Beef prices hit wallets, boost poultry's appeal

There's no beef about it, prices for red meat are surging and demand for chicken is benefiting.

Chicken's versatile appeal and its perception as a good source of protein that's better for you than red meat are also driving sales, RBC Capital Markets' David Palmer said in a phone interview.

"Chicken is really hot right now, and poultry is viewed as a source of protein that's relatively less inflationary," Palmer said. "You're seeing even the pizza players get into chicken."

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Amid surging beef costs and dampened production, chicken consumption has spiked, rising 17 percent from 2012, according to a recent report from the National Chicken Council.

"Choice retail value (for beef) is the highest it's ever been," said William Hahn, an agricultural economist for the USDA. "We've had several years of drought. Several years of drought and very high feeds costs discourage supply."

In the wake of rising food costs, restaurants have some protection since they typically lock in commodity contracts six to 18 months ahead of time. But persistently high prices eventually affect them, too.

On average, beef accounts for about 14.4 percent of quick-service restaurants' cost of goods sold, according to a recent Piper Jaffray note. Fine-dining chains, such as Ruth's Hospitality Group and Del Frisco's Restaurant Group, are even more exposed.

Rising prices present restaurants with a few options: Pass along prices to consumers and risk driving them away, tinker with recipes to cut down on pricey items or absorb the extra costs.

"With commodity costs, among other restaurant-level expenses, expected to rise at a minimum with inflation, restaurants continue to be challenged to identify the correct menu price increases without jeopardizing same-store sales and profits," Piper Jaffray analysts wrote in a recent report.

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Some restaurants, including burger chain In-N-Out and Chipotle, have already chosen to raise prices. Following Chipotle's first nationwide price hike in three years, the Mexican food chain has seen some shift in demand from steak entrees, which rose more, to chicken, which increased less.

"We expected some customers would trade down from steak to chicken as a result of the higher steak premium, and we have, in fact, seen some customers shift from steak to chicken," CFO John Hartung said in a call with analysts.

Sanderson Farms, which produces, processes and distributes chicken, also recently noted a rise in chicken demand. Fresh chicken sales rose 8.1 percent in the second quarter from last spring, CEO Joe Sanderson told analysts.

"We believe the improved demand we are enjoying ... is a result of higher priced beef, not more foot traffic in restaurants," he added.

Movement toward comparatively lower-priced meat, in this case chicken, is to be expected, the USDA's Hahn said.

"Generally speaking on the demand side, high prices for any one meat are going to decrease its consumption and would tend to encourage consumption of the other meats," he said.

Compounding this lower demand is smaller beef supply. The USDA expects beef production to shrink this year and next.

RBC's Palmer sees casual dining chains that are heavily meat sensitive and restaurants that don't have as many franchisees as the ones that are most affected by commodity inflation.

"They tend not to want to take prices too different than the overall inflation. They don't want to cause any consumer alarm bells to go off," Palmer said.

—By CNBC's Katie Little