Beef costs have been a big problem for fast-food chains

When Meritage Hospitality Group, the giant Wendy’s franchisee, filed for bankruptcy last week, it laid some of the blame on beef costs.

Specifically, the company noted that its beef costs were up 18.9%. And 80% of Wendy’s protein sales involve beef, compared to 50% at rival McDonald’s.

Beef costs hit records earlier this year, amid a combination of low cattle supplies and high demand for burgers and steaks. Unlike, say, chicken, a beef inflationary cycle takes years to work its way through.

Beef cost impact

The good news is that there are signs things should improve by next year. The bad news is it’s too late for a lot of companies.

Wendy’s is hardly the only chain facing higher beef costs. Beef costs soared 20% at Burger King last year, halting progress the brand made on franchisee finances. At McDonald’s, higher beef costs cut operator cash flow on the eve of a remodel cycle for its franchisees.

The higher beef costs have coincided with a brutal discount war that forced operators to push lower-priced items in a bid to convince consumers to come into the restaurants a bit more often.

All of this has damaged margins. And the business of operating restaurants isn’t getting any easier.

Franchisors ask a lot of their franchisees. Operators are paying more technology fees. And remodel costs have increased, as has the cost of debt needed to fund such remodels.

Franchisee financial strain

Unsurprisingly, franchisees have been filing for bankruptcy at a disturbing rate this year. Many of these operators, like Meritage, have amassed huge amounts of debt to buy, build, and remodel locations.

Capital structure was also a problem with another big bankruptcy this year, the Popeyes operator Sailormen. Huge amounts of debt, a high-cost environment, and a discount war is a bad combination.

Indeed, Meritage fell behind on royalty payments long before Wendy’s sales fell off a cliff. The franchisee’s problem was its capital structure and the generally weak profitability within the Wendy’s system.

But Meritage’s comment on how much Wendy’s relies on beef for its protein sales is itself interesting.

Menu strategy and demand

Wendy’s is, fundamentally, a burger chain. They, McDonald’s, Jack in the Box, Burger King, and many others have, over the years, added more chicken products to their menus to cater to a broader array of consumers. And chicken is the most popular protein in the U.S.

Yet beef demand remains relatively strong. And brands that have leaned into their burger bonafides have done just fine. Recall that Burger King reduced its reliance on discounts for marketing and then started pushing an upgraded Whopper. Customers responded with one of the best performances, relative to its competition, in that chain’s history.

Indeed, some chains pushed bigger burgers during this run-up in beef prices, including Wendy’s competitor McDonald’s and the fast-casual chain Shake Shack.

Brands can and often do promote chicken to ease profit challenges when beef costs are up. Wendy’s last year introduced new chicken tenders, which was something of a bright spot. And this year it improved its Spicy Chicken Sandwich. That should help.

But Wendy’s also front-loaded marketing spending last year, leaving it less able to promote those chicken products, or its burgers, which helped lead to its sales declines, exacerbating an existing profit problem.

The bankruptcy of Meritage was about a lot more than just beef costs. But inflation of the crucial protein has weakened an already bleak state of franchisee finances.