Data Signals Distortion in Pricing Behavior within the Food Services Sector - Central Bank of Turkey Economic Notes
Forex - The Central Bank of the Republic of Turkey (CBRT) noted in its Economic Note titled "Recent Developments in the Food Services Sector Pricing" that the recent increase in price/cost indices calculated by considering the developments in fundamental cost items such as food, personnel, rent, energy, and general expenses for different concepts, being above the historical average, implies that pricing behaviors in the food services sector may have been distorted.
The Economic Note from the CBRT states: During the Covid-19 pandemic, the food services sector, which was among the most affected sectors by restrictions and changes in consumer behavior, has seen significant price increases in the post-pandemic period along with recovery. The price dynamics of the labor-intensive food services sector, which primarily relies on food products, are substantially affected by developments in minimum wage and food prices. In this context, it is expected that food service prices will show similarity with price increases in the food and non-alcoholic beverages group and will accelerate during wage increase periods. However, the recent increase in food service prices has often been discussed in public as not being fully explained by the rises in fundamental cost items such as food, fuel, and wages. This study focuses particularly on recent developments, examining the pricing behavior dynamics in the food services sector. Representative cost indices incorporating major expenses such as food, personnel, and rent for products under food services have been established.
The created cost indices have been examined comparatively against sector price trends. The findings suggest that especially post-2023, food service prices have begun to increase above the levels indicated by cost items. The analyses conducted by subgroups point to a differentiation in pricing behaviors among product groups. For products containing red meat, which exhibits relatively high inflation, such as kebabs and döner, the differentiation between selling prices and costs is more limited, while it is noted that in relatively lower-cost chicken-based and fast-food services, the price-cost gap has significantly widened over time.
In 2020, during the height of the Covid-19 pandemic, the food services sector was one of the most affected sectors due to restrictions, closures, and changes in consumer behavior. According to the turnover index data from the Turkish Statistical Institute (TÜİK), while the service sector turnover index excluding accommodation and food services showed a limited increase of 5% in 2020, the turnover of accommodation and food and beverage services decreased by 25% during the same period. However, from 2021 onwards, the sector entered a rapid recovery process as measures and restrictions were lifted.
Post-2021, significant price increases in food services have been notable. The divergence in price indices between the pandemic period was first seen in the food and non-alcoholic beverages group, while as of the second half of 2023, the food services price index surpassed both the food and non-alcoholic beverages as well as the CPI excluding food and dining services. Eldemir and Yürek (2023) utilized micro price data at the restaurant-product level obtained from an online food ordering platform, indicating that the intense demand for the sector post-pandemic has led to quicker transmission of inflation expectations and developments in accumulated costs to prices.
The food services sector, which has food products as its most significant input, is also labor-intensive. Therefore, it is expected that sector prices will show similarity with increases in prices for the food and non-alcoholic beverages group and will accelerate during wage increase periods. However, the observed increases in food sector prices post-2023 and the differentiation raise the question: "Is there a notable distortion in sector pricing behavior?" For Turkey, Özmen (2016) analyzed the determinants of profit margins in the beverage services sector, which is a subgroup of food services, during the 2006-2014 period.
The analysis results indicate that profit margins have increased over time and that firms possess increasing market power in pricing; meanwhile, indicators like minimum wage, output gap, food and energy prices, exchange rates, and economic uncertainty significantly affect profit margins.
In periods of widespread price increases, along with increasing uncertainty, the instinct of businesses to maintain purchasing power and reasonable profit levels can lead to distortions in pricing behavior and price rigidity. It is crucial for central banks to control pricing behavior distortions to anchor inflation expectations and establish disinflation. In this context, the objective of this study is to examine the dynamics of the sector's pricing behavior by focusing on how much of the recent increases in food service prices can be explained by rises in fundamental cost items such as food, wages, and rent. Accordingly, the cost structure of the restaurant services sector has been examined, and then cost indices have been established for potential product groups under restaurant services. By comparing the price/cost ratios of the different concepts under restaurant services, whether there is differentiation in the sector's pricing behavior has been analyzed. The results suggest that by 2023, the observed increases in food service sector prices exceed what cost developments imply. The analysis performed by subgroups shows differentiation in pricing behavior according to concepts. The differentiation between price and cost is limited for products containing red meat, which typically has high inflation, while for relatively lower-cost chicken and fast-food services, the price-cost gap has opened over time.
