Outlook 2018

By Peter Thor, President, Bellissimo Foods

In 2017, we witnessed a seesaw market in ingredient costs, and faced uncertain demand. For 2018, some “Experts” forecast robust restaurant sales while others expect a recession. Rarely has our pizza industry seen such uncertainty across the board. Here we explore what we think is most likely, as well as our expectations for ingredient costs and inflation. Fortunately, we believe we’re in for some pleasant surprises in supply and costs.

“It’s the Economy, Stupid!” the phrase first coined by Bill Clinton in 1992 is applicable today. The economy is a major determinant of demand for dining out including pizza. We believe that the pizza industry is partially insulated from economic woes due to its attractive value proposition, but other factors can both dampen and stimulate demand. Last fall saw lackluster demand which was blamed by some in our industry on football and the protest factor. The potential for demand side stimulation due to tax reform is real, but whether the trickle-down effect really matters is a question. On the cost side, the catastrophic hurricanes in

Texas and Florida and the fires in California will play a role in national consumption, potentially influencing ingredient costs. 

Independents can compete: Demand is also determined by macro industry trends as well as local issues. At a macro level, trends seem to favor the heavily advertised and promoted pizza chain brands which have invested in consumer friendly ordering and delivery options. Recently though, there have been indications that “local” independents can effectively compete if they participate and promote themselves through Yelp and Facebook where customers can rave about better food quality and service usually offered by independents.

The supply and cost picture also has many facets. On the one hand, the value of the US dollar compared to European and Asian currencies has recently been relatively stable, which suggests low cost inflation for imported ingredients and energy. The cost of many domestically produced ingredients which spiked in mid- 2017 but moderated by year-end, are creeping up again.

Cheese and key meat products are compelling examples: The block cheese market increased modestly by about 10 cents per pound from October through December, despite ample stocks. Experts now suggest that prices in 2018 will remain in historical bands, closely following 2017 levels. Cheese inventories are higher than year ago, and exports are an unknown factor that could raise prices through mid-year.

Pork and Beef: The expensive beef and pork markets appear to be mostly behind us, with additional supplies on the horizon but exports trending up. Beef production is up 4% this year compared to last, and expected to increase another 4–5% in 2018. The additional supplies have kept cattle prices low. Most cuts of beef and ground beef prices are selling below year-ago prices. But exports have been robust with strong demand in Asia especially; S. Korea +7%, Taiwan +9%, and a 68% increase to ASEAN countries, offsetting lower demand in the Caribbean.

Hogs take less time to raise than beef cows, and thus pork supply has rebounded faster. Most pork prices are about 10% below last year and production is expected to be 4% higher next year. A supply-demand imbalance created by higher red meat supplies chasing lower red meat demand (-6%) has the USDA forecasting that 2018 hog prices will remain low except for the ever-popular bacon.

Pepperoni pricing will be better than 2017: The near perfect storm of problems with raw product cost and packer supply constraints, which together created both high costs and shortages industry-wide. Supply shortages are now behind us and manufacturers have added sufficient capacity to accommodate industry requirements. Costs for pork 72’s and beef 50’s (cost indicators) peeked mid-2017 and dropped rapidly through November before moving up. We do not expect a repeat of last year, believing that supplies will be adequate and prices in 2018 will follow historical averages.

Chicken production is tracking 3% above last year and average weights have trended down for the first time during the summer. However, the industry is expecting solid year over year production gains with strong demand, particularly for wings. Prices for breast meat are down 6-10% from year ago, while wing prices are up about the same, reflecting seasonal demand. Unusual pricing for wings, however, is that jumbo wings continue to be in short supply and priced close to 20 cents per pound higher than small wings.

The economy and strong dollar will also have a big impact on grain prices, with producers facing stiff competition internationally. We expect continued attractive cost basis for grains and domestic oils.

To summarize, we believe independent pizza operators have some exciting opportunities in 2018 and beyond. Competing in marketing as well as product and service will be a key to success. A favorable ingredient supply and cost basis for the foreseeable future, combined with sales growth will help power a successful year. Delco Foods is dedicated their independent restaurateurs who depend on our superior quality and value. Good luck to all!

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