Jack In The Box 2013 Annual Report Download - page 25

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Food and packaging costs were 32.6% of company restaurant sales in 2013, 32.9% in 2012 and 33.5% in 2011. In 2013, the benefit of selling price
increases and favorable product mix at our Jack in the Box restaurants, were partially offset by higher commodity costs and greater promotional activity at our
Qdoba restaurants. In 2012, higher commodity costs were more than offset by the benefit of price increases and a greater proportion of Qdoba company
restaurants which generally have lower food and packaging costs than our Jack in the Box company restaurants. Commodity costs increased as follows
compared with the prior year:
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
Jack in the Box 2.2%
2.7%
Qdoba 1.5%
4.3%
In 2013, costs were higher for most commodities other than bakery and dairy, with the largest increases in pork, beef and produce. In 2012, commodity
cost increases were driven by higher costs for most commodities other than produce and pork. Beef represents the largest portion, or approximately 20%, of the
Company’s overall commodity spend, and we typically do not enter into fixed price contracts for our beef needs. For fiscal 2014, we currently expect beef
costs to increase approximately 3%-4%, and overall commodities to be up approximately 1% compared with fiscal 2013.
Payroll and employee benefit costs were 28.0% of company restaurant sales in 2013, 28.6% in 2012 and 29.7% in 2011. The decrease in 2013 reflects
leverage from same-store sales increases, lower levels of incentive compensation at our Jack in the Box restaurants and the modest benefits of refranchising
Jack in the Box restaurants, partially offset by higher staffing levels at our Qdoba restaurants. In 2012, the decrease reflects leverage from same-store sales
increases, the benefits of refranchising and the favorable impact of recent Qdoba restaurant acquisitions.
Occupancy and other costs were 22.3% of company restaurant sales in 2013, 22.5% in 2012 and 23.6% in 2011. The lower percentages in 2013 and 2012
are due primarily to leverage from same-store sales increases, the benefits of refranchising Jack in the Box restaurants and the favorable impact of recent
acquisitions of Qdoba franchised restaurants. These benefits were partially offset in both years by higher depreciation expense related to the Jack in the Box re-
image program. In 2012, the percentage was also impacted by higher debit card fees, and costs associated with the new menu board and uniform program at
our Jack in the Box restaurants.
Franchise costs, principally rents and depreciation on properties leased to Jack in the Box franchisees, increased $7.5 million in 2013 and $29.9 million
in 2012, due primarily to our refranchising strategy. As a percentage of the related sales, franchise costs were 50.2%, 51.0%, and 48.3% in 2013, 2012 and
2011, respectively. The percent of sales decrease in 2013 versus 2012 is primarily due to a decrease in re-image contributions to franchisees, which are
recorded as a reduction of franchise revenues. The higher percentage in 2012 as compared with 2011 is primarily due to a decline in revenue from franchise
fees and higher rent and depreciation expenses resulting from an increase in the percentage of locations we lease to franchisees, partially offset by lower re-
image contributions to franchisees.
The following table presents the change in selling, general and administrative (“SG&A”) expenses in each year compared with the prior year ( in
thousands):



Advertising
$(30)
$(10,263)
Refranchising strategy
(2,005)
(6,277)
Incentive compensation
(1,357)
11,941
Cash surrender value of COLI policies, net
1,647
(6,327)
Pension and postretirement benefits
4,409
2,893
Pre-opening costs
(2,497)
1,906
Qdoba region administration
1,366
1,702
Other
(5,744)
6,327
$(4,211)
$1,902
Our refranchising strategy has resulted in a decrease in the number of Jack in the Box company-operated restaurants and the related overhead expenses to
manage and support those restaurants, including advertising costs, which are primarily contributions to our marketing funds determined as a percentage of
restaurant sales. As such, advertising costs decreased at Jack in the Box and
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