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National Restaurant Association - Wheel of fortune? High cheese prices wedge food costs

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Wheel of fortune? High cheese prices wedge food costs

Higher cheese prices could raise restaurants’ food costs, but industry experts say now is not the time to raise menu prices or switch ingredients to compensate for the increase.

With the price of block cheese hovering at more than $2.42 a pound, pizza operators and other restaurateurs are looking at some financial challenges, food commodities analyst John Barone said.

The price of a pound of block cheese is more than 20 cents higher than last month, and more than 73 cents above year-ago levels.

“There is a very strong global demand for milk powder and that’s driving the price up,” Barone said. “The international cheese markets are extremely high right now, and countries like China … are putting demand on world dairy markets.”

Barone noted that cheese prices generally rise later in the fall, but this year’s early increases are the result of a reduced number of dairy cows in production right now. Droughts and increased feed prices have affected cattle ranchers in recent years, and growing global demand for milk products has challenged available supply.

“As long as international demand continues, pressure on the domestic market will continue,” Barone said. “That said, we do expect milk production to pick up later this year in the United States, Europe and New Zealand, so that should help temper prices.”

Still, he said, restaurant operators – especially pizzerias – could face issues, “if they didn’t get [their supply contracts] booked last fall. If they did, they might be in good shape, but if not, they’re probably looking at higher cheese prices in the short term.”

Restaurant industry consultant Dennis Lombardi said the situation likely would be tougher on smaller chains and independents rather than the larger chains.

“They don’t have the same volume buying power that the big guys have. A lot of the larger brands already locked in their prices so they won’t really be affected by all of this unless it spirals upward permanently. Still, pizza operators are very aware of the situation and will, perhaps, shift focus to items that are less costly to produce, like bread sticks or boneless wings, in the short term.”

Anthony Rosati, a principal owner of the Chicago-based Rosati’s Pizza in Chicago, and a member of the National Restaurant Association’s Pizzeria Council, said that while the rising price of cheese is a concern, pizza operators “are very accustomed to a fluctuating cheese market and our rule of thumb is not to panic or overreact. We know from years of experience that as quickly as the prices rise, they can just as quickly fall.”

Rosati advised his fellow pizza operators not to raise menu prices to compensate for the increased food cost or try and switch to a less expensive product in the interim.

“We try very hard to take a conservative approach and hold our pricing to the consumer steady,” he said. “Once we raise our menu prices, it will be very hard to go backwards. I also think that a first impulse to possibly switch to a cheaper product to save a few cents would be a mistake, too. Doing that could actually be more harmful to our businesses by compromising our brand standards. As an industry, we live and die by our reputations so in the long run it’s important for us to remember we’re here for the long haul. We need to hold steady and weather the storm.”

Hudson Riehle, the NRA’s senior vice president of research, said consumers are still cautious on spending, which could make it challenging for restaurateurs to raise menu prices.

“Operators realize that raising menu prices must always be given careful consideration to balance consumers’ value expectations, especially since consumer confidence remains fragile compared to pre-recession levels,” he said.

According to the NRA’s 2014 Restaurant Industry Forecast, consumers remain stuck in a recession mindset when it comes to their personal finances even though the level of pent-up demand for restaurant services is high.

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