Edit
Financing

What to do about commodity prices?

With many commodity prices hitting new highs and food costs overall expected to rise by 3 percent to 5 percent this year, many operators recently raised the white flag in their battle to hold the line on menu price increases. Led by McDonald’s, which in late January announced it would take a 2 percent to 2.5 percent increase this year, other players soon followed, including Texas Roadhouse, Tim Horton’s, Buffalo Wild Wings, Applebee’s, Morton’s, Cracker Barrel, Panera Bread, Cheesecake Factory and Red Robin Gourmet Burgers.

The move isn’t universal, however. Many others remain committed to keeping higher menu prices off the table as a survival strategy despite climbing commodity prices. With the economic rebound taking longer than anticipated and rising fuel costs taking a bigger bite out of consumers’ disposable incomes, they see menu price hikes as simply too risky right now.

Martyrs? On the surface it may seem so, when you consider just how significant some of the increases in raw materials are and the fact that food costs almost without exception are expected to head higher still through 2011 and into 2012.

Take proteins. Cattle prices for 2011 compared to 2010 are expected to be up nearly 25 percent, hog prices will be up about 26 percent, turkey prices up about 12 percent and broiler prices up about 5.5 percent, according to Altin Kalo, commodity analyst for Steiner Consulting Group, Manchester, New Hampshire. Behind that rising tide, he says, is a volatile combination of sharply rising input costs (e.g., corn and soybeans for animal feed), bad weather in growing areas, soaring export demand and a global population that’s grown by a billion people over the past decade. (For more information see Foodservice Buyer.)

Beyond proteins overall, cheese and dairy prices are also up significantly. “Year to date (early April), we’re at $1.84 per pound on block cheese. This time last year we were at $1.40 per pound,” says Christopher Webb, director of commodity procurement at SpenDifference, a Denver-based supply-chain management firm that does outsourced purchasing for regional restaurant chains. “The price on Class III milk that goes into commodity cheddar is up from $13.31 last year to $16.88 now.”

Animal products aren’t the only ones spiking upward. During the first quarter, fresh produce skyrocketed—in some case up to 400 percent per case—due to weather calamities in key growing areas. While at press time they were coming back down to earth, Webb says produce prices will nonetheless rise overall this year beyond their normal weather-related swings. “For the first time in a long time, we’re seeing growers shift their acreage to commodity corn to take advantage of the strong market and record-high prices. You’ve now got third-generation potato farmers in Idaho switching to corn, for example, so produce supplies could be tighter than normal this year due to those types of shifts.”

Wheat, too, is on the rise. In early April, year-to-date bushel prices on the Chicago Board of Trade were $7.88 compared to $4.72 per bushel at the same time in 2010. While significant wheat acreage was planned this year, Webb said early-season weather had not been ideal and it was too early to predict what the rest of the year might bring.

That’s largely true in the case of corn, as well, which as of early April had more than doubled in price over the prior year and is the one commodity, along with fuel, that dramatically impacts virtually all others. “If we have a not-so-good corn harvest this year—not even a bad harvest, but just a so-so one—we’ll see very high prices for proteins overall going into 2012,” Kalo says. “In the case of cattle, you’re for sure going to see very high prices well into next year and likely beyond because the cattle production base isn’t there. It takes a good three years from the time you make a decision to expand your herd to the time that those calves are going to be ready to come to market. Hog producers aren’t expanding their breeding herds, either, because of high input costs, so you’re not going to see any meaningful increase in pork production through the first half of next year. When the corn harvest comes, that’s when we’ll get a good idea of what will happen for all of 2011 and beyond. But at least in the near future, there’s not much relief in sight.”

While some operators have thus far chosen to forgo raising menu prices, few in the current environment can afford to just sit tight and wait it out. Here’s a look at how five companies are working to beat the heat on commodity prices.

Café Rio Mexican Grill
Salt Lake City, Utah
40 units

Pain points: “Kind of across the board, but produce—lettuce, in particular—went sky high for a while,” says Dave Gagnon, COO. “We were paying two and three times per case more than we normally do, and when the price goes up on lettuce the quality usually goes down. Some of our proteins are up, too. And we just had a fuel surcharge kick in, which was worked into our contract if the price of gas hit a certain point.”

Coping strategies: Don’t raise menu prices; focus on doing a better job at the restaurant level; eliminate waste by prepping smaller batches throughout the day of fresh-made items; double- and triple-check information from
suppliers and work closely with them to make sure that if prices do rise, quality remains consistent.

Togo’s Sandwiches
San Jose, California
240 units

Pain points: “We started feeling it most in the fourth quarter of last year and we expect the pressure to continue through this year. It’s across the board in areas where we haven’t locked in a contract,” says Renae Scott, vice president of branding and marketing. “Avocados, which are a critical component of one of our top-selling items, are way up in cost, about 10 percent per sandwich.”

Coping strategies: Let franchisees substitute a turkey sandwich with cranberries for the one featuring avocado in daily specials promotions; redesign menu boards to showcase a new line of toasted subs with lower food costs; sharpen the pencil against packaging to find cost savings; work closely with suppliers to hold prices down; introduce “Classic Minis,” half-sized sandwiches with better margins; take a menu price increase of an average of 10 cents
per sandwich, but also decrease the price on a few to bring them under $4; purchase supplies from regional sources to save on transportation.

Millennium Restaurant Group
Kalamazoo, Michigan
8 units

Pain points: “Short-term it’s been borderline brutal in produce, with
simultaneous freezes in Florida, California, Arizona and even into northern Mexico. Usually there’s a field somewhere to shift to in the winter, but
with- out a field anywhere to shift to it was acute. But the longer term pain
is in beef and dairy. That’s where we see the biggest rising costs,” says Matthew Burian, chief procurement officer and director of food and beverage for the multi-concept group. “We’re seeing double-digit jumps on
some beef items and on cream.”

Coping strategies: Maintain current prices but focus on providing greater value via gourmet items, convenience, healthy options, great service; talk with vendors about sharing the biggest price jumps, such as the recent 400 percent spike in produce case prices; do more forward buying, particularly on chicken and ground beef; feature more local products, some of which offer cost savings and some of which don’t, but all of which guests associate with higher value.  

Extreme Pizza
San Francisco, California
40 units

Pain points: “The two categories that we’ve noticed the biggest increases in are cheese and flour. They’re up by high double digits, 50 percent to 70 percent from what were almost historical lows the past year or so. While they’re not at all-time highs, they seem to be headed there,” says CEO Todd Parent.

Coping strategies: Release newly updated menu with no increases to base pizza prices and with decreases to some topping prices to help boost competitiveness and traffic; offset higher commodity costs with higher volume and better labor cost; focus on providing a great customer experience; keep the menu fresh; promote exciting new gourmet vegetarian items; negotiate with primary distributor to remove additional fuel surcharges; have more frequent conversations with all vendors to keep everyone on the same page.

Sizzler USA
Culver City, California
260 units

Pain points: Known for its steaks and bountiful salad bar, Sizzler is
working to manage increases in beef, produce and dairy, in particular, through SpenDifference, its third-party purchasing agent, according to
Mike Branigan, vice president of marketing.

Coping strategies: Plan key buys and lock in pricing well ahead of
commodity market swings; pool volume on some items through purchasing cooperative; maintain menu flexibility; create a new signature attraction with underutilized tri-tip sirloin steak; balance rising costs on beef and other items with switch to fresh preparation of soups; don’t wait until contracts
are about to expire to begin negotiating favorable renewals; maintain a holistic approach to menu pricing and how consumers use the brand.

Trending

More from our partners