Many local owners, reluctant to charge more, will eat losses

by: TRIBUNE FILE PHOTO: L.E. BASKOW - Super Bowl Sunday is a big day for pizza, but local restaurants are being squeezed by higher cheese prices, forcing them to charge a little more for a pie.A sharp run-up in cheese costs is taking a bite out of Portland-area pizza profits at a time when Super Bowl sales should be boosting the bottom line. Intense competition, however, makes it difficult for pizza store owners to raise prices in the face of higher food costs.

Block cheese is selling this month at record levels of $2.29 a pound, up substantially in the past 30 days and up 69 cents a pound from a year ago, according to the Chicago Mercantile Exchange. The prior cheese price record of $2.28 was set in May 2008.

Dairy industry analysts expect prices to slowly moderate as milk production increases to meet demand. Meanwhile, pizza store owners are hanging in there.

“We’ve come to a point where we just expect cheese prices to go up,” says Bill McCracken, co-owner of two Atomic Pizza stores in Portland. “The good news is that sales are going up.”

McCracken says that despite higher costs, he’s careful about raising prices ... only twice in five years. “There comes a point where you kind of have to,” he said.

National dairy market analyst, Jerry Dryer, says that stronger demand for dairy products — milk, milk powder and cheese — both in the United States and abroad has outstripped supply pushing global milk and cheese prices higher. For instance, the U.S. food service business reported November sales that were 13 percent higher than a year ago, Dryer says.

“Export demand is also strong, driven by a shortfall of milk in China and a drought in New Zealand, which limited output there for several months last year,” he says. “We are already seeing milk production worldwide start to increase in response to demand.”

Cliff McMillan, who with his wife, Karen, has operated Vancouver Pizza Co. in downtown Vancouver for 14 years, carefully tracks his food costs. “In the first few years we were in business, a big increase in cheese prices would blow my mind,” McMillan says. “Now, it’s not something I panic about. You have to take into account the short-term situation and follow the trends.”

He says that among the first things he teaches new employees is how much cheese to put on a pizza — enough, but not too much.

Price outlook

Dryer and Washington-based dairy industry columnist, Lee Mielke, both see cheese prices moderating at the year goes along.

“In the past several months we’ve seen literally a perfect storm that’s driven up dairy prices,” Mielke says. “Bad weather, no increases in milk production, and strong global demand are all contributing to higher prices. China has been a big factor.”

Neither Mielke nor Dryer see prices crashing any time soon.

“The fundamentals are there for a strong first quarter,” Mielke says. That’s good news for Oregon dairy farmers and the state’s ag industry, generally. More cows and increasing production mean higher demand for hay and other feed.

Dryer expects cheese prices to remain volatile in the short term.

“The cheese price average will be about $1.84 per pound for all of 2014 versus $1.77 last year and $1.71 in 2012,” he says.

Meanwhile, the pizza business has become “a business of pennies” said one store owner with everyone reluctant to raise prices for fear of losing customers.

He says about $3 worth of food costs go into an average $5 medium-size pizza. Higher cheese costs, right now, are taking 20 cents out of the net profit on that sale. “And,” he says, “that takes a chunk out of the bottom line.”

The U.S. pizza industry with 70,000 stores and total annual revenue of $32 billion represents 12 percent of all U.S. restaurant sales. Average Americans eat at least one pizza a month and about 46 slices of pizza a year, industry research says.

What’s next? Pizza businesses, large and small, continue to experiment with pricing strategies, toppings and discounts to lure customers.

“Pizza makers are in a Catch-22, right now, says analyst Mielke. “Even if they bought in-bulk a few months ago at a lower price, they’ve got to eventually buy more cheese. They essentially have to eat the higher cost when prices go up and hope they come back down. Meanwhile, you make money on your bread sticks and pop sales.”

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