• Melting Profits

    Tags: Cheese
    -

When prices increase on any pizza ingredient, operators see a gradual chipping away of profits. But when the ingredient is cheese-which accounts for 35 to 40 percent of the cost of a pizza-those chips become chunks out of the bottom line.

According to the trade publication Cheese Reporter, cheese prices have gradually gone from just under a dollar in late 2000 to near the $2 mark. (Cheese is traded on the Chicago Mercantile Exchange in 40-pound blocks and 500-pound barrels of cheddar. Wholesale prices vary widely by cheese type and volumes purchased by each operator, but most soft cheeses stay fairly close to cheddar prices.)

"The market bottomed out at about 98 cents last November, and it's sitting at about $1.72 right now," according to Dick Groves, publisher and editor of the Cheese Reporter. "It was pretty gradual. If you look at monthly averages starting in December, they started ticking up, and they've been sitting over $1.70 now for a month or more."

"[Cheese prices have] gone up at odd times this past year," said Ted Rowe, owner of Mulberry Street Pizzeria in San Rafael, California. "It hasn't followed its historical pattern. For instance, usually when school comes back in session, there's an increase in dairy prices."

Rather, it seems that current price conditions are the result of a three-year convergence of circumstances. The machinations of supply and demand have brought milk production to a too-low point.

"In 1998 and 1999 milk prices were very high," said Groves. "That in turn led to production expanding, and it basically led to an oversupply. The oversupply led to prices crashing in late 1999, and they stayed low for well over a year. The result of low prices is exactly the opposite of high prices; low prices led to declining production, and that declining production in turn eventually led to higher prices."

Groves says that according to the USDA, milk production is still below what it was last year. "We have yet to see production completely respond to the high prices," he said.

As you can guess, a lack of milk not only creates a shortage for cheese production, but for all dairy. "Not only is cheese up, but butter's up over 100 percent over last year," Rowe said. "It's not just cheese, it's all our dairy."

Pizzeria owners seem to be steeling themselves for even higher prices, but opinions are divided on how exactly to respond to those increases. Some operators are willing to look at raising their prices as a necessary cost of doing business.

"Every 10 cents cheese goes up, you lose one point in food cost," said Mike Scruggs, senior vice president of global operations for Detroit-based Little Caesars. "So if you don't adjust your pricing accordingly, guess what? That's a point off the bottom line. We raised prices in our company stores in June from a menu board standpoint, but a lot of our business is done off couponing. We haven't adjusted since [cheese] went up another 40 cents.

"Are we going to? We're taking a look at it. We've got to be cognizant of our profitability. You've got to have a plan to maintain the margins."

Scruggs said operators have to be good at suggestive selling, enticing people to buy drinks or side items or more toppings at regular prices. That he, added, offsets discounts.

Ann Arbor, Mich.-based Domino's Pizza take a different view.

"Pizza is a highly competitive category, and companies would be raising prices at their own risk," warned Tim McIntyre, vice president of corporate communications for Domino's. "The other risk, which is extremely short-sighted, involves those companies who reduce their portions. Customers notice things like that, and that's bad business."

McIntyre said that the pizza business is different that others, such as the gasoline business, where operators raise and lower prices based on fluctuations in product costs.

"Again, we look to manage our costs to the best of our ability," he continued. "In our case, we also look to create better-value 'bundle' deals for our customers."

Caught somewhere in the middle of all this is the independent operator, constantly watching what the big boys do and trying to anticipate its affect on them.

"We took a price increase about a year ago," said Rowe, "and we're not anxious to take another one. Every time we take a price increase, there's fallout. I feel we lose a certain portion of our guests to somebody who maybe is selling it cheaper. It's hard for mom-and-pop operations."

John Vajda, national sales manager for the food service division of cheese producer Sorrento Lactalis, Inc. offers this advice for the pizzeria operator: "Slowly raise your menu prices, watch your yields carefully, stay on top of the market and constantly challenge your sales rep to make sure you are getting the best possible price."

Cheese Reporter's Groves disagrees with Vajda's increase strategy.

"Right now I'd be a little hesitant to raise prices, with the economy how it is," said Groves. "Back in 1998, cheese prices hit $1.90. Granted it's been a huge increase since last November, but prices are still 20 cents below their peak. I don't know what pizza makers did in 1998 and 1999 in response to those higher prices, but their strategies might be along those lines. What goes up must come down."

But when? Like most operators, it can't be soon enough for Rowe, especially when customers don't feel his pain.

"When we raise prices, then people go home and see Donald Trump advertising a $12 pizza on the TV," said Rowe. "They ask us, 'Well, why are you charging $18?' I had a lady in here give me grief the other day over a $20 pizza, then she went out and got into a new Volvo with all the bells and whistles."

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