Coping with commodities

Aug. 4, 2008
Like most pizzeria operators, Moutasem Atiya has been facing difficult times in the pizza business. Over the past year, he's seen the price of everything from cheese to heating costs go through the roof.
Atiya operates Kyro Pizza in Baltimore. Despite the increased cost pressure, Atiya hasn't changed his recipes, although he has had to raise prices
"If we scaled back, the customers would know," Atiya said. "We are biting the bullet and hoping that prices start to go down."
Kyro offers a variety of salads, sandwiches, pastas, calzones and gourmet pizzas. Specialties include Tandoori Chicken Pizza, General Tso's Pizza and a Falafel Pizza.
To cope with the rising cost of commodities, Atiya has stepped up his marketing efforts, hoping to offset rising costs through increased business.   "We have had to look at different ways to attract new customers to the Kyro brand," he said. "We've seen it as a challenge to get more people in the door. 
It's a familiar refrain for pizzeria operators. Nearly all of the key ingredients of a successful operation, from mozzarella cheese to gas for delivery vehicles, have skyrocketed over the past year.   As of mid-July, block cheese prices on the Chicago Mercantile Exchange were averaging slightly under $1.91 per pound, close to where they were this time last year, but still substantially higher than they were at the beginning of 2007 when they averaged about $1.30 per pound. Cheese prices had hit a high of close to $2.30 per pound in mid June.   Flour prices are more than double where they were a year ago, boosted by a weak dollar and surging demand from overseas.
And causing the most pain are fuel prices. Along with the everyday pain of filling up the gas tank, many vendors have tacked on fuel surcharges to their delivery invoices, putting even more pressure on pizzeria operators.
"Two of my distributors have instituted delivery surcharges due to the rapidly rising cost of fuel," said Ann Reichle, owner of Angelina's Pizza in Olmstead Falls, Ohio. "I am in the process of eliminating a vendor to drag more business into my two remaining distributors for better pricing; so they can make money also. Without them we are all out of business."
Rising wages hurt as well
The big players also have been feeling the pain. In its second-quarter earnings, Pizza Hut parent Yum! Brands said commodity expenditures for its U.S. operations had risen $30 million in the quarter compared with the same period last year. Overall, the company expects commodity expenditures to increase $100 million in 2008 compared with last year.
Papa John's, meanwhile, said the price it paid for cheese increased 20 percent in the 2008 first quarter. Domino's said its supply margins had declined 1.5 percent in the 2008 first quarter, partly due to rising cheese prices.
Labor costs also were a factor for many operators. Last year in Ohio, for example, the minimum wage rose from $5.35 per hour to $6.85 per hour.
"The first pay period cost my location $900 in additional payroll," Reichle said.
"The hidden cost was that this increase was so great that it surpassed the raises I had given those in between who had worked their way up to $6.50 or $6.75," she said. "Those willing souls, who had earned their way up the ladder said, ‘Where's mine?'"
Ohio's minimum wage has a built-in annual cost-of-living increase, so at the beginning of 2008, the minimum wage increased to $7 per hour.
To cope with the increased payroll, Reichle was again forced to raise her prices.
"Customers were less than impressed when they were told that they voted in the wage increase and now they would have to pay for it," she said. "They felt the business owner would foot that bill."
Finding ways to cope
Joe Devellis, who owns and operates three Giove's Pizza Kitchen restaurants in Connecticut, saw his flour prices triple over the past year.
And although flour prices have fallen a bit in recent months, he's still paying more than double what he was in early 2007. On top of that, the price he pays for fryer oil has tripled as well.
"My partner and I, in anticipation of the increases, adjusted our prices last fall as much as we thought we could," he said. "Still, you just can't make up the difference. Our profits are down considerably."
Scott Anthony, a pizzeria consultant and owner of Fox's Pizza Den in Punxsutawney, Pa., has taken a number of steps in his shop to cope with price pressures.
"We have to really pay strict attention to our food cost," he said. "Portion control is strictly enforced."
Fox also has invested in new energy-efficient ovens in an effort to lower utility costs. He's replaced light bulbs with compact fluorescent bulbs, and all of his light fixtures and thermostats are on timers.   Fox has tweaked his schedules to make them as tight as possible and sends workers home when it's slow. He also constantly evaluates his menu items to make sure he's getting the most for his money, he said.
"You have to closely track ads and see where your greatest return on investment is and go with that," he said. "Not all costs can be passed on to the consumer, so you have to save wherever you can."
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Scott has implemented bonus programs to encourage his employees to bring in business, and he recommends operators engage in e-mail marketing as a low-cost alternative to direct mail. He's also tweaked his schedules to stagger shifts and help lower payroll costs.
Most importantly, Anthony said, operators need to make an effort to be a real part of their community and make customers aware of the pressures they face
"Be honest with your customer," he said. "Consumers will be more empathetic of your situation and the prices you have to charge if you just level with them."

Topics: Cheese , Delivery , Domino's Pizza , Dough , Operations Management , Pizza Hut

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