It’s hard not to get discouraged when all-time-high costs are affecting nearly every ingredient in the kitchen, from beef to cheese. But it’s important to have a strategy in place to navigate the unpredictable volatile nature of the supply chain, to partner with an efficient distributor and to be aware of potential issues down the road.
During last month’s National Restaurant Association Show, Joe Schechinger, senior director of Commodity Risk Management for Wendy’s Supply Chain Coop QSCC; Joe Hinton, senior director of Logistics and Brand Program Management at Brinker; and David Cox president of Arby’s Coop, ARCOP Inc., offered their insight and tips for operators big and small.
Markets and volatility
Schechinger said volatility is unprecedented in the protein and grains markets. This is being driven by a variety of factors, including unrest in the Ukraine, which has a strong pipeline for energy and is also one of the largest grain producers in the world.
“Right now, they should be getting crops in the ground. If not, there is going to be a big gap,” he said.
There has also been unfavorable weather in South America that has damaged crops enough for a yield loss. With deteriorating conditions in heavy wheat growing areas, prices peaked in early May. But we’re starting to get a glimpse of relief, Schechinger said.
Other drivers of uncertainty include:
- The EPA’s expected biofuel rulings;
- Forecasts calling for the likelihood of an El Niño weather pattern this summer, which could cause dry weather in the Midwest. The upside of this, however, is it could break the long-standing drought in California and help bring produce costs down.
- U.S. agricultural exports remain high or, as Schechlinger said, “Off the chart this year. Soybeans are already at 98 percent this year with four months left in the crop year. Dairy exports have been wildly high, mostly to China. That’s why we’ve seen record-high cheese prices,” he said.
The protein market is especially complicated right now because supplies are lower than the forecast. Beef, in particular, is higher than anticipated with high grain costs and a reduced herd.
“The retention of heifers and a reduced cow slaughter is reducing beef trim supplies,” Schechinger said. “That’s bad for now, but good for the long term.”
Also of note, ground beef is almost as much as the whole product at the moment, as more carcass is being “fed into the trim.”
“Anyone who’s selling ground beef in 99-cent products, that’s going to make it hard,” Schechinger said
Pork and bacon prices are also higher than anticipated because of grain prices and the PED virus that has caused an estimated 7 to 9 million hog deaths. The extreme volatility is expected to continue throughout 2014, especially now through August.
Dairy prices have broken records due to both the California drought and the cold temperatures in the Midwest this winter, which have held back production growth.
To navigate the commodity instability, Schechinger suggests determining which one is the most critical to your operation and using forward pricing and risk management tools to reduce uncertainty and lock in margin.
“Talk to vendors and suppliers. They’re a great resource. Build a strategy to eliminate risk and lock in margin for your business,” he said. “We hope the markets are going to come down, we hope it's going to rain. But hope's not a strategy. Write it down, talk to your partners and figure out how to protect yourself.”
Picking the right type of distribution
Hinton provided an overview of the current distribution landscape, and how to choose the best partner. There are, essentially, three types of distributors, including broadline, systems and specialty.
Hinton said there are also three types of distributor relationships – transactional, developmental and preferred customer. Transactional is common with broadline distributors. Developmental helps operators take costs out of their system. And preferred customer relationships include culinary support.
“(Preferred distributors) are your purchasing arm. They do it for you. They have vendors coming in and showing what's new and then they bring it to you,” Hinton said. “They sometimes even help develop your menu. They can be critical to your strategy.”
Distributors typically price their programs through margins, putting a percentage on top of cost and delivery; fee per case; surcharges (for non-controllable costs like fuel) and service requirements (i.e. cases per delivery and delivery per week).
What defines a good distributor?
Cost isn’t the only thing that defines a good distributor, however. Hinton said it’s also important to look at their food safety record and customer service metrics, as well as their sanitation practices.
Also, assess their growth potential. If you’re looking to grow your brand, can they support you and grow with you, or are they limited by geography?
“Ask about their price and cost information sharing. If they’re not willing to share their information, help get them there,” he said. “Also, look at stability. What’s their turnover rate. Visit their warehouse. By talking to their people, you’ll learn a lot.”
Finally, Cox forecasted emerging issues that could continue to impact supply chain costs, including ethanol/corn; antiobiotics; animal welfare; and “food components of concern.”
Ethanol/corn impact, he said, is a big issue. Up until 2006, corn prices were set by food supply and demand only. Now, energy has a bigger impact because of the Renewable Fuel Standard that was expanded by the EPA in 2007.
“The RFS mandate established an underlying floor for corn by creating mandated ethanol production levels that increase each year,” Cox explained. “It guaranteed demand for ethanol. So now, 40 percent of corn grown in the U.S. is used for ethanol production. In commodity world, corn is king. It impacts all other costs.”
The National Restaurant Association and the National Council of Chain Restaurants are both focused on a repeal of the RFS. The policy, Cox said, impacts chain restaurants by $3.2 billion a year, or about $18,000 per QSR per year.
Finally, there are emerging food components that are now on the radar that weren’t just a few years ago, such as salt and high fructose corn syrup reduction. Most chains have moved away from transfats and are in the process of eliminating ADA, “the yoga mat chemical” from their food.
“The industry can make a quick change to this because there are alternative food colorings,” Cox said. "I don't know if it's critical or a health concern, but nobody thinks ‘artificial’ should be in food anymore.”
Photo provided by Wikimedia.
Alicia Kelso has been a professional journalist for 15 years. Her work with QSRweb.com and PizzaMarketplace.com has been featured in publications around the world, including Good Morning America, Voice of Russia radio, Consumerist.com and Franchise Asia magazine.