During the Restaurant Finance and Development Conference in November, a few operators were casually talking about their biggest challenges. Among the biggest? Energy prices.
“Everyone is talking about food costs and labor costs, and for good reason, but nobody is talking about our crazy electric bill,” one operator told me.
However, higher utility costs are, indeed, top of mind, and that was sufficiently reiterated during the most recent round of earnings calls; executives from McDonald’s, Shake Shack, Chipotle, Red Robin, The Cheesecake Factory, Potbelly and Jack in the Box all touched on the headwinds they’ve experienced from higher energy costs.
Michael Bailen, Texas Roadhouse’s senior director of investor relations and financial analysis, called utilities a continued “pressure point.”
According to the National Restaurant Association’s State of the Industry 2023 report, 80% of operators said their total utility costs were higher in 2022 versus 2019. This adds to a confluence of higher costs across the board, including food costs, which 92% of operators say is a “significant issue,” labor costs and occupancy costs. On average, utility outlays were up nearly 12% in 2022 versus 2019. On the West Coast, restaurants that use natural gas (nearly 80%) have been grappling with a 32% price increase since December.
The trend has been relentless. According to Paul Leanza, director of gas supply at Columbus, Ohio-based IGS Energy, the price of natural gas – which directly influences the price of electricity – more than doubled in the last half of 2022.
“It’s been several years since we’ve experienced volatility and price fluctuations like we have in recent months,” he said. So, what’s going on here? There are several short- and long-term factors affecting energy prices, Leanza said, including weather and energy production starting to normalize after the throes of the pandemic. Production is also a long-term factor. In the U.S., natural gas production has increased by nearly 40% in the past six years, for instance.
“Meanwhile, storage capacity hasn’t increased in any meaningful way, leading to an increase in volatility as daily, monthly and seasonal balancing options become limited,” Leanza said. “As gas becomes more dominant, we’re experiencing price inelasticity. During times of high demand, the price can become excessive, especially in areas with limited supply options.”
Another long-term factor is the U.S. energy market’s increasing globalization. U.S. exports have grown materially in the past several years, Leanza notes, and currently about 20% of natural gas produced in the U.S. is exported. That means even more volatility.
“We’re no longer only concerned with regional weather in the U.S. We also have to worry about what’s happening across the globe, notably in Europe and Asia. Demand for liquefied natural gas and domestic producers’ response is the primary driver of price,” Leanza said.
One final factor he points out is the domestic energy grid’s “massive transition” from coal to natural gas to renewable energy sources. As older power plants retire and new, more efficient plants come online, we’re shifting into a stage in which the grid no longer has excess supply, Leanza said. Simultaneously, demand continues to increase. Again, more volatility.
“Consider this: There are about 250 trading days in a year. In 2022, there were 46 days – nearly once every five trading days – during which the price changed by at least 7% day-over-day,” he said. “That makes 2022 the most volatile year for energy markets in recent history.”
So, the question becomes whether there will be any relief for restaurant operators, who typically spend 3-to-5% of their operating costs on energy. The answer is complicated. Leanza said near-term conditions are hard to predict, but prices will continue to fluctuate based on supply and demand and based on weather, infrastructure issues, production outages and economic conditions.
There are some glimmers of hope. The fifth warmest winter on record since 1950 and corresponding drop in demand has eased energy prices a bit in the most recent quarter.
“For now, restaurants can take advantage of the low prices we’re currently seeing,” he said, adding that operators can lock in the price of energy. “Work with your energy partner on your strategy so you can make decisions quickly when the market is most favorable. Restaurants that locked in their rate when the market was lower than it is today know all too well the benefits of being proactive. Restaurant owners can take advantage of proactive market monitoring and adjust their strategy over time.”
Prices can be locked in for the year each September, but that is just one piece of advice Leanza provides. The other is to create a longer-term strategy, like looking ahead three-to-five years when you’re making energy contract decisions.
“If you’re responsible for making energy decisions for your restaurant, know that long-term energy prices are still relatively affordable, even despite the recent swings in the market,” he said.
It’s also important to focus on energy efficiency, whether that means smarter equipment or bigger initiatives like solar power. About half of each energy bill is driven by energy demand.
“The demand you’re billed for is the peak amount of power used at any one time during your billing period. You aren’t charged for demand during the times when you’re using less than the peak amount,” Leanza said. “Energy efficiency efforts typically help you save money by lowering the demand required to run your operations. So, being able to flex your energy load through efficient solutions is one of the simplest ways to reduce your energy spend.”
Contact Alicia Kelso at [email protected]