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    Rising Food Costs -- Eat Them or Pass Them On?

    Retailers have a few options when coping with food price inflation

    By Don Longo, Editor-in-Chief

    The era of cheap food in America appears to be over. The Consumer Price Index (CPI) for all food increased 4 percent in 2007, the highest annual increase since 1990, according to the U.S. Department of Agriculture's Economic Research Service (ERS). For food consumed at home, the increase was 4.2 percent, led by significant increases in the price of eggs, dairy and poultry. Prices for food away from home rose 3.6 percent.

    For 2008, the ERS is projecting another increase of between 3 and 4 percent, as retailers continue to pass on higher commodity and energy costs to consumers in the form of higher retail prices. Food-at-home prices are forecast to increase 3.5 to 4.5 percent, while food-away-from-home prices are forecast to increase 2.5 to 3.5 percent in 2008.

    I think those predictions are conservative. Federal mandates to increase ethanol production will drive up the price of corn, as well as a wide variety of other products, such as cattle, sheep, hogs and poultry, which feed on corn. Soft drinks, baked goods and hundreds of other products that use corn by-products, like corn oil and corn syrups, will also be affected.

    The weakened dollar is also driving up the demand for exports. As a result, corn exports are projected to reach a record- high 2.45 billion bushels this year. Wheat prices are also hitting all-time highs due to greater worldwide demand.

    Higher fuel prices are driving up the transportation cost of everything delivered to a warehouse or c-store.

    Because of intense competition in their markets, many c-store retailers can't just pass along to consumers the higher prices they are paying at the wholesale level for food products. But, they can't be expected to absorb those increases indefinitely either.

    In foodservice, retailers have some flexibility in how they respond to rising prices. To cut costs, one area to look at is complementary supplies -- the paper packaging, napkins and condiments that go with every hot dog you sell, for example. Complementary supplies could represent as much as 20 percent of the cost of an item, according to David Bishop, partner with the consulting firm Willard Bishop.

    Another option is an alternative source for the core food item. "If you are not contracted with a national brand like Oscar Mayer or Ballpark, you can consider a different [lower cost] product," Bishop noted.

    Or, you could redesign some of your menu items, changing recipes and ingredients based on where the costs are rising the fastest. For example, if pineapple prices are soaring, why not replace pineapples in fruit cups with a lower cost fruit like grapes?

    C-stores could also look into selling slightly smaller portions. Because consumers perceive price points more than portion sizes, a retailer can adjust the amount of food per item. Bishop pointed to Frito Lay as an example in snack foods of "a company being able to take price increases without raising the retail price of their product just by reducing portion sizes."

    To save money in cold dispensed beverages, operators may be tempted to fiddle with the machines' brixing to change the syrup to water ratio -- but I wouldn't recommend doing that because it would distort the flavor profile. A better tactic, in hot dispensed, would be to rationalize the number of flavors and blends of coffee sold. Concentrate on the best selling flavors so you'll throw away less stale coffee.

    Another strategy might be to hold the line on your food prices, but enact a much subtler form of a price increase in beverages by eliminating your smallest sized beverage cup -- effectively forcing your customers to trade up to a larger size. Going from a four-tiered program to a three-tiered pricing program would simplify operations, reduce inventory carrying costs and increase sales of larger cup sizes.

    It looks like the battle to rein in rising costs throughout the store will be a continuing storyline in 2008.

    For comments, please contact Don Longo, Editor-in-Chief, at (646) 654-7489 or [email protected].

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