Unstable Staples

Operators adapt to fluctuating food costs to keep afloat

By Erin Shea, Associate Editor -- Restaurants & Institutions, 10/1/2004

Scrambled eggs and bacon at 9 p.m. may sound dreamy to customers of The Flying Biscuit Cafe, but for owner Delia Champion skyrocketing egg prices have made serving nonstop breakfast a bit of a nightmare.

With 6,000 guests weekly pouring into Champion’s two Atlanta locations—and 80% ordering egg dishes—the food-cost pressure on this casual eatery has been intense. “This year has been a roller-coaster,” she says. “Eggs are the most expensive I’ve seen them in 10 years.”

Rising commodity prices have forced The Flying Biscuit Cafe to readjust its menu.

Last year, Champion paid about 58 cents a dozen; lately she’s been shelling out $1.10, a situation that’s forced her to find other ways to improve margins. “I know my profit is not in eggs right now,” she says. “You can only ask your customers to pay so much for one egg.”

Champion’s conundrum is common, and the problem isn’t limited to eggs. Foodservice operators in all segments are trying to cope with high or at best unstable prices for dairy, meat and other staples. Low-carbohydrate diets that have spiked demand for protein of all kinds are one factor. Another has been high gasoline prices; the producer price index for fuels that was 106.5 in January 2003 stood at 129.4 in July 2004.

Champion’s approach is to work with those higher costs while searching for other ways of turning a profit. “This year I tried to sell more alcoholic beverages,” she explains, and emphasized popular brunch drinks such as the mimosa.

The egg-price increase also gave Champion an opportunity to revisit training for her staff. “We reviewed how our line cooks were ladling the eggs,” she says. “Every 2-ounce ladle is one egg, and pouring an extra half ounce changes the cost.”

Attention to detail makes a difference, says Ronald Hankamer, president of Houston-based Marble Slab Creamery. After seven years as an ice cream retailer, he’s noticed boosts to dairy prices. With each subsequent increase, he advises franchisees to button down the operations.

“When food costs are high and there isn’t much we can do about it, we tell them to watch labor costs, to make sure everything is perfectly in line,” Hankamer explains. “When you keep service in line, you can keep customers coming back.”

Seasons Change
Nary an item on the menu at Bob Evans restaurants hasn’t been impacted by cost changes.

187.0
Where the Producer Price Index for eggs stood in March 2004, versus 153.0 in January 2004 and 99.7 in January 2003. (U.S. Department of Labor)

“We’ve experienced a substantial increase in food costs across the board over the last 12 months,” says Merl Beery, vice president of purchasing for the 580-unit family-dining chain. “Eggs went up, cheese went up, pork bellies went up.”

Like many operators, Columbus, Ohio-based Bob Evans locks in prices for a major portion of its food purchases with a distributor, leaving a small percentage vulnerable to market conditions. Beery says that for those few items—basics such as cheese and butter—the company implements a series of cost-stabilizing programs.

The programs, he explains, “deseasonalize pricing” for products whose costs vary from season to season. Accomplishing this requires careful orchestration, including risk-management assessment.

“Sometimes our deseasonalizing programs have us simply buying products in advance of when they are most expensive, storing them in refrigerators and managing our inventories,” Beery says.

Cheesy Choices
More than rent and employee labor, mozzarella cheese takes the biggest bite out of Papa Murphy’s Take ‘N’ Bake Pizza’s revenues.

Marble Slab Creamery advises franchisees to keep other operating costs in check when dairy prices increase.

Jerry Kenney, senior vice president of operations, says that the price the Vancouver, Wash.-based carryout pizza chain pays for mozzarella varied between a low of $1 a block pound in 2003 to a high of $2.20 this year. With 830 stores each producing about 1,100 pizzas a week, the chain estimates that it will use 38 million pounds of mozzarella this year.

“You try to do long-range forecasting and commit to product rollouts and specials, sometimes months or even quarters in advance, without knowing what the cost of your most expensive ingredient will be,” he says.

To assist its franchisees in getting the best cheese price, Papa Murphy’s corporate office has developed a Cheese Stabilization Program. “We go to our cheese suppliers and contract a price out for a year,” Kenney explains. “Our operators have a choice whether to opt into the program or not.”

For Papa Murphy’s, Kenney says, the popularity of its lower-carb pizza, deLITE, has had an unexpected but beneficial impact on food costs. “The deLITE pizza has a lighter crust so we reduced the toppings and the amount of cheese we use so the crust can support it,” he says.

Chicken Dance
Peter Rossi, assistant director of purchasing and systems for Brown University Dining Services, says healthy relationships with a variety of vendors help his operation manage food costs.

Charged with serving more than 5,000 meals a day to students, faculty and visitors at the Providence, R.I., university, Rossi says he and the dining-services staff lock in prices for about 70% of their products, including canned and dry goods. The other 30% goes out for bid.

“For whole produce we have five vendors that we request weekly pricing from, which allows us to get competitive with our costs and get the best quality for the best price,” Rossi explains.

For example, when poultry prices began to climb in the beginning of 2003, he was able to find an alternative—a frozen product—that Rossi and his entire staff was comfortable serving and that boosted the bottom line.

“That frozen chicken breast saved us about $10,000 through the course of the year,” he says.

Fat Chance
When butterfat prices fattened up in the fall of 2003, Chris Prasifka, chief operating officer for frozen-treat operator Carvel Corp., went straight to his franchisee advisory board to take action.

“By January, butterfat prices were $1.60 a pound,” he explains. “We decided then to buy enough to make it through our entire summer season and then we watched as the market price eventually reached $2.10 a pound.”

Such decision-making, Prasifka says, is crucial, as is consulting with experts.

“Our ice cream mix is 65% of our entire food-cost purchase so we are tied very closely to the commodities that relate to it such as butterfat, milk and sugar,” he explains. “We talk to experts in the commodities markets to tell us if we should hedge during a particular time period.”

Traditionally, Atlanta-based Carvel recommends that its franchisees enact an annual 2% menu price increase during spring, which Prasifka says helps to cool the sting of fluctuating butterfat prices.

“Doing this ensures that price increases are done consistently and during the slowest time of the year,” he says. “It’s best to make price increases when you don’t have as many door swings.”

Houston-based Marble Slab Creamery takes a similar approach, adjusting prices during slower months to compensate for higher food costs of sugar, milk and butterfat.

“It’s up to each franchisee how to price their products,” says Ronald Hankamer, president of the ice cream chain. “While the majority have elected to leave their pricing where it was and weather the storm, there have been a few who took a price increase in March and April with the intention of reducing prices when food costs went down.”