Raw Deal: The Rising Cost of Food Necessitates Scrutinizing Every Phase of Operations to Preserve Healthy Margins

I’m a creature of habit — especially before 7:00a.m. — and have been visiting the same neighborhood coffee shop nearly every morning for the past three years.

I always make small talk with the owner, the 30something cashier-barista-dish washer whose friendly, hands-on management style has cultivated a steady following among locals. One morning this past spring, I ordered my “usual” — a medium latte to go — and as Steve rung up my order, he apologized that the total was 15 cents more expensive than usual.

“Sorry, coffee prices are killing me,” he explained. “Had to do it.”

Less than a month later, I noticed my to-go cup was different. No more customized store logo; this was a standard issue hot cup. I asked Steve about the switch.

“Coffee prices keep going up and I can’t keep raising my prices, I’ll lose customers,” he said. “And unless I switched beans, I had to look to other areas for savings.”

Insistent on using only fair trade coffee, a quality standard that offers few compromises, Steve said as the cost of coffee continued to increase (according to a recent Huffington Post article, the cost of coffee has increased faster than the cost of gasoline this past year, up more than 40% since April of 2010), he was forced to assess every area of operations, especially foodservice equipment and supplies, where the food and drink item could remain unaffected.

Steve’s procurement strategy is one on a short list of those cited at the National Restaurant Association’s (NRA) annual trade show this past May in Chicago, where foodservice industry experts discussed the rising price of raw materials at a seminar called, “Commodity Price War Plan: Experts Share Strategies on Fighting Back Against Increased Costs.”

The standing-room only crowd of attendees attests to the industry-wide concern of rising raw materials costs. The panel of NRA experts weighed in on solutions — how best for retailers to maintain a healthy bottom-line in the face of rising food costs — recommending an approach that balances portion size, ingredients, price, and procurement. As for portion size, we’ve all seen the results of this in supermarket aisles: The brand of shampoo, soap, or cereal suddenly appears smaller. Our eyes are not deceiving us; indeed, when the cost of materials increases, shrinking product size is a popular solution for some.

“Size reductions in China are a way for companies to absorb cost increases without gaining too much attention,” said Torsten Stocker, an analyst for Cambridge, Massachusetts-based consulting firm Monitor Group in a recent Wall street Journal article. And over the past several months, according to Stocker, companies in China have been doing just that – cutting product sizes.

The risk for foodservice retailers in reducing product size is of alienating customers. For those accustomed to a foot-long hot dog, 16-ounce medium coffee, or 4-ounce frozen yogurt, a 10% or 20% shortfall is a noticeable one that might just lead to retailer defections.

Other foodservice insiders turn to modified recipes, substituting less expensive ingredients in order to resists raising prices. While the strategy works for some, others see this as a last resort.

“No way will I trade the quality of my [coffee] beans,” said Steve. “It’s my signature product, my customers would notice immediately. It’s what sets me apart from the chains.”

Raising prices is a decision fraught with anxiety, but one becoming increasingly common and necessary. Indeed, over the past several months, J.M. Smucker (distributor of Dunkin’ Donuts, Millstone, and Folgers coffee brands), Starbucks, Caribou Coffee, McDonald’s, and Kraft (maker of Maxwell House coffees) have all raised prices. And it’s no wonder: Over the past year, the price of green, unroasted coffee on commodities exchanges has spiked nearly 92 percent.

But as Steve found out, foodservice retailers cannot keep raising prices without risking losing customers. Even if a coffee drinker won’t migrate to a competitor, he might just decide to brew a cup at home, Steve explained.

Which is why Steve turned to a comprehensive procurement assessment for helping his bottom-line, especially as coffee prices continued to climb.

“I looked at everything, cleaning supplies, cups, sugar, even first-aid supplies,” Steve said. “And it’s amazing how much I was able to save. My customers, they’ll notice immediately if I switch coffee brands or even trim the serving size … but a napkin or cup … “

He paused, looking around his shop, which was beginning to fill with rush-hour commuters.

“It was a no-brainer.”