Will 2004 be the year the pizza industry finally raises prices?

April 6, 2004

Three cheers for soaring cheese prices—the best thing to hit the industry in years!

Why would I say such a thing?

Not because I'm milking a few head of dairy cattle in the back yard or moonlighting for Kraft. Rather because these record prices are pushing pizza operators to do what they've needed to do—but feared to do—for years: raise pizza prices.

On PizzaMarketplace's homepage, our unscientific poll asked this week, "With cheese prices at record levels, will you raise pizza prices?"

One third of respondents said they've already done it, another third said they will raise prices if cheese prices go higher (block prices have risen 5 cents since the poll started), and the final third said they won't.

Memo to final third: If you want to make even a meager profit this year, you soon may have no choice

Steve Coomes, Senior Editor

but to raise prices.

* Consider this: Dairy analyst Bill Brooks stated in his March 26 commentary on eDairy Inc.'s Web site, that Class III milk futures may hit $22 this year—which equates to a block cheese price of $2.33!

Add in your own provider's margin and try not to shudder.

Assessing the big picture, Brooks' forecast looks beyond milk and cheese shortages to other commodities that influence the price of cheese. For example, if crude oil continues climbing, milk shipping costs will soar. If natural gas prices rise even further, then cheese production costs will rise accordingly.

China has become a factor in the mix as it bids alongside the U.S. on world markets for grain destined for U.S. cattle feeders. That pushes feed costs higher, which ... well, you get the picture.

* MCT Dairies' newsletter, MCTCompass, forecasted a block cheese price of $2.07 for April. Well, on March 31, it hit $2.09, and there's no sign it'll retreat. The same newsletter forecast a block price of $2.18 for August, when Class III milk is expected to hit $21.20.

OK, enough bad news. Here's some good news: I've had several calls and e-mails from operators who have raised pizza prices—only to say their customers haven't made a peep. One operator e-mailed me on March 25 to say she was increasing pizza prices 50 cents across the board, a move made with great trepidation.

However, her tone changed markedly the next day when she reported not a single complaint. Three days later she e-mailed me again saying she sold 600 pizzas over the weekend, and still without so much as a question about the higher prices.

Her message ended with her kicking herself for not boosting prices sooner, and for not raising prices 75 cents instead of 50.

(* I'm currently working on story about raising pizza prices, and I'm looking for sources. If you'd like to talk, call me at 502-241-7545, or send an e-mail to stevec@networldalliance.com, and include your number, and I'll call you.)

Baby you can drive my car ... if you fill the tank

If your delivery drivers are griping about rising gas prices, who could blame them? Like cheese prices, gas prices are soaring to record heights in the U.S., and it appears the ceiling isn't near.

Reuters reported on March 31 that OPEC is so fond of the idea of pushing crude oil to $40 per barrel that a majority of its members have voted not to boost production to ease prices.


To make matters worse, Reuters also reported that an explosion rocked the third-largest oil refinery in Texas on March 30, and that the price ripples already are visible at the gas pumps. (Aren't you glad the cheese market doesn't react that fast?)

In the past I've talked to operators who say they don't raise driver reimbursements when gas prices go up. But if long-term forecasts are correct, high gas prices could plateau a while before falling, and higher reimbursements may be necessary.

Again, we're back to raising prices, but this time we're talking about a delivery charge, not a menu price increase. Could 2004 be the year you bite the bullet and do it?

* To get a good idea of how much money the higher gas prices are costing your drivers, click here to read a story I wrote one year ago about this subject. Inside the piece is a handy table for calculating fuel cost increases over the course of a year.

Tough times make tougher operators

During my recent trip to Las Vegas—where I was in Pizza Expo exile (see See you Las Vegas ... just not at Pizza Expo)—I had several interesting conversations about how under-prepared some pizza operators are to handle this year's cost challenges.

Serving as a judge for the annual Pizza Festiva contest, Jeff Zeak, an instructor at the American Institute of Baking in Manhattan, Kan., realized that at least half of the 12 contestants did not know the actual food cost of the pizzas they'd entered.

Not good.

Equally bad was "Big" Dave Ostrander's discovery that fully 50 percent of the attendees of his cheese-cost seminar did not raise their hands when he asked who in the room portion-controlled their cheese.

As one who always tells it like it is, Ostrander warned the group that he believed some of them would be forced out of the business this year if they didn't get serious about portion control. "I told them, 'I'm definitely afraid that this is going to take some of you people down; it's big enough to do it to you,'" he said in a recent story (see PIZZA EXPO COVERAGE: Attendees sing the cheese price blues).

If the fear factor isn't enough to motivate you to measure everything, then do it for the profits. Operations consultants say most pizza operators can boost profits by 2 percent to 6 percent just by establishing portion control standards. Sound enticing?

Some other things I learned while in Expo exile ...

* John Harvey, inventor of the Presseal round pizza box, was in town to see whether pizza box manufacturers would be interested in his innovative product, and he visited with me to show it off. It's truly a neat thing, and one that makes a lot of sense for pizza operations. It's handsome, very sturdy, has a much-needed bottom grease barrier, doubles as a serving tray, and—get this—takes up one-tenth the storage space that assembled boxes do in a pizza shop.

Want more details? Read an in-depth story on it right here this week.

* Sales of low-carb pizza are super strong at a Papa Murphy's Take 'N' Bake Pizza store in Phoenix. An operator from another Phoenix pizza company said the PM's franchisee told him he was about to abandon his operation until the company's low-carb Thin crust deLITE pizzas debuted in February (see Papa Murphy's to launch lower-cal, lower-cab line of pizzas). "Now, I'm thinking about opening new stores," the PM's franchisee told my source.
That's what I call a successful new product rollout.

Care to comment on this commentary? E-mail Steve Coomes at stevec@networldalliance.com.

Topics: Cheese , Commentary , Operations Management , Papa Murphy's Take 'N' Bake Pizza

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