Data and Method This study aims to investigate the pricing behavior in the food services sector, focusing on products listed in the basket published within the framework of the TÜİK-Consumer Price Index News Bulletin. The CPI item basket comprises various meal concepts including kebabs, pita, soups, hot meals, as well as fast-food items like pizza and burgers, and non-alcoholic beverages.
To reveal the pricing behavior dynamics in the food services sector, which has recently experienced high price increases, the costs and prices of the food groups listed (No. 357-364) have been examined comparatively.
In the first phase, the main cost items of firms in the food services sector and their weights in total costs have been established based on information gathered from the Public Disclosure Platform (KAP) reports and field observations. When creating the cost index, five main cost items were taken into account: food input costs, personnel, energy, rent, and other expenses. The weighted average of the price indices for these cost items has been utilized as an indicator for the total cost index of the product.
Determining the Distribution of Cost Items Cost structures in the food services sector are fundamentally composed of food materials, labor, rent, energy (electricity, water, gas), alongside other costs such as equipment, depreciation, and packaging. To elucidate the cost structure of the sector, information has been drawn from reports filed with the Istanbul Stock Exchange (BIST) and field studies conducted as part of the Economic Lens on the Real Sector (RESİM) within the CBRT.
By utilizing the cost of sales tables included in the price determination reports of companies in the food and beverage services sector within BIST, the average shares of the five main cost items mentioned above have been determined.
According to the results obtained from KAP filings, food constitutes an average of 49% of total costs, labor accounts for 23%, and rent and energy costs hold shares of 8% and 5% respectively. Other expenses including depreciation and amortization average around 16% of total costs. Field information obtained from company interviews with food sector representatives in the TCMB-RESİM also presents similar findings regarding the sector's cost structure. Field observations indicate that in the food sector, the average shares of food, labor, energy, and rent costs in total costs are approximately 49%, 20%, 5%, and 13%, respectively.
Based on information obtained from KAP reports concerning large publicly traded companies and field observations also involving medium-sized firms, it has been assumed that, on average, a business operating in the food services sector's total costs consist of 21% labor, 49% raw materials, 5% energy, 10% rent, and 15% other costs.
In the next phase, utilizing these average weights, representative cost indices have been established for the products under the food services group based on general cost items such as food, labor, rent, energy, and other expenses.
First Item and Material (Food) Cost Index: Calculation Example The food cost index is calculated as the weighted average of the prices of the key inputs that constitute the product. The materials for products with different concepts such as soups, hot meals, kebabs, and fast food can show significant variations in input costs. To account for these differences, standard recipes for possible products under various concepts have been used to calculate the materials and their shares in the total cost. Table 5 shows an example of food input cost distribution calculated based on a recipe sourced from "nefisyemekler.com," one of the most visited pages found through the keywords "restaurant-style beans without meat." The weights of the ingredients listed in the recipe are calculated by multiplying their gram weights by the corresponding unit prices.
The total unit costs of all ingredients have been aggregated to determine the total food input cost for making the bean dish. Subsequently, the shares of the input group have been calculated. According to the calculations presented in the table, 40% of the total food input cost for the beans without meat comprises beans, 30% vegetables, 15% spices, 14% oil, and 1% tomato paste costs.
In the next phase, using the shares calculated from the recipe, the food cost index for the bean dish has been obtained as the weighted average of the prices of the relevant items.
Similar to the example of the beans without meat, food product cost indices have been calculated using the most visited recipes available online for the food groups included under restaurant services.
Non-Food Cost Indices In the food services sector, non-food cost items fall under four main categories: personnel, energy, rent, and other costs. The minimum wage has been considered for personnel costs; the CPI for electricity, gas, and other fuels for energy; and the CPI for the actual rent paid by tenants for rent.
