents per pound after peaking at $3.25 in May 2021, U.S. Department of Agriculture data showed.

Privately held A&W Restaurants projects its total cost of goods will rise just 2.4% this year, versus about 20% in 2022, Chief Executive Officer Kevin Bazner told Reuters.

"There's increased confidence in 2023, maybe the inputs come down and consumer demand seems to be holding up," said Bank of America analyst Sara Senatore.

Investors had been somewhat reluctant to think positive signs could persist, but they increasingly think the Federal Reserve will soften the blow of interest rate hikes on the economy, she said.