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Food Inflation: Price Increase Disrupt Vendor Profitability & Purchasing Patterns

5/6/2015

By Timothy Herrick

Photo courtesy of Matt Cook

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The good news may be that the price of food is 7.1 percent lower than compared to a year ago. The bad news is that the this decline in price follows more than a decade of often steep increases in price, resulting in a long term impact on the profitability and buying habits of the food vendors at fairs and other outdoor events. 

But like price increases, the price decline measurements use areaggregate figures. Lower prices overall are a good thing, but many traditional fair food categories, like beef and turkey remain high, or at least higher than they were before the jump in prices and they are not falling as fast as other categories. 

According to David Maloni, president of the American Restaurant Association (ARA), the Producer Price Index (PPI) indicates that "prices are Photo By Matt Cookdeclining to a 4 year low, and there was a record corn harvest, which encourages protein and dairy prices to decline," he said. "There is some modest weakness in the commodity markets, and while beef is fairly expensive, at the wholesale feed market, when corn prices go down, then other prices go substantially down.

Sustained Rise
Maloni pointed out that the food price woes began in 2006, when the government mandated more use of ethanol, which blends corn with gasoline, thus cutting into the supply of corn. At the same time, the dollar rose, which increased exports of corn. "The price of corn more than doubled," said Maloni, which had the ripple effect of increasing other costs. "As feed prices rise, so do production costs, and this inflated the price of commodities."

The food commodities market can be volatile and unpredictable, and there can also be a lag to the cycle of food production. In addition, bulk food buyers usually do not feel the repercussions of increased or decrease commodity prices until about a year later. 

During the past 10 years, according to the ARA, spikes of more than 8 percent in food prices - in 2008 and 2010 - were seen, alongside years with increases around 5 percent in 2011 and 2012. "Food prices are always vacillating up and down," said David Koretsky, Director of Sales, Source 1Purchasing. "The overall trend is up, but not all prices rise at the same time or rate."

Price Responses
Fair concessionaires are not alone of course, but other wholesale food purchasers such as supermarkets and restaurants, are addressing the rising cost of food. In general, Maloni said food sellers have three options: "You can raise prices, decrease portion sizes or change menu specs," said Maloni.

Changing menu specs means shopping for less expensive foods. As an example, Maloni cited, "if my restaurant was in New Jersey and I sold a lot of BLTs, I might buy the famous N.J. tomatoes because they may be cheaper and off set cost increases for the bacon."

In some instances, a different purchasing pattern can mean lower quality items - or more competitive buying, food vendors are looking at more sources for their product to get the lowest price point. Koretsky said "we are seeing more buying strategies, more shopping by the concessionaire to get the lowest price. The prices are not always the same from different warehouses and sources, so we are seeing more strategic purchasing by vendors because even when a price of a commodity increases, not all places are selling at the same price. The question is if saving a nickel it worth it to go to supplier whom you do not know."

Decreasing portion sizes is an option many consumers are seeing by other food retailers. Supermarkets often address food price inflation by changing packaging - selling a 10-oz. size box of cereal for the same price as the 12-oz. size for example. There are anecdotal tales of restaurants making similar reductions in portions, but serving them on smaller plates so the portion shrinkage is less noticeable. But reducing portion sizes at the fair has not been seen as a trend, probably because vendors do not have the same flexibility as other food retailers. "You can't really sell a smaller corn dog and not have people notice," said Jim Sinclair, Deputy General Manager, Minnesota State Fair. 

While smaller corn dogs are not being used as a hedge against food inflation, food vendors are manipulating portion sizes, but in the opposite direction. 

"We are seeing more super-sizing," said Rey O'Day, National Independent Concessionaires Association (NICA)West, Executive Manager. "Customers drive sales. People buy with their eyes and they are buying larger sized item, and they meet at a table and they all share the supersized items. Concessionaires are developing larger sizes because there is more of a meal feel to it. If you add cheese and a side item, it becomes an entrée and you charge more. Customers see more value, and there is a savings for concessionaires when it comes to higher food costs. Also, instead of putting an item into two boats, it goes into one, and there may be less ancillary products being used which is also a savings."

Retail Price Maintenance
What all food sellers do not want to do is increase the prices. "The last resort is raising prices to improve profitability, because when you do that you typically lose business," said Maloni.

"Concessionaires do not want to increase prices," agreed O'Day. "There are people who come to the fair every year for their favorite foods, and they do not like it when they see a jump in price. It affects loyalty." 

The fact is that food concessionaires often do not have the option to increase price. "Fair vendors have to charge a price that the market will bear," said Sinclair.

At the Minnesota State Fair - one of the country's largest fairs with more than 300 food vendors - Sinclair hasn't noticed an increase in the price charged to the customers. 

"There is the elasticity of demand, and we publish food prices so all the vendors can see what each other is charging," he said. "We don't fix prices, but the food prices are public record. Also, unless there is a promotion, the price they come into the fair charging is the one they have to stick to." 

