Creatively managing the impact of rising commodity prices

May 22, 2012

Phil Daniels, Group President, Marlin Network

There are few business segments more vulnerable to the rise of commodity food prices than the foodservice industry. In fact, the impact of food ingredient and energy prices can easily determine whether a restaurant or restaurant group achieves profitability or not. Evidence is the impact of the recent Arab Revolt in the Middle East that has driven the price of oil to levels above $100 per barrel and the subsequent increase in fuel prices. It not only impacts the costs of food, but also has a significant impact on how far consumers are willing to drive to access foodservice, or even if they will go out to eat at all.

The dynamics of our economy are not helping us here! Rising national debt and the specter of rising taxes, especially on small businesses, are hindering the economy’s recovery. The impact is being felt in many sectors of the economy, but the restaurant industry has felt its fair share of negative impact going back as far as 2008. And this is not just affecting the food commodities that we need to fill our pantries and successfully execute our menus. Recent data in the Foodservice Equipment Reports indicates that the cost of steel, especially stainless steel, is on the way up and will soon impact the cost of the equipment we employ in our kitchens. It seems we are being hit from all sides with rising commodity costs.

So how do we deal with this? To continually pass costs all the way through the system to consumers can have a negative impact on how they perceive your brand in the long term. Therefore, operators need to continually add value to their consumers’ meal occasions and not just add costs to their checks.

What are the options in dealing with rising commodity costs? One: Operators can pass the rising costs on to their consumers and see how they react. But, operators haven’t always done this in the past, so they risk a negative reaction from their patron base.

Two: operators can try to take costs out of their menu, but over a period of time consumers may equate this to a “cheapening” of food quality, which will weaken the brand with them—and potentially force them to go elsewhere for their food solutions.

Three: operators can try to add perceived value to the menu while also reducing the impact of rising commodity costs on the bottom line.

Option three sounds like a good plan, but what does it ultimately look like?

Well, there are several ways we can approach this. First, take a look at your menu and determine which pantry items can be more “locally or regionally sourced” to potentially save on transportation costs. This also takes advantage of a growing trend that has had a very positive impact with consumers. Locally sourcing part of your pantry opens up a marketing opportunity that can add perceived value while also potentially lowering some of your food costs, creating a win-win for you and your patrons. But what if you went a step further and created a whole Menu Event built around locally sourcing part of your pantry? Suppose you created a “Farm-to-Table Menu” event one day a week that would be perceived by your consumers as improving menu quality, while in reality it could potentially lower your overall food cost structure.

The Farm-to-Table movement has been referred to as “where the culinary world meets the Farmer’s Market.” But it is really a back-to-basics approach that consumers can relate to. Some foodies call it “vernacular food” due to its emphasis on freshness, seasonality and local availability all wrapped around simple preparations.

So, what if we could pull this off in multi-unit operations just like many of the local independent restaurants are doing throughout the country? It might help insulate us against the seemingly continual rise in costs coming in to our restaurants while giving our consumers something positive to say about our operation.

I’m thinking that instead of going with the flow of continual commodity food cost increases, we take matters into our own hands and proactively develop a “hybrid” farm-to-table platform that can be executed in a fast casual operational environment. Maybe one or two days or nights a week to start, or maybe even start with a farm-to-table LTO platform to work out the kinks.

It’s at least something to consider. Most businesses find that being proactive yields more sustainable results than taking a reactive posture. So think about Farm-To-Table — it might be just what your operation needs.

Topics: Business Strategy and Profitability , Food & Beverage , Operations Management

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