Cheap Lobster Means Cheap Lobster Rolls, Right? Hardly

Cheaper food input costs won't trickle down to you

   
Cheap Lobster Means Cheap Lobster Rolls, Right? Hardly

Headlines are making the rounds this week about an unlikely subject — lobster rolls.

The main reason: Lobster meat is currently going for about $2.20 per pound, yet lobster rolls themselves generally go for at least seven times the cost of the meat they contain.

Matthew Yglesias at Slate says you are “paying for the shipping and the labor and the cost of the building rather than for the uncooked lobster meat,” but the folks over at The Atlantic Wire maintain that markup is absurd, arguing it is “like paying $123,522 for a standard $18,000 Honda (HMC) Civic.”

Both make decent points, but if you ask me, it’s not really about lobster.

Instead, the high price of lobster rolls illustrates the unfortunate reality for consumers when it comes to food costs. That is, when food input costs rise, it will just be passed on to you. But when the input costs fall, the retail price of that food will not fall with it.

Why? Well, businesses have no incentive to drop those prices back down. Instead, they can just pocket the difference. Besides, if they did drop prices in the wake of lower input costs, they would then have to increase them again when costs inevitable rise again — something that wouldn’t sit well with customers.

Of course, lobster is an exceptional example, in that its perceived as an expensive, luxury good. But it’s purposely positioned that way to make other menu options seem cheaper — the “comparative other” in our decision-making.

As Alexander Abad-Santos at The Atlantic wrote: “High lobster prices also make selling medium-priced fish easier—a lower price would make those medium-priced entrees seem more expensive.” That’s undoubtedly true at dining destinations like Bloomin Brands’ (BLMN) Bonefish Grill or even Ruth’s Chris Steakhouse (RUTH), which offers lobster alongside a few filet options.

So, sorry consumers — you lose again.

Of course, that doesn’t mean it’s all smooth sailing for seafood sellers. While countless private eateries dotting the Maine coast may be winning big, more diversified places like Darden Restaruants (DRI) are still struggling.

Lobster may be cheap, but shrimp prices have hit record highs. That’s especially bad news for Darden considering shrimp is the company’s largest food cost already, and that it’s trying to offer more cost-conscious options. It’s hardly anything to celebrate for Ignite Restaurant Group’s (IRG) Joe’s Crab Shack, too.

Still, for the most part, the lesson remains: For those dining out, food costs are generally not your friend.

As of this writing, Alyssa Oursler did not own a position in any of the aforementioned securities.


Article printed from InvestorPlace Media, http://investorplace.com/2013/08/lobster-rolls-food-costs/.

©2014 InvestorPlace Media, LLC

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