Whereas cyclical supply and demand seasonality used to be the key factor for food cost stability, today factors are more widespread and the stakes are higher.
Note the volatility tornado whipped up by geopolitical, environmental, and operational variables from the past few years:
- 2019’s wettest North American growing season on record
- African Swine Fever
- Years-long tariff and trade implications with China, Canada, Mexico, Japan, etc.
- Supply chain breakdowns like Tyson’s beef plant fire in Kansas or the shuttering of a dozen Midwest meat plants during 2019’s Polar Vortex
- Food safety recalls and outbreaks across foodservice, distribution, and retail.
- The coronavirus spread
Here are five chain-specific examples of recent earnings reports where juggernaut leaders in the industry were affected by market volatility:
As African Swine Fever (ASF) took off worldwide, so did McDonald’s prices. As pork product supply decreased, demand increased, leading McDonald’s, which uses pork for several regular breakfast menu items, to increase their prices. As a result of ASF, McDonald’s forecasts estimated that commodity costs in the U.S. would rise, with prices increasing as much as 3% in 2019.
Chipotle’s 2019 financial report showed a 14.8% increase for the fiscal year thanks to increased menu prices and affordable avocado pricing. In order to offset higher costs for several of their food items, most notably their carne asada and sour cream, Chipotle raised menu prices. This change, coupled with higher profits due to lower avocado prices, led to Chipotle’s successful fiscal year.
Despite rising food costs, Domino’s is confident that its long-term fiscal future is bright. Thanks to forecasts about commodity prices and international markets in 2020, Domino’s estimates that food costs will rise from 1% to 3%. Domino’s is prepared to make pricing adjustments in order to reach its goal of 7% to 10% growth in global retail sales.
Buffalo Wild Wings
Buffalo Wild Wings boosted its stock after raising its forecast for full-year earnings and releasing plans to combat rising food costs. When the price of traditional chicken wings rose from $1.72/lb to $2.16/lb last year, Buffalo Wild Wings responded by changing a promotional deal to help customers favor buying boneless wings instead. This move allowed Buffalo Wild Wings to avoid cutting prices for traditional wings, causing its stock to increase heading into 2020.
Brinker International, which owns the Chili’s restaurant chain, saw the impact of commodity pricing on their sales in the second quarter of fiscal 2020.
Chili’s saw a decrease in its cost of sales due to raising menu costs to offset rising food costs. Unfavorable commodity costs required Chili’s to raise menu prices, negatively impacting Chili’s sales.
With menu prices and shifting costs influencing purchasing practices, it’s no longer enough for restaurants to just forecast, hedge, and take a position. Comparing a purchasing strategy against a commodity price index is old-school.
Warren Buffet says, “Great companies are those that identify how to make the whole value chain more efficient.” This can be done through utilizing real-time market visibility and risk awareness for fluid decision-making.
Buffet further considers how exposed a business can be “to a piece of its value chain that is out of its control.” And within QSRs, Fast Casual, and Family Dining, the obvious answer is food costs.
Even with long-term price contracts, significant opportunity may be left on the proverbial kitchen table when there is no room to flex sourcing decisions. Furthermore, a supply chain disaster might nullify these contracts, leaving restaurateurs in a precarious position.
So how can restauranteurs grow margins in light of food costs?
Ditch traditional forecasts and welcome market simulation.
Market simulation puts purchasing leaders in the driver’s seat. Rather than reacting to market movements or supply chain snafus, businesses can generate scenarios showing financial benefits and risk profiles side-by-side. Tactical alternatives for purchasing and sourcing can be evaluated against one another within minutes.
Furthermore, the power of running 250,000 simulations is tangible. Users determine probabilities of outcomes at scale and create a feedback loop where accuracy informs and improves future forecasts via machine learning. As internal market experts use a market simulation platform, the collaborative nature of human + machine begins a flywheel.
Furthermore, rather than competitive negotiation and solely focusing on price or convenience, there are win-win opportunities for suppliers, improving the efficiency of the whole value chain.
The future of forecasting commodities is here. To learn more about DecisionNext’s work in this space with leading meat and food companies, reach out to email@example.com.