Posted on: Tuesday, September 4, 2001

Pizzerias feel pinch of cheese prices

By Justin Bachman
Associated Press

SMYRNA, Ga. — The cheese still goes on thick but pizza parlor bosses are giving employees a new edict when it comes to managing the mozzarella — don't waste, it's not so cheap, capisci?

"Yeah, I hear that a lot," said Sherwin Kannukkaden, wiping his brow as he waits to pull another pie from the pizza oven at a suburban Mellow Mushroom.

Although cheese prices fluctuate like any other commodity — because of weather, energy prices, supply, demand, herd conditions and countless other factors — high costs this summer are eating into the pizza industry's bottom line.

"Oh man! I can cry for a week on that," said Jim Fox, founder of Pittsburgh-based Fox's Pizza Den, with 215 franchises in 17 states. "It's just brutal."

Cheese accounts for nearly half of a pizza's cost, which makes restaurateurs extremely sensitive to price changes. And few in the industry are willing to buy in advance because the market is so volatile.

In their second-quarter earnings reports, Pizza Hut and Domino's cited higher cheese costs as a factor for lower operating margins. Papa John's International said it expects to pay more for cheese later this year, which will pressure margins.

Smaller players have been squeezed even more.

Michel Panos, who owns three Mellow Mushroom franchises, says his customers won't pay more for his pizza, so he can't pass along the higher cost.

"Cheese prices go up and (people) say, 'What's that got to do with us?' " he said. "They just see what the price of the pizza is. They don't really know what all goes into it."

Consumer expectations have been reinforced by pizza makers' aggressive marketing. Half-price specials and bundled deals have become the norm in an industry with such price sensitivity and ferocious competition.

"The price of everything else in the world seems to go up, but a pizza has always been between 9 and 11 bucks," said Tim McIntyre, a spokesman for Domino's Pizza, based in Ann Arbor, Mich. "That's what people think they cost."

Market research shows sensitivity to "three-digit pricing," McIntyre says — people buy lots more pizza at $9.99 than at $10.99.

Pizza operators are accustomed to swings in cheese prices. They typically jump in midsummer, when dry weather often curtails supply, and again during the winter holidays, when Americans tend to buy more cheese.

Cheese is traded in 40-pound cheddar blocks and 500-pound barrels on the Chicago Mercantile Exchange. Restaurant buyers' prices for mozzarella and other varieties are based on the block pound price, which was $1.68 this week. Back in November, the cheddar block price had fallen as low as 98 cents a pound.

Many pizza people say they're bracing to pay high prices for several more months because of lagging supplies.

Dallas-based Pizza Hut, the nation's largest pizza maker, and Papa John's, based in Louisville, Ky., have begun cooperatives to handle purchasing for their franchises.

The co-ops help franchise owners smooth price swings by pooling members' funds when cheese drops and absorbing costs when it rises, although "in the long-term that buying co-op doesn't change what the system pays for cheese," said Barry Stouffer, an analyst with BB&T Capital Markets in Nashville, Tenn.

To help combat squeezed margins, pizza chains are pushing new products to add to their delivery mix: sandwiches, chicken wings and salads.

Domino's, which once experimented with a breakfast pizza, is sponsoring a contest for franchise owners to suggest products that could potentially be delivered with pizza.

Pizza makers say they won't skimp on cheese because customers would notice and might not return, but some concede that high prices have prompted some to look for bargain alternatives.

"We work hard not to have the commodity drive the price of the pizza," Pizza Hut spokeswoman Patty Sullivan said. "You have to learn to manage your business in other ways."

Fox buys about 30,000 pounds of a provolone-mozzarella blend each week for the three stores he operates near Pittsburgh. He conceded that some of his franchisees "are buying just the cheapest stuff they can out there on the market and mixing it with the good stuff."

Alfonso Orefice, who owns Alfonso's Pizzeria in Tampa, Fla., raised his price for extra cheese to $3, nearly double the $1.60 for other toppings. Orefice says he'll likely raise pizza prices, too, if the cheese stays pricey.

"It's getting tough," he said. "The cows, they are driving us crazy."