Mitigating commodities concerns for restaurants

This is part of Nation Restaurant News' special coverage of the 2012 MUFSO conference, taking place Sept. 30-Oct. 2 at the Hilton Anatole Hotel in Dallas. Follow coverage of the event on NRN.com's ‘At the Show’ section, read onsite blogs from NRN editors at Reporter’s Notebook, and Tweet with us using #MUFSO.

Rising commodity prices will be a hurdle for restaurant operators in the next few years, but collaboration – both internally and with suppliers – can help minimize the impact, a MUFSO panel said Monday.

This year, commodities are on everyone’s mind, “and it’s all about corn,” said John Barone, president and chief executive of research firm Market Vision Inc., and a contributing editor for Nation’s Restaurant News.

The nation is suffering from a second year of drought that is impacting commodity prices overall. In 2011, the drought was focused on Texas and Oklahoma, where about one third of the nation’s cattle was located.

This summer brought a second wave of drought through most of the central U.S. that has taken a big bite out of the corn crop, and will likely continue to impact livestock that depends on it, said Barone. The drought is expected to persist through the year’s end.

As a result, corn prices are expected to continue to climb. The U.S. Department of Agriculture is forecasting prices of $7.90 per bushel in 2013, a 26.4-percent increase.

The worst news, however, is about beef, which Barone said may be pressured through 2015. Cattle prices, which saw a more than 20 percent increase in USDA pricing in 2011 versus the prior year, were expected to rise more than 5 percent this year, with another 5 percent increase projected by 2013.

Chicken wing prices are also expected to remain high as bird counts drop, though breast protein is expected to be more available, said Barone.

The good news: The reported bacon shortage is expected to be limited to Europe. In the U.S., pork prices have been declining since summer as producers liquidate their stock, but prices are projected to climb about 6.6 percent next year, according to USDA forecasts.

If the U.S. sees a strong corn crop next year, however, “there will be light at the end of the tunnel,” said Barone – at least for the second half of the year.

Managing risk

With such challenges ahead, restaurant operators must focus on visibility within their supply chain, taking a close look at every aspect of getting their product in the door, said Charlie Lousignont, vice president of supply chain management for Aramark.

Some areas to trim costs are less obvious, but effective, he said.

Restaurants might, for example, consider giving their suppliers more flexibility with delivery, which could help them reduce their costs and pass those savings. Or it could be something as simple as rethinking the cardboard box the product is delivered in, or the packaging. “That sort of thing doesn’t really impact the consumer,” he said.

Janet Erickson, executive vice president of supply chain for Del Taco, based in Lake Forest, Calif., agreed. “Get data. Understanding where you are is key,” she said. “First look at where your money is going, then start to peel back.”

Erickson said the team at Del Taco had a brain-storming session last year after seeing pressure on one commodity that hadn’t been anticipated. Together, the team evaluated ways to mitigate the increased cost and found opportunities to save.

Some restaurant operators might be tempted to push back on suppliers, or threaten to take business elsewhere, said Lousignont. “That might feel good, but, at the end of the day, it could also be the most expensive decision you make,” he said. “You have to recognize they’re dealing with forces you can’t always control.”

Erickson said suppliers are much more willing to break down costs, giving restaurant operators an opportunity to drill down more deeply. “Twenty years ago, if a buyer asked for a formula on pricing, they’d say, ‘Why do you want to know? You’re just going to beat me up about it.’”

Restaurant operators must be proactive in seeking a solution, said moderator David Parsley, senior vice president of supply chain management at Brinker International.

Added Barone: “Wishing, hoping and praying are not good risk management strategies.”

Find more MUFSO 2012 coverage online at NRN's sister publications, Restaurant Hospitality and Food Management.

Contact Lisa Jennings at [email protected].
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