By Peter Thor, President, Bellissimo Foods
In 2016 the “experts’ couldn’t accurately estimate how many people were going to vote, so it shouldn’t surprise us that there are “experts” forecasting robust restaurant sales while others expect a recession. Rarely has our pizza industry seen such uncertainty in demand. 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 used to believe that the pizza industry was insulated from economic woes due to its attractive value proposition. The 2009 recession and loss of many good paying jobs demonstrated that no industry is immune. The potential for demand side stimulation in the form of infrastructure projects and construction jobs in the new administration could be a real stimulant for our industry if the projects are initiated quickly in areas where jobs are needed. Job losses in the energy industry, for example, could be reduced and replaced boosting disposable personal income to workers in the age groups most likely to increase pizza consumption. Wage growth also is increasing which will further stimulate demand.
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 rise in the value of the US dollar compared to European and Asian currencies will help keep costs down for imported ingredients and energy. The cost of many domestically produced ingredients are also expected to decline at least partly due to reduced export opportunities facing US producers, again due to higher value of the US dollar which makes them less competitive on international markets.
Cheese and key meat products are compelling examples: The block cheese market increased by more than 35 cents per pound in less than 8 weeks from October through the end of November, despite ample stocks of cheese and forecasts of stable pricing. Experts now suggest that prices have peaked, and once Christmas orders are filled that prices will decline back to summertime levels. Cheese inventories are 7% higher than a year ago, and exports are 30% below the peak in 2014. International demand is expected to decrease slightly in the next year due to a strong US dollar, low oil prices, a Russian trade embargo and limited Chinese growth.
Pork and Beef: The expensive beef and pork markets appear to be mostly behind us, with additional supplies on the horizon and exports trending down. Beef production is up 6% this year compared to last, and expected to increase another 4-5% in 2017. The additional supplies have significantly reduced cattle prices. Most cuts of beef and ground beef prices are moving well below 2015 prices. 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 the 2017 hog prices will be the lowest since 2003.
Pepperoni pricing will probably be an exception: A supply-demand imbalance due to manufacturing constraints in the US has large producers scrambling to keep up with demand. The imbalance of supply and demand is likely to continue through 2017, leaving suppliers clearly in a strong position.
Chicken: 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 a year ago, while wing prices are up about the same, reflecting demand. Wing prices especially will remain high during the next several months through winter and the football season.
The economy and strong dollar will 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 2017 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 2017. Delco Foods is dedicated to independent restaurateurs who depend on their superior quality and value. Good luck to all!