Article

Commodity pressure mixed in early 2012

As restaurant operators head into 2012, industry forecasters are calling for an increase in food costs, but not every analyst is predicting a commodities pricing surge.

December 12, 2011 by Valerie Killifer — senior editor, NetWorld Alliance

As restaurant operators head into 2012, industry forecasters and even the USDA are calling for beef and poultry prices to increase by 9 percent and 5 percent, respectively. Meanwhile, the cost for corn, soybean and wheat also has been predicted to increase despite an additional combined 6-million-acre increase to their growing regions in the U.S.

But not every analyst and forecaster is predicting an increase in commodities heading into 2012.

In spite of a potentially record-harvest year, the past imbalances of supply and demand will deem much of the increase useless. Instead, the influx of corn and soybeans will work only to stabilize market levels, making feed affordable once again for poultry, dairy and beef farmers who have been priced out of the market.

Robert Bresnahan, founder of Trilateral Inc., thinks the markets will remain flat barring any global weather disaster that in the past has included floods, droughts, freezes and intense heat.

"Right now, the prospects are for commodities to go down," Bresnahan said.

He pointed out that the market peaked for corn August 30 when it reached a high of $7.89 per bushel. It has since dropped 31 percent to roughly $6 per bushel, he said, the lowest rate since March of this year.

In regard to block cheese prices, the market is trading as low as it's been since the spring and butter prices are as low as what they've been since early 2011, he said.

"With dairy, we usually have a run-up of prices going into the baking season, but we didn't see that this year," Bresnahan said. "Beyond January – in April, May and June – there's a good chance that we could see prices go even lower."

For operators looking to stay ahead of commodity-cost increases, Bresnahan advises executives to think short term. "If you're used to covering out for six months, cover for three and try to average down," he said.

Other options

Go Roma's president Jeff Drake knew the company would be facing high commodity costs as the chain headed into 2011. Poultry and dairy were of specific concern due to the chain's high volume of pizza sales that featured both cheese and chicken.

Unable to purchase chicken futures, Drake and his team designed a plan that would shift the menu's focus away from pizza, add more seasonal offerings and additional limited-time items. Pasta dishes were moved to a more prominent position on in-store menus and salads played a stronger supporting role.

Meanwhile, Go Roma's director of supply chain management continued to work with company partners to stay ahead of industry trends.

The measures were much-needed solutions for the chain and for executives who did not want to raise menu prices just as consumers were heading into an economic recovery.

While raising menu prices was something Drake did not want to implement at Go Roma, other concepts have had success with the increases.

Panera Bread, Starbucks and Chipotle have continually raised menu prices without much consumer outcry. In each case, the increases have been slight and drawn out over long periods of time and have been reflected in revenue and sales growth for all three chains.

Dale Furtwengler, author of "Pricing for Profit," advises foodservice operators to raise prices incrementally – in good times and in bad.

"From my experience, companies that periodically raise prices and have a series of smaller price increases typically fare better than others for several reasons," Furtwengler said. "In good times it's easily absorbed by the buyer and when there is a downturn, you may not have to raise prices as much because you've been raising them all along."

Most consumers expect prices to increase and in the cases of Panera Bread, Starbucks and Chipotle, they continued to purchase products after the increases took effect.

Consumers are loyal to price increases if those increases are tied to some sort of value; however, the value needs to be well defined and matched by the increase.

"When you make a strong marketing claim and the price is still low, consumers don't believe the marketing claim," Furtwengler said. "When companies make a marketing claim and then have something at a high price, the customer will believe the price. The key is to be able to quantify the value. It's always helpful that if you're raising prices, you're also doing something that lets them think they're getting more."

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