PIZZA EXPO COVERAGE: Attendees sing the cheese price blues

March 30, 2004

LAS VEGAS—Michael Shepherd knew cheese prices were going up, but he hadn't checked the block price in several days since setting out for the International Pizza Expo, held March 16-18 at the Las Vegas Convention Center.

When told the block price on the Chicago Mercantile Exchange (CME) hit $1.97 on March 17, he was shocked.

"Oh, that's not good," said Shepherd, owner of two-unit Michael Angelo's Pizza in Kenton, Ohio. Informed that one dairy watcher predicts the price may peak at $2.20, he added, "Man, that really stinks!"

For him, but not his customers. The same amount of cheese will go on his pies as always, he insisted.

"We just eat the increase," he said. "A lot of operators will raise prices temporarily, but we'll just ride it out."

That same day, a standing-room-only crowd of about 150 operators came to hear "Big Dave" Ostrander discuss why cheese prices are so astronomically high. Exactly a year earlier, the block price was $1.08, and operators' food cost worries were few.

What a difference a year makes.

"I said to a lot of people back then to save some money every week while prices are low, because I knew

What's Important

Record-high cheese prices are crushing pizza operators' profits.

Industry experts recommend operators stay the course and don't reduce the amount of cheese on their pies. Instead, institute strict portion control measures to manage costs.

Sooner or later, industry watchers predict, prices will return to more manageable levels, but that $1.80 cheese prices could be the norm for months to come.

it would come back to get them," said Ostrander, a former Oscoda, Mich., operator turned pizza industry consultant. "Dairy farmers can't operate profitably for any price under $1.30 on the CME, and it was well below that much of last year. So, when we feasted, the farmers died, and now the pendulum has come the other way."

It's not expected to swing backward anytime soon, according to many dairy watchers. Pat Spaulding has tracked the dairy industry for decades as a foodservice sales and marketing consultant for cheese companies. All sources indicate, he said, that the block price could hit $2.20 before falling backward slowly.

"That's a high number, I know, but it's not out of the question," Spaulding said. "It won't stay there long, but I think we could see cheese in the $1.80 range for a long time."

As Ostrander told his audience, multiple factors combined all at once to push prices deep into record territory. Among them:

* Low demand for cheese in 2003 drove U.S. dairy farmers to cull their herds.

* Poor feed quality and rising grain prices are pinching those same farmers' already-meager profits.

* Neither a mild winter nor the onset of spring has boosted milk production as expected.

* A synthetic hormone used to boost per-cow milk production is in woefully short supply worldwide.

Add to the mix some panic buying and you get a scarcity problem, he said.

"A couple of major (pizza) players are coming up short and now they're going to buy anything white," he said. "Milk's in short supply ... and we're not even in ice cream season yet."

There's nothing sweet about that, said Ron Stilwell, president and CEO of 23-unit, Phoenix-based Eatza Pizza.

"More than $2?" Stilwell asked, when told the market was climbing. Making a profit on such high prices is particularly difficult for a $3.99 all-you-can-eat buffet concept like his, he said. "I'm not sure how you get through that without at least thinking about raising prices. This is going to be tough."

Everybody should do it

Sean Brauser, owner-operator of Romeo's Pizza in Medina, Ohio, said high prices won't push him to cut back on the quality or quantity of cheese he puts on his pizzas. But he believes the increase mark the opening pizza operators need to justify raising their prices en masse.

"Let's get it done, let's all raise prices," said Brauser. "And when prices come down, we'll all make a better gross profit, which we need. Otherwise you're giving pizza away when you're paying $2.50 for cheese and not changing the price."

Steve McPherson, a buyer for Jack Palmer Foodservice in Shelbyville, Tenn., agreed that operator profits will be hurt by the price increase. He

"I'm afraid some of you are not going to be in business next year. I'm definitely afraid that this is going to take some of you people down; it's big enough to do it to you."

Big Dave Ostrander,
pizza industry

recommended, however, that owners use some simple math to help them see that the per-pie price increase isn't that dramatic.

Most of his 300 pizza clients put 6 ounces to 8 ounces of cheese on a pie, he said, which yields a cost increase of about 20 cents to 25 cents for each, based on current prices.

"That's why I think they ought to stay the course," he said. "If you start running around to Sam's and Wal-Mart to buy cheap cheese, you're taking a gamble on your customers for a quarter per pie. You're better off to be honest up front and add surcharge."

High cheese costs also may signal a good time to rewrite menus and update prices, McPherson added. "Instead of going up that quarter, you should go up 50 cents. That way if it does go higher, you're covered for a period of time."

Shepherd wishes he had the option of raising his menu prices, but a recent trip to the printer effectively quashed that idea.

"I just had 50,000 menus printed, so it's kind of hard to go raise prices now," he said. "What we can do is pull back on our discounting and try to move customers back to our original menu price."

Since both Shepherd and Brauser already follow strict portion control standards in their operations, there's little else to do internally other than ride out the current price spikes. According to Ostrander, only half of the people in his seminar raised a hand when he asked who weighed out and pre-portioned their cheese.

"I told them, 'You've got to go downstairs (to the Expo show floor) and buy a scale now,' " he said. " 'You've got to put the tools in the hands of your employees that will allow them to do the job, or I'm afraid some of you are not going to be in business next year. I'm definitely afraid that this is going to take some of you people down; it's big enough to do it to you.' "

Toughest on independents

Shepherd said a Domino's Pizza franchisee he knows saw the price increases coming and bought several thousands of pounds of extra cheese to store in a commercial freezer. While Shepherd admired the man's shrewdness, he said he couldn't do the same because he uses fresh cheese.

"We don't have that luxury, and I guess we suffer for it," Shepherd said. "But I don't want to use frozen cheese, either."

Brauser wished independent operators could find a way to combine their limited capital and hedge themselves on the milk futures market. Going it alone isn't an option for small operators, he said, but a group effort might work.

Tom Bowyer, owner of Gotti's Grinders in Chesapeake, Va., believes small operators like him simply have to tough it out until the situation improves, and that shopping for cheaper cheese prices will only damage relationships with suppliers who are struggling, too.

"We went to a Sorrento open house reception the other day, and we told them we're not going to go to a lower-grade cheese, that we're staying with them," said Bowyer, a former executive with Dollar Tree stores. "The same thing happens in other businesses and you just have to play the hand you're dealt. Operators just have to look at it that way and not panic, and in the meantime, do the right things for their own businesses."

Topics: Cheese , Operations Management

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