How To Make Commodity Pricing Work For You
Each and every year, food prices vary—Sometimes dramatically. Late 2007 and early 2008 saw one of the most significant food price spikes in recent history. Globally, the cost of wheat and maize doubled and rice tripled in cost. In 2015, the globe's second biggest supplier of cocoa beans, Ghana, saw a massive drop in yield because of poor weather and crop disease. This, combined with a spike in demand, created huge price increases. In 2017, flooding in the Mediterranean forced grocery stores in the UK to ration their vegetable supplies. Around the same time, a tropical cyclone wiped out Madagascar's vanilla crop, causing prices to surge in everything made with vanilla bean, from ice cream to candy to coffee.
The simple fact is that political instability, unpredictable weather, diseases, and pests make it difficult for restaurants to budget around their commodities. These food commodity costs make up nearly a third of a restaurant's revenue. Spikes in certain food costs force many restaurants to choose between raising their prices or changing their menu, both of which can be damaging decisions if done incorrectly. Additionally, raising the prices will only go so far. Oftentimes, when food commodity prices spike, the increase is so extreme that if food prices were raised to match it, foot traffic in restaurants would dwindle.
Alternatively, restaurants can make changes to their processes in order to maintain a constant awareness of commodity pricing. The key to this is harnessing the power of commodity data.
Understanding Restaurant Food Commodities
Just as stock index futures can be traded on an exchange, so can food commodity indexes. When the value of the food commodity goes up or down, the value of the index moves with it. While a commodity price index can be based on current and future prices, at its core it is the weighted average of the individual food commodity.
The value of these commodities are impacted by a variety of factors. When energy costs increase, this means it will cost more to plant, feed, harvest, and transport the food. When there are global conflicts, the price of certain foods may go up or down because of halted food production and transportation or disturbances in the monetary exchange rate. If there are declining reserves, the price will increase because of lack of availability. Then there are poor weather conditions, disease, and increased global demand. Oftentimes there is a mixture of these factors affecting the price at the same time.
If restaurant operators closely track these trends, they can get accurate predictions and then plan the menu around them.
How To Make Commodity Pricing Work
When it comes to dealing with fluctuations in commodity prices, there are several strategies. The key to any of them, though, is to plan in advance. Restaurants need to keep their eye on the market and on global events that may create shortages or surpluses.
1. Be Creative With Promotions
Promotions are often what drive new customers to a restaurant and what encourage loyal customers to come in on a day that they normally wouldn't. It's just that little nudge that tips the scales in the right direction. But restaurants need to start thinking more critically about their promotions. They shouldn't see them as just a method for getting more feet through the door. Promotions should be used strategically to guide customers to menu items that are more profitable for the restaurant. If the price of cocoa has gone up and the price of dairy has gone down, make the cheesecake and ice cream the dessert centerpiece rather than the chocolate cake. The same goes for different types of meat, down to the different cuts of meat.
2. Don't Push Customers Out Of Their Comfort Zone
Every consumers knows the price of certain commodities. The price of a gallon of milk, a cup of coffee, a hamburger. When the price exceeds a certain limit, a customer will either refuse to make the purchase anymore or have an expectation that the commodity is a little more special than usual (i.e. a hamburger made from Kobe beef, a cup of coffee made into an Irish version, or a gallon of milk that never expires). Restaurants need to identify what the customer limits are. One good rule of thumb is to try and remain within the same range as before. If a meal's price is $8, try not to raise it above $8.50. If a family can eat at the restaurant for $50, make sure it doesn't exceed $59.
3. Price For The Future
Restaurants are not always going through periods where they face commodity surge pricing. For months at a time, producer costs will be normal and stable. It is during this period that restaurants need to start thinking about the future. They should begin making slight price increases. The point of this is to increase profitability when it is possible. This additional profit will be a buffer for times that there is a commodity shortage or an unparalleled cost increase. It will enable the restaurant to maintain their prices, which customers will appreciate when they see other establishments hiking their menu prices.
4. Architect The Menu
Raising prices will help. Unfortunately, in some cases it can only help so much. Restaurant operators need to look beyond nickels and dimes. Instead, they should look at the food that they are serving. The same idea that applies to promotions, applies to the menu as a whole. Restaurant owners should look at adding new items that don't include the costly commodities. Items that aren't popular should be scratched—This is a general rule of thumb even if all prices are stable. When it comes to popular menu items that are creating cost issues, restaurant owners should try and re-engineer them. They can make ingredient substitutions, trading in one cut of meat for another or putting an entirely new spin on it and framing it as an 'update'.
5. Be Open
'Honesty is always the best policy' can sometimes be the case with menu price increases. In certain scenarios it can be a good idea to simply be upfront with customers and let them know that prices are increasing because of exhorbitant commodity increases. It can help customers to be more understanding and willing to open their wallets. However, this should only be done if specific commodities can be pointed to, such as the cyclone incident in Madagascar that wiped out a good portion of the vanilla supply. If this is done too often, though, it will come across as complaining, so use it sparingly.
6. Make Incremental Changes
A big price increase is a sour pill for customers to swallow. Therefore, if poor weather conditions or potential geopolitical concerns are likely going to cause price increases in certain commodities, restaurants should start acting far in advance. Over the course of several months they can incrementally increase prices. It is much less dramatic to approach price increases from this angle. It also helps to begin providing that buffer for later in the year when prices can only be raised up so much against commodity price surging.
7. Harness Data
Every restaurant has data. They know what customers are buying and what different items are often bought together. This can be used to redesign the menu so that customers are directed towards more profitable pairings. The essential aspect of this idea is that any change that is made should be based on cold, hard customer behavior.
8. Get Long-Term Contracts
One of the best ways to stabilize prices for long periods of time is to buy commodities on long-term contracts. This allows a restaurant to buy certain foods at a secure price. Producers like these contracts because they guarantee purchases and restaurants like them because it provides pricing dependability.
9. Don't Get Scared Off
Commodity prices fluctuate. They always have and they always will. Sometimes they will go up a lot. This does not mean a restaurant should raise prices or give their menu a facelift. This sudden increase could be temporary. It could just last a month or two and then go back down. A restaurant can't always get jittery with these brief swells. They need to stay consistent because consistency is what builds customers trust and loyalty.
10. Stay Abreast Of Commodity Developments
The best way to be able to implement any of the previous strategies is to always know what is going on in the commodities market. By following commodity data and reading expert analyses, restaurant operators can choose the most strategic course of action. One of the most accurate ways to do this is to set pricing alerts. An operator obviously can't sit in front of the computer all day watching the markets. So instead, pricing alerts allow them to be immediately notified when a commodity price change is starting. With this information, immediate decisions can be made and the wheels of change can start turning.
The most effective way to ensure that profits are maximized, costs are reduced, and commodity spending is under control is to partner with an expert in the field. With the right tools and advice, restaurants can weather the harsh elements that are part an parcel of food commodity price fluctuations.