Over nearly two decades, Dave Ostrander has helped pizzeria clients weather the storms of cheese price hikes, labor shortages and recessions. But given the triple whammy of hikes in dairy, labor and, now, flour, Ostrander, an Oscoda, Mich.-based consultant and former pizzeria owner, expects a lot of pizza businesses to be wiped out.
Flour costs have at least tripled for most as depleted wheat supplies pushed the price of that commodity five times higher this February than last. Meanwhile, 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.
“There’s going to be an industry shakeout, no doubt,” said Ostrander, who operated Big Dave’s Pizza for 25 years. “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. That’s flour, and it’s here.”
The surge in wheat prices also is hurting flour-dependent chains outside of the pizza segment. In February, Lakewood, Colo.-based Einstein Noah Restaurant Group Inc., said that it had locked in wheat prices for the year in a proactive move to rein in costs. The company, which has about 600 restaurants under the Einstein Bros. Bagels, Noah’s New York Bagels and Manhattan Bagel brands, said it would still pay $6.1 million more for wheat in 2008, but without the new contract, it would have paid $15 million more.
Despite record block cheese prices of $2.20 per pound in 2004 and 2007, supply always met pizzerias’ demands. This year, flour is an entirely different story. Ongoing droughts in Australia, Argentina and Europe, plus last year’s dehydrating summer in the United States, have depleted 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, or NAWG. “This is the lowest supply we’ve seen here since World War II. We really need to bring in a good crop this year.”
Coppock said rumors of flour shortages are serious, and while he doesn’t expect widespread shortages, he predicts millers and distributors will ration flour to ensure no one runs out totally. Rationing already is underway, said a single-unit client of Ostrander’s. In the final week of February, he ordered 25 50-pound bags of flour, but received only six 25-pound bags. Needing more, he procured 15 bags from another supplier for a cost of $23.89 per bag—nearly triple the 2006 cost.
Although Michael Angelo’s Pizza is on pace to post record sales in 2008, owner Michael Shepherd said the meager money he’s making is just enough to keep the lights on at his Kenton, Ohio, store.
“We’ve never worked harder and made less since I’ve been doing this,” said Shepherd, who owns a second store in Rushsylvania, Ohio.
Last year, a Domino’s Pizza store not far from his closed, confirming chains are suffering too.
“If they’re not making it, that ought to tell you something,” Shepherd said.
For now, he has cut unnecessary expenses and tightened labor.
“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,” Shepherd said.
Large players are suffering, too, said Vic Cassano Jr., owner of 36-unit Cassano’s Pizza in Dayton, Ohio. As a frozen dough supplier to other restaurant companies, Cassano buys millions of pounds of flour each year, but the volume is not lowering his price much.
“It’s a nightmare for us, too,” said Cassano, whose flour prices are up threefold. “We’re locked in through July, but if the spring crop doesn’t come in, there’s a possibility we won’t get any more.”
Craig Moore, president of 620-unit CiCi’s Pizza in Coppell, Texas, said its operators are spending as much as $1,000 more per week on food, and that stores raised buffet prices between 50 cents and $1 nationwide to offset the increase. Luckily, he added, same-store sales “are plus 7 [percent] for the year, and that number’s protecting us from a lot of problems.”
Jim Moran, a regional director for Domino’s Pizza Team Washington, a 58-store franchise group based in the U.S. capital, was recently shocked by cost increases.
“Just on Monday we saw price increases on cheese, green peppers, ham, ground beef and bacon,” Moran 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 and rising petroleum costs on pizzerias’ P&Ls, but he says much of the raw-materials 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 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.”
Tom Lehmann, director at the American Institute of Baking in Manhattan, Kan., said the draw-down on global flour stocks started 20 years ago when food manufacturers began shifting from rice as a starchy staple for their products to wheat as a foundation.
“Things were fine as long as had we had a strong supply, and supply historically outstripped demand,” he said.
But unusual weather has changed the game, he added. 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.
“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.
NAWG’s Coppock said global wheat consumption has outpaced production six of the last seven years, and that a supply imbalance was inevitable. Crazy weather merely became the tipping point. He adds that while farmers are thrilled about this year’s price increases, they’re still not making much money. Costs for diesel fuel and fertilizer have tripled over the past two years.
Cassano wants the federal government to ban wheat exports to bring some relief to domestic users.
Coppock disagrees strongly, saying tight supplies are not a good reason to reverse the long-proven benefits of free global trade.
Both Lehmann and Coppock say reports from the wheat fields, where the winter crop will soon emerge, are good so far. Lehmann said a loss of this crop would be significant but not devastating as long as the spring crop, which is planted in the spring and harvested in late summer, comes in. He noted that at least three to five years of good crops worldwide are necessary to replenish global stocks. But even if the spring crop is good, he said, “we’re not going to have a significant reduction in flour prices.”
“Look for prices to stabilize and then thank God we’ve got a full year to resupply inventories,” Lehmann said.
In the meantime, Ostrander said, pizzeria operators must raise prices or go broke. But Shepherd of Michael Angelo’s said that after raising prices three times over the past 18 months, he thinks his customers are at the breaking point.
Nonetheless, Ostrander said, independents and chains alike have to focus on the long term and “quit ignoring that they’re bleeding to death.”
“Most of these guys are not even aware that they’re selling their food below cost, and they’re borrowing themselves into debt just to stay alive,” he said. “You’ve got to raise your prices or you’ll be bankrupt.”