Chicken, beef and pork prices, which are staples of Burger King’s menu, have steadily climbed over the past four years. The Consumer Price Index (CPI) for meat, poultry and eggs is up 27 percent since 2010, and the CPI for beef and veal is up 45 percent.
According to a USA Today report which quoted USDA economist Annemarie Kuhns: “Beef and veal prices are on track to rise 8.5 percent in 2014, a bigger increase than previously forecast, while pork prices will grow 8 percent and chicken 3.5 percent, according to the Agriculture Department. ‘We weren’t so much surprised that we had to raise beef prices as we were that demand has remained high for beef,’” says Kuhns.
“Are animal protein costs a big deal? Are we concerned about rising protein costs? Are we doing anything about it? The answer to those questions is yes, yes and yes!," says George Hoffman, CEO of Restaurant Services Inc. (RSI), the buying cooperative for Burger King restaurants in North America at the Informa Economics Animal Protein Seminar during the Oilseed & Grain Trade Summit.
Beef prices will continue to increase
Keeping 7,100 Burger King restaurants in the U.S. supplied with everything from beef trimmings that go into Whopper burgers and chicken breast filets in Tendergrill sandwiches to fries, soft drinks and packaging, as well as premiums like Pokeman toys for the chain’s younger patrons, is no simple operation.
Hoffman is responsible for the supply chain management that includes global sourcing from suppliers in the U.S., China, Australia, New Zealand and Canada. Just negotiating and managing the 1,500 freight lanes, which are the connections between the suppliers, distribution centers and restaurants, is, on its face, a labyrinthine business.
He confirmed demand remains strong for beef at Burger King restaurants, and discussed the challenge higher prices pose for restaurant margins.
Beef is the single-largest item of all food and packaging purchases ($2.6 billion) for North American Burger King restaurants. Beef purchases at $495 million account for 19 percent of the total spending for food and packaging. Soft drinks rank second among Burger King’s food and packaging purchases, with chicken the third largest at $280 million (11 percent) and pork at $111 million (4 percent).
Responses to rising meat protein costs are similar at all fast food restaurants, according to Hoffman, but a chain’s menu profile and other factors influence execution of strategies.
“There are basically only two options for responding to rising protein costs,” he said, “raise the top line of the profit and loss (P&L) through price increases, or reduce costs.”
He outlined possible responses to rising protein costs:
- Raise the P&L’s top line (sales). This means passing through higher costs of goods to customers with higher menu prices, either by raising prices for menu items directly impacted by cost increases (burgers) or raising menu prices, generally on all or many menu items.
- Reduce expenses by targeted cost-reduction initiatives on the menu items whose costs have escalated, by either reducing costs of the ingredient with cost inflation or reducing costs of other ingredients in the menu item to offset.
- Reduce costs of other food items to maintain gross profit margins.
- Reduce the cost of non-food items to maintain bottom-line restaurant profitability.
“Depending on the restaurant brand, and depending on its concentration of the different protein products, a brand may respond in a slightly different way or at a different pace, but all of us are dealing with the same dynamics. For Burger King, with almost 20 percent of our cost of goods in the beef category, the increase in beef costs is really a big deal,” he said.
Animal protein cost increases, product development
“High-cost products are going to get less new product focus than relatively lower costs ones,” Hoffman said. “In the Burger King system, for example, today, we have two burger‑related SKUs in the kitchen. We have got a large burger and a small burger. On the other hand, we have 11 different chicken SKUs in the restaurant and they're dynamic. We'll add new ones and discontinue some older ones. But you'll see fewer burger-related new product introductions, promotions and discounts.”
In the face of continued high prices for meat proteins, foodservice companies are reducing costs to protect their P&L’s.
“There are dozens of ways to reduce costs,” Hoffman said, “any of which depends on marketing strategy, relative costs and timing.”
He described the following cost-reduction strategies:
- Resize portions of the product that is causing the cost increase
- Modify the specification of the offending product and/or other unrelated products
- Use ingredient “extenders” (cheese, seasonings, etc.)
- Apply pressure on suppliers to control costs
- Increase the intensity of commodity hedging and risk management activity
- Reduce costs of other non-food items in restaurant P&L – cost reductions of last resort are labor (second to last) and facilities maintenance (last resort)
- Combination of the above
Cost-reducing product modifications can, in some cases, be attractive to foodservice patrons.
“One such offering at Burger King is a stuffed burger that includes cheese, pickles, pimentos, and a number of other things in the burger sandwich. There's a lower percentage beef and higher percentage of other things. The sandwich actually has a higher weight, but cost is reduced and it can be sold as a premium product."
Buying more chicken, eggs
In the current cost-inflationary environment, Burger King has stepped-up activity in purchasing organizations for forward contracting and hedging of raw materials. This is usually done along with manufacturers of finished goods. It includes cross hedging raw materials with futures contracts plus buying and holding of raw materials for future manufacturing.
“RSI is doing a lot more proactive forward contracting for raw materials, particularly on non‑beef products like chicken and eggs, dairy products and others,” Hoffman said, “However, opportunities to cross-hedge, forward contract or implement fixed-pricing contracts are more limited on beef than almost any other product,” he explained.
Chicken, pork prices may drop in 2015
Lean beef trimmings prices in 2015 are critically important for Burger King restaurants, Hoffman said. This means, among other things, little or no new product development involving beef items, he added.
“Given the supply and demand and price pattern in place, RSI expects another serious increase in lean meat trimming prices in 2015. With more price increases in the queue, and likely to be sustained for some period of time, this is being built into the marketing calendar, brand strategies, new product development and marketing programs for the entire year ahead.”
Hoffman, however, told listeners, “We think we're going to get some relief on pork and chicken prices in 2015.”
Not surprisingly, he indicated new product development will continue to be almost entirely non‑beef but instead focused first on chicken and secondly on pork products.
The Oilseed & Grain Trade Summit 2014 was hosted by HighQuest Partners and Informa Economics.