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Commodity Price Hikes Impact Quick-Serves
Bakery/cafes, in particular, are being affected by rising grain prices.

Already reeling from rising costs for dairy, fuel, and other commodities, quick-serve restaurants—especially those featuring café and bakery fares—are taking another hit with record-high grain prices that have forced operators to strategize how best to absorb raw material expenditures for flour and other ingredients.

We were paying $20 for a 100 weight bag of flour in June, and now we’re paying $33 to $34. That’s a huge increase.”

“We are getting clobbered,” says Ed Frechette, senior vice president of marketing for Au Bon Pain in Boston. “We were paying $20 for a 100 weight bag of flour in June, and now we’re paying $33 to $34. That’s a huge increase.”

And that price surge is not likely to subside anytime soon. In fact, the year 2008 will be one that farmers will perhaps remember fondly, but one that quick-serves will not soon forget.

Whether it’s a report from the U.S. Department of Agriculture’s (USDA) Economic Research Service, a grain exchange in Minneapolis or Chicago, or updates in the paper or televised on evening newscasts, the stories all have the same elements of drama: Poor harvests, the weak dollar, increased consumption and a global demand that has India and China vying for the same bushel changes the face of the commodity environment.

According to the USDA, grain—corn, soybeans, and wheat—make up nearly 5 percent of the U.S. gross domestic product. Wheat, however, recently surged passed $10 per bushel, more than double what it was last year, according to grain exchanges in Minneapolis and Chicago. Soybeans were fetching nearly $12 a bushel, but corn at $4.40 a bushel is $1.50 more than it was 18 months ago.

The increasing prices for grain reverberates, if not rips, right through the supply chain. With grain being more expensive, poultry, beef and dairy products are more expensive to produce. The same goes for breads, cereals, and pastas.

“It isn’t just this one commodity. We are faced with multiple increases of commodity items,” says Michael Kalupa, president of the Retail Bakers of America and owner of Kalupa’s Bakery in Tampa, Florida. “There’s almost no hope.”

Retail Bakers is a trade group made up of small business, the neighborhood bakeries, many at the mercy of the market. For Kalupa, the 40 percent hike in bread flour exacerbated the situation. For the last six months, he’s been paying $100 a bag for milk solids, twice the regular price.

“It’s pretty much an uphill climb,” he says. “We have had to raise prices and for a small business that hurts, but we have to make a profit. If it means we lose a customer, we lose a customer. It may mean cutting back deliveries and, sometimes, a couple of employees. It isn’t very pleasant.”

Frechette says Au Bon Pain is having similar experiences, despite being at the other end of the quick-serve spectrum.

“In New York, we have 35 cafes. If the rent goes up at one, you can spread that pain across the other stores, but in this situation, it’s pain across the board because half of our sales involve flour,” he says.

Au Bon Pain, however, is renegotiating supplier contracts for other products, Frechette explains. In many cases, they have changed suppliers and or consolidated with others. For example, for its deli meats, Au Bon Pain now uses just one supplier and while the cost for the products remains the same, the freight is less.

“It’s literally counting pennies,” he says. “Our purchasing department is trying to determine when to buy. We are constantly looking for places to tighten our belts. We need to stay competitively priced for the guests, and we are hoping to ride this out. We do not plan on making a price increase.”

Whether it’s a neighborhood bakery, a quick-service chain, or a supplier, price hikes for commodities present common problems that are shared by virtually everyone throughout the farm-to-fork supply chain, says Ed Honesty, president and chief operating officer of Best Harvest Bakeries in Kansas City, Kansas.

If you are a buyer of commodities, you have to have predictability. You don’t want to be a victim of circumstances, the overhead and production costs.”

From his Best Harvest perch, Honesty has a bird’s eye view of how increased prices are managed throughout the supply chain. Best Harvest supplies hamburger buns to more than 560 McDonald’s restaurants in Kansas, Missouri, and Nebraska. Through its partnership with Fresh Start Bakeries in Brea, California, 14 bakeries supply 24 percent of the McDonald’s restaurants in the United States, 64 percent of the Golden Arches’ restaurants in Latin America, and 14 percent of the McDonald’s restaurants in Europe.

“It puts a challenge on bakeries and restaurants to be more efficient in other areas,” he says. “Sure, the easiest thing to do is to raise prices, but that’s the last thing we want to do. We try to be as efficient as possible.”

That involves working with grain millers to determine if there is a position that gives Best Harvest and Fresh Start bakeries stable and predictable pricing. It involves energy conservation. For instance, turning ovens on one hour instead of four before making product.

Moreover, Honesty says building relationships with suppliers, providing some degree of transparency in the process for customers, and challenging suppliers to reduce your overhead costs are perhaps the best ways to weather the storm of commodity price hikes.

For a customer like McDonalds, that means cooperating with other McDonald’s bakeries and officials of the restaurant chain to develop processes and ways to give value to the customer: “The family and individuals who order our products.”

“It has to be more than raising prices,” says Honesty, who declined to comment on how much he is paying for flour. “You let your customers know what the pricing is going to be ahead of time. If you are a buyer of commodities, you must have predictability. You don’t want to be a victim of circumstances, the overhead and production costs. Nobody should go through this alone.”