The foodservice world is currently experiencing a shortage of products. Some purveyors are actually refusing to add customers because the are afraid they won't be able to supply both existing and new customers with popular products. There are many reasons for these shortages, including: international issues in developing countries, world affluence, weather-related problems, plant capacities, and the diversion of corn from food uses to ethanol production.

Issues Associated with Developing Countries

The world's major producer and exporter of cocoa, the Ivory Coast, is locked in a stalemate over who won a recent presidential election. Both parties are impeding the export of cocoa to prevent the other from having the fund necessary to operate the government.

World Affluence

With rising economic status comes an increasing demand for higher quality food products including more animal proteins and foods that might be considered "luxuries". Increased affluence results in increased demand that drives up prices and in the case of many foods drives producers to unsustainable levels of harvesting and production. A single bluefin tuna, a species thought to be excessively harvested, recently sold at auction in Japan for nearly $400,000.

Weather Related Issues

In January 2011 Australia's multi-year drought ended with devastating rains and massive flooring and more rain is on the way. Neighboring New Zealand is still in the grip of a multi-year drought. Neither situation is good for crops or dairy production. For years Australia and New Zealand have supplied China's and India's growing demand for dairy products. China's imports of non-fat dried milk has increased more than 260% in the past few years, while India uses ghee (clarified butter) for cooking.

With Australia and New Zealand unable to supply China and India, these countries have turned to the world market, primarily in North America to meet their dairy needs, driving up prices. As of late January 2011, prices of a 2 ½ gallon bag of soft-serve ice cream mix are already up $0.70 and expected to go even higher as summer's demand hits. Hard pack ice cream mix and high-butter fat content foods will increase at an even greater rate.

Plant Capacity Issues

Not all that long ago there was an explosion in one of the largest sugar refineries in the United States. The explosion destroyed 40% of the US sugar production capacity resulting in sugar prices rising from about $0.25 per pound in 2009 to about $0.60 per pound today.

On Thursday, January 20, 2011, a major cocoa processing plant in Holland blew up. Cocoa that was selling on the world market in 2009 for approximately $0.80 per pound closed above $2.80 per pound on Friday, January 21, 2011. Since many cocoa producers are already at or near capacity, it is likely that those companies who had contracts with the destroyed plant will either not be able to get cocoa at all or will push prices even higher.

Diversion of Corn

As corn that would normally go into food products beef, pork, chicken) or be used as feed for animals that produce food - milk from cows, eggs from chickens, is diverted to the production of ethanol, the price of the corn used for feed increases. This results in increasing prices for many animal products.

Future Price Increases

The "official" government forecasts are that overall food prices will rise about 3% this year, on top of already significant year-to-year increases in beef, pork and other specific foods. Forecasts for price increases for specific food include another 10% for sugar, 15-18% for milk solids and butterfat, and another 25% for cocoa powder.

For a restaurant running a 33% food cost, a 3% increase in the cost of the foods it buys will increase the food cost to 34% and reduce operating profit by 1%, which if the restaurant was operating at a 5% profit will be a 20% reduction in profit!

No wonder that McDonald's corporation recently announced that the rising cost of foods will soon be reflected in increased menu prices at their restaurants.

Our Suggestions

We believe that a business should earn a fair profit. In order to do so cost increases that are beyond the control of the business should be passed along to customers. We suggest the following response to food price increases:

1.     Calculate the cost of your menu items and determine if there are those whose costs

are out of line and mark them for adjustment or deletion.

2.     Determine the sales mix of your menu and find out if there are any items that sell poorly and should be dropped from the menu or that sell unusually well suggesting that they are exceptional values whose price could be increased without impacting sales.

3.     Survey your competition, particularly chains, and prepare a comparison of prices of similar menu items. Mark those that appear too low for possible price increases.

4.     Check your trash cans and "doggie" bags. If there is too much food in the trash can or too much going in the doggie bags, your portions may be too large and might be cut. This could allow you to hold your prices steady, but still reduce your food cost.

5.     If you are not computing your food cost regularly, at least once a month, start doing so, so you can track your cost.  

6.     Make sure that the prices you are being charged by your suppliers are fair, take the time to periodically compare prices and make sure that the prices you were quoted are the prices you are charged!

7.     Consider printing fewer menus at a time, so that you have more flexibility with regards to changing prices to reflect increased costs and changes in your sales mix.

8.     Implement the changes to your menu, your pricing, and suppliers and remain vigilant.

If you need help with these steps, give us a call at (413) 774-2786 or (617) 938-8668. We have cost control support service packages starting at a little as $700.