For other expenses such as depreciation and amortization, cleaning, packaging materials, insurance and social security premiums, maintenance and repair expenses, kitchen equipment, furniture and decoration, and marketing and advertising costs, the average of PPI and CPI has been used. The weighted average of food and non-food cost items, calculated using the weights provided in Table 4, is proposed as an indicator representing the cost of the relevant food service.
Cost Indices by Product Group in the Food Services Sector Products under food services categorized by TÜİK include (i) red meat-heavy kebabs, pide, and döner, (ii) chicken-heavy kebabs and döner, (iii) home-cooked meals, and (iv) fast food. The calculated indices reveal changes in cost structure over time and by concept.
The cost index for red meat-heavy products, which was at a level of 219 in December 2019 prior to the pandemic, has increased 8.1 times to reach a level of 1767 by July 2024, making it the group with the highest increase. In contrast, the cost index for home-cooked meals, which has shown more limited increases from December 2019 to July 2024, has risen 6.6 times.
To observe the reflection of the cost increases seen in the sector on prices and thus profit margins, the ratio of prices to the calculated cost indices has been analyzed. It should be emphasized that the price/cost indices presented in the graphs do not reflect profit margin levels but represent their relative levels based on the profit margin taken as a baseline in January 2013.
The price/cost indices for all concepts have fluctuated around a certain average during the period from 2013 to 2022, whereas by 2023, they exhibit a distinct upward trend. The recent trend observed in the indices implies that the transmission of rising costs to consumer prices is above the long-term average and that the price-cost gap continues to widen cumulatively over time.
The price/cost indices for meat-heavy food services, which have seen more pronounced cost increases, displayed a relatively horizontal movement around the long-term average until 2023.
In the red meat-heavy food services group, the price/cost index sharply increased starting from 2023, reaching a level of 1.54 in July 2024, significantly surpassing the long-term average of 1.05. In chicken-heavy food services, a more pronounced rise has been observed, with the index reaching 1.79 in the last month compared to the long-term average of 1.09 for the price/cost index.
In the home-cooked and fast-food concepts, where cost increases are comparatively more limited, a noticeable upward trend in price/cost ratios is observed as well. The average price/cost index for home-cooked services during the period 2013-2022 was 0.94, while this ratio has risen to 1.30 by July 2024. The index for home-cooked services demonstrates that cost increases were initially not immediately reflected to consumers in 2022, resulting in the price/cost index dropping below the long-term average (to as low as 0.77). However, in 2024, it is notable that price increases in home-cooked services have significantly surpassed historical cost increases, reaching a level of 1.30.
For fast-food groups, including hamburgers, pizzas, and köfte, the calculated price/cost index has been noted to enter an upward trend post-pandemic, with this trend accelerating starting in 2023. The price/cost average for the period 2013-2022 was 1.17, while the index rose to a remarkably high level of 2.08 by July 2024.
Overall, the notable upward trend of the price/cost indices around the long-term average as of 2023 suggests that pricing above rising costs has occurred in the sector, indicating a significant deterioration in sector pricing behavior in recent years. Additionally, the analyses point to differences in the distortion of pricing behaviors by meal concepts. It has been observed that in past periods, the price/cost differences between various concepts were relatively limited, but over time, this gap has widened considerably. As of July 2024, the differentiation in price/cost for fast-food and chicken-heavy services is much more pronounced than for home-cooked and red meat-heavy food services.
Conclusion and Assessment The recent upward trend of the price/cost indices, computed based on developments in fundamental cost items such as food, personnel, rent, energy, and general expenses, suggests that pricing behaviors in the food services sector may have been distorted.
The analyses conducted by subgroups highlight variations in the price-cost gap according to concepts. For products, such as kebabs and döner, which contain a substantial portion of inputs exhibiting relatively high inflation, the differentiation between selling price and cost is more constrained, while for relatively lower-cost chicken and fast-food services, the gap is more pronounced.
The widespread trend of price increases, combined with rising costs, presents a significant barrier to businesses maintaining reasonable profit margins, while their desire to sustain profit levels, especially amid increasing uncertainty, may contribute to distortions in pricing behavior and the observed rigidities in service inflation. The findings obtained from this study indicate that the observed price increases in the food services sector in recent times may be influenced not only by cost increases but also by distortions in pricing behavior.