Pizza makers hit with higher cheese costs
Pizzeria's spreading the pain as dairy prices eat into their profits
Sharply rising cheese prices has pizza restaurant owners watching the cheese on their
pizzas like this one being prepared at Constantly Pizza in Concord, N.H.
The demand for pizzas is continuing to grow at a healthy rate, boosted by everincreasing appetites of consumers in the USA, Australia and the UK for high
quality pizzas delivered to their homes. Demand has also been fuelled by the
inventiveness of the major retailers who are continuously introducing consumers
to new products such as stuff crust, ciabatta and stoneground pizzas. The global
market is now worth billions of dollars and is dominated by well known brands
such as Pizza Hut, Domino's, Papa John's and Yum! At the same time, there is a
living to be made by thousands of small locally-owned retailers.
The global price of mozzarella cheese, the principal ingredient in quality pizzas,
rose to US$3000 a tonne this month. Two years ago, it was US$1940 a tonne.
Cheddar cheese, which is sometimes used as a cheaper substitute, has also
increased in price but by much less than the price of mozzarella. Global cheese
output has risen to meet increased demand and US stockpiles have been
released as suppliers have sought to benefit from rising market prices.
Before the dinnertime rush, Larry Lewis was chewing over business strategy at
the Fat Jimmy’s pizzeria he manages. The store had absorbed sharply rising
cheese prices as long as possible.
“We don’t really have much choice,” said Lewis, who competes in a pizza-heavy
city that’s the corporate home of large chains and features a large selection of
pizza restaurants.
Block cheddar cheese reached $2.08 a pound Thursday on the Chicago
Mercantile Exchange, up 78 percent from $1.17 a pound a year ago. At the end
of 2006, the price was $1.33. Cheddar is the benchmark for mozzarella and other
cheeses. Industry observers attribute the price surge to strong demand coupled
with higher milk prices.
Some big pizza chains, which use mountains of cheese, already have
responded.
Both Pizza Hut and Papa John’s International Inc.
have raised the price of their cheese-only pizzas to
the same amount as one-topping pizzas at companyowned stores.
The higher cheese prices have exacerbated
pressure companies already face from higher wages
and fuel costs, said Chris Sternberg, spokesman for
Louisville-based Papa John’s.
Papa John’s uses about 100 million pounds of
cheese each year, and the cheese typically makes
up 35 percent to 40 percent of the food cost in
making a pizza, he said.
And cheese-only pies cost the company more,
requiring an extra cup of cheese, he said.
“So the customer is getting something of extra value
for the price,” he said.
Pizza prices at Papa John’s restaurants vary by location. At a downtown
Louisville store, customers were paying $12.58 for a large cheese pizza that
used to be $10.99. Customers had the option of adding an ingredient, such as
pepperoni, at no additional cost.
Papa John’s locked in cheese prices at a “reasonable level” through the third
quarter, but cheese costs went up enough to prompt the higher price for a
cheese pie, Sternberg said.
Dallas-based Pizza Hut, part of fast-food giant Yum Brands Inc., which is
headquartered in Louisville, goes through 300 million pounds of cheese each
year, spokesman Chris Fuller said. The chain’s cheese-only pizza has 50 percent
more cheese than a one-topping pie.
At Domino’s Pizza Inc., spokeswoman Lynn Liddle said the Ann Arbor, Mich.based delivery chain has seen plenty of ups and downs in the cheese market
over the years. For the most part, she said, the chain has “managed to work
around these peaks and valleys.” But if the price of cheese and other items
continues to rise, Domino’s will have to boost its prices, she said.
Mom-and-pop shops are feeling the pressure, too. Constantly Pizza, a family-run
chain of three shops based in Concord, N.H., has stood pat on pizza prices, but
the escalating cost of cheese has changed some routines in the kitchen.
Veteran pizza makers used to casually eyeball the amounts of cheese heaped
onto pizzas, but now everyone has to be more meticulous — tumbling cheese
into measuring cups.
“We’re not cutting back our cheese. We’re just making sure that our employees
are being very accurate,” said owner Dave Constant.
His shops, which use up to 2,000 pounds of cheese a week, have seen cheese
prices go up 45 cents a pound during the past two weeks. “That bites right into
the profit margin,” he said.
Prices for milk, a key ingredient in cheese, have gone up — a result of higher
feed grain costs for dairy cattle herds, said Rob Hainer, spokesman for the
Atlanta-based Southeast United Dairy Industry Association. In particular, corn
prices have risen amid growing demand for ethanol fuel, he said. Also fueling
higher cheese costs has been strong U.S. and global demand for dairy products,
he said.
Pizza topping can account for up to 60% of the variable cost of producing a
quality pizza, according to a senior manager of Yum!, the Australian and Asian
pizza chain. Speaking at the International Dairy Federation's World Dairy Summit
in Melbourne, he claimed that the rising price of mozzarella was of serious
concern to all pizza producers, whether they were multinational companies with
strong buying power, or just small independent producers. In short, profits were
being melted down.
But he has found a silver lining. At least costs for flour and tomato sauce have
been stable, he said.
Source adapted from: http://www.msnbc.msn.com/id/19375949/ns/business-retail/t/pizza-makershit-higher-cheese-costs/# (22 June 2007)
Questions:
1.
State and explain two possible determinants of the increase in demand
for high quality pizzas.
2.
Using demand and supply analysis, show how the global price of
mozzarella cheese has increased.
3.
Explain how the global market for cheese might change with the
release of US stockpiles.
4.
From the 2nd paragraph, the global price of mozzarella cheese has
increased by around 60% within 2 years. It is estimated that on its own
this price would have led to a 12% fall in the quantity demanded of
mozzarella cheese.
a) Calculate the price elasticity of demand for mozzarella cheese
within the 2 years.
b) Explain the significance of your answer in part a) for mozzarella
cheese producers.