NATIONAL REPORT With flour prices already having tripled and wheat prices running five times above the year-ago cost, the nation’s pizzerias are facing what observers say is an unprecedented challenge that could force some players out of business.
“We watched them handle the cheese spike and then the minimum-wage increase, but I always feared one more cost spike could do some in,” said Dave Ostrander, an Oscoda, Mich.-based consultant to pizzerias for nearly two decades and a one-time operator himself. “That’s flour, and it’s here.”
It’s not as if those other cost issues have gone away, Ostrander noted. Cheese prices, driven by strong international dairy demand and soaring feed costs, are again above $2 per pound, and labor costs are soaring on the heels of state-mandated wage hikes.
But flour is different, in part because availability is a factor along with the price of the market’s limited supplies. Ongoing droughts in Australia, Argentina and Europe, plus last year’s dehydrating summer in the United States, have depleted wheat supplies to 30-year lows abroad and 60-year lows at home.
“For six out of the past seven years, we’ve consumed more globally than we’ve produced,” said Daren Coppock, chief executive for the Washington, D.C.-based National Association of Wheat Growers. “This is the lowest supply we’ve seen here since World War II.”
Occasional droughts in one or two wheat-growing countries didn’t upset the global market. But recent years’ unseasonably cold springs and searing summers have ruined crops in nearly all of the world’s largest wheat-growing countries, said Tom Lehmann, director of the American Institute of Baking in Manhattan, Kan. “As a result, the world’s inventory of wheat has gone from what historically was a nine- to 12-month supply to what I’m hearing is a two-week supply today,” he said.
Coppock said rumors of flour shortages are serious, and though he doesn’t expect widespread shortages, he predicts millers and distributors will ration flour to ensure no one runs out.
Rationing already is under way, according to a single-unit client of Ostrander, who declined to identify the pizzeria. In the final week of February, the operation ordered 25 50-pound bags of flour but received only six 25-pound bags — 150 pounds, versus the 1,250 pounds that were ordered. Needing more, the operator procured 15 bags from another supplier for a cost of $23.89 per bag — nearly triple the 2006 cost.
Large players are suffering, too. Craig Moore, president of 620-unit CiCi’s Pizza in Coppell, Texas, said the chain’s operators are spending as much as $1,000 more per week on food, and that stores raised buffet prices 50 cents to $1 to offset the increase. Luckily, he added, same-store sales “are plus-7 for the year, and that number’s protecting us from a lot of problems.”
Jim Moran is a regional director for Domino’s Pizza Team Washington, a 58-store franchise group based in the U.S. capital. Cost increases handed down to him recently shocked the industry veteran. “Just on Monday we saw price increases on cheese, green peppers, ham, ground beef and bacon,” he said, adding that he knows Domino’s is getting a better deal than independent competitors. “Team Washington’s sales are higher than they’ve ever been — an average of $18,000 a week. But it’s almost impossible to make any money when costs are like this.”
Moran acknowledged the effects of drought-driven flour shortages, but he says much of the supply problem can be blamed on increased corn planting and the government’s subsidy of the crop.
“This is an election year and the politicians need to win states that produce corn,” said Moran, son of U.S. Rep. Bryan Moran, D-Va. “They’re all going around saying ethanol is the answer when it makes no economic sense. The [overemphasis on corn] is having a ripple effect on the entire market and everything we buy. It’s a scam that’s costing everybody.”
Last summer, the National Restaurant Association asked leaders of the U.S. Senate to consider the impact on food prices of measures intended to foster ethanol production. The association asked lawmakers to consider such alternative as biodiesel, which can be recovered from used restaurant fryer oil.
The cost and supply of flour is hurting players outside of the pizza segment, too. Last month, bagel specialist Einstein Noah Restaurant Group Inc., said that it had locked in wheat prices for the year to rein in costs. The company, which operates or franchises about 600 shops under the Einstein Bros., Noah's New York and Manhattan bagel brands, said it would still pay $6.1 million more for wheat in 2008. But the increase would have been $15 million higher without the new contract.
Yet the impact may be more profound for pizza concepts because flour is such a significant part of their supply mix.
Michael Angelo’s Pizza had its busiest year ever in 2007, and is on pace to break that record in 2008. But while owner Michael Shepherd hoped profits would fund an expansion of his Kenton, Ohio, store, the meager money he’s making is instead devoted to keeping the lights on.
“We’ve never worked harder and made less since I’ve been doing this,” said Shepherd, who owns a second store in Rushsylvania, Ohio.
For now, compressed margins have forced Shepherd to cut all unnecessary expenses and tighten his labor scheduling — while being busier than ever.
“We’re so busy we need more drivers, more insiders to keep up with demand, and yet after we pay all the bills, it’s little more than breakeven,” Shepherd said. “We’ve managed to patch together enough things to save us about $15,000 a year, but with all costs going through the roof, I don’t know if that’s going to be enough.”