While this policy favors the fairgoer, Sinclair added, "I understand that vendors are under pressure because of increased costs of food and have in some cases accepted lower margins."

"The thing is that rents fairs charge never goes down and the food prices increase," said Audrey Poole, Vice President of Business Development, Fare Foods Corporation. "Concessionaires either cut their margins or raise prices, but they are not willing to put their business at risk by raising prices. What we've seen is that they are making lower margins."

She added, "our customers have made their business on quality and customer loyalty, and they don't want to cut quality because they'll lose customers." 

Instead of increasing prices and with other cost control methods not as effective in the fair vendor market as they are in brick and mortar food sellers, what concessionaires have done for the past 10 years is accept a lower bottom line. Koretsky finds that the overall increase is "about 3 percent, and food vendors tend to accept that because it is manageable and better than increasing their price to the consumer."  

O'Day admits that most food vendors responded to increased food costs by lowering their bottom line expectations. "I would say that most concessionaires accepted a decrease in profitability," she said. 

However, consecutive years of increased prices, price increase-resistant fair goers, and absorbing the negative impact on the bottom line, have had a dispiriting effect on concessionaires.  

Dominic Palmieri, CEO of Odyssey Foods, a food concessionaire at fairs throughout the southwest, cited the stark reality is that if overall food costs increased 3 percent, that may be small enough for a food vendor to accept - as opposed to raising the customer's price - which can affect sales and customer loyalty - "but you multiply that loss by 30 or so events, you are now talking about tens of thousands dollars,"said Palmieri.

The cumulative affect of these losses, he added, is that "you can't make capital improvements, like new signage, new uniforms, sprucing up your presentation."

Palmieri pointed out, some prices - such as meats - have gone up drastically in the past three years while overall costs may have risen but not as high. Price increases  are manageable when they are not across the board. 

Due to issues with cattle production, beef prices have essentially gone up "95 percent in the last two years, prices have basically doubled," said Palmieri. "Some concessionaires are switching meats, selling more turkey and chicken, or they are pairing up the foods with beans and coleslaw and fresh cut potatoes, but that can only be so effective."

"Last year was one of the biggest increases we've seen in the meat market," said Trampas Porter, Director of Purchasing, Fare Foods Corporation "It was a crazy meat market. Some vendors passed that on to the fairgoer, but that is very difficult. It hurt their bottom line."

Concessionaire Buying Groups
A few years ago, concessionaires began to form buying groups - basically buying coalitions where group purchases can bring economies of scale into play and actually lower wholesale costs. NICA SYSCO Marketplace is one of the largest, with 514 members and a reported savings in 2014 of $476,883 or 5.04 percent of total sales, according to NICA. Buying Groups have been an integral part of many industries for decades - in the retail business, it has been a way for mom & pop stores to buy larger volumes and be more competitive against large chain stores. For fair food vendors, it's the last decade of food price inflation that prompted the formation of a group buying as a response to tightening margins and declining profitability. 

"We are independent concessionaires," said Palmieri. "For many it is important we do our own thing and purchase independently and that worked for a while, but the reality was we needed to to pool our buying together because since 2008, food prices have kept inflating. 

Buying groups have helped soften some of the increases. Vendors have had to make changes, it's been very hard because we do not want to raise prices to costumers and we do not want to cut back on quality. Fair food vendor coalitions have been formed strictly because of the price inflation of food." 

Some price increases have had a more specific impact on fair food vendors, and the buying groups have been effective. Turkey Legs - a staple of most fairs - were about $1.15 a pound three or so years ago, said Palmieri. White turkey meat was more in demand than dark turkey meat, so the leg was relatively inexpensive - but as poultry companies, due to consumer trends, increased production of beef substitute products, such as turkey sausage or turkey ham - the entire bird was being used and the turkey leg prices rose to the range of $1.99 to $2.49. "In the past year and a half, we've seen significant increase in turkey prices, said Palmieri. "Turkey manufacturers have come up with new items that use the whole turkey, so the prices have been increasing." 

Buying groups had an impact on this price. "We were able to buy in sufficient volume to lower that price to about $1.80," said Palmieri. "Turkey legs are sold at every fair, but the vendors were accepting a lower profitability on them."

And what about that 7.1 percent decrease in prices ARA figures indicate for this year? "As far as this year, we are starting to see decline in prices," said Porter. "Fuel prices are down, so that is good."

Recent reports of food price decreases may be a silver lining, but there is still plenty of dark clouds when it comes selling food at fairs this year. In addition to 10+ years of food inflation, and until recently, rising gasoline prices, O'Day emphasized in the past eight years, leases on the vendor spots increased from 20 percent to 26 percent of sales. "We've seen increases in the minimum wage, which also have increased costs," said O'Day. "Food prices like gasoline prices go up and go down but the price never drops back down as far it was. We are always finding a new floor of prices that is higher than before."


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