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www.WATTAgNet.com ❙ December 2014
16 ❙WATT POULTRY USA
Buying chicken for Burger King: End-user perspective on protein costs
■ CUSTOMER PROFILE/MARKETS
BY GARY THORNTON» Keeping 7,100 Burger King restaurants in the U.S.
supplied with everything from beef trimmings that
go into Whopper burgers and chicken breast ! lets in
Tendergrill sandwiches to fries, soft drinks and pack-
aging, as well as premiums like Pokeman toys for the
chain’s younger patrons, is no simple operation.
George Hoffman, CEO of Restaurant Services Inc.
(RSI), the buying cooperative for Burger King res-
taurants in North America, has responsibility for the
supply chain management that includes
global sourcing from suppliers in the
U.S., China, Australia, New Zealand and
Canada. Just negotiating and managing
the 1,500 freight lanes, which are the con-
nections between the suppliers, distribu-
tion centers and restaurants, is, on its face,
a labyrinthine business.
But there’s one supply challenge for
Burger King and its restaurants that now
rises above all others – the four-year
climb in the price of beef, chicken and
pork, which are the staples of the chain’s
menu. The Consumer Price Index for
meat, poultry and eggs, he noted, is up 27
percent since 2010, and the CPI for beef
and veal is up 45 percent.
Surprising strength in meat prices, demandSpeaking at the Informa Economics
Animal Protein Seminar during the Oilseed
& Grain Trade Summit, Hoffman said, “Are
animal protein costs a big deal? Are we concerned about
rising protein costs? Are we doing anything about it? The
answer to those questions is yes, yes and yes.”
The CEO at the company in charge of buying meat and poultry proteins for Burger King North America outlined strategies at the Oilseed & Grains Trade Summit for dealing with rising costs.
Managing Burger King’s bottom lineAreas of focus to maintain restaurant profi t margins
Sales ($ thousand) % of sales
SALES $1,000 100.0%
EXPENSES:
Beef $50 5.0
Non-Beef $240 24.0
Packaging $30 3.0
TOTAL F&P $320 32.0
Labor $300 30.0
Rent $90 9.0
Royalty $40 4.0
Advertising $40 4.0
Utilities $40 4.0
R&M $30 3.0
All other $15 1.5
Total expenses $875 87.5
EBITDA $125 12.5
Source: George Hoffman, Oilseed & Grain Summit, 2014
#1
#2
#3
#4
#5
#6
Bottom line
» The hierarchy of margin-protection action moves from
the top of the P&L to the bottom, with the fi rst action
preferably taken in the sales area and the last in facilities
maintenance.
December 2014 ❙ www.WATTAgNet.com
WATT POULTRY USA ❙17
He cited a USA Today report which quoted USDA
economist Annemarie Kuhns: “Beef and veal prices
are on track to rise 8.5 percent in 2014, a bigger in-
crease than previously forecast, while pork prices will
grow 8 percent and chicken 3.5 percent, according to
the Agriculture Department. ‘We weren’t so much sur-
prised that we had to raise beef
prices as we were that demand
has remained high for beef,’”
he quoted Kuhns.
Beef and chicken prices play critical role in profi t and loss Hoffman con! rmed demand remains strong for
beef at Burger King restaurants, and he discussed the
challenge higher prices pose for restaurant margins.
Beef is the single-largest item of all food and pack-
aging purchases ($2.6 billion) for North American
Burger King restaurants. Beef purchases at $495 mil-
lion account for 19 percent of the total spending for
food and packaging. Soft drinks rank second among
Burger King’s food and packaging purchases, with
chicken the third largest at $280 million (11 percent)
and pork at $111 million (4 percent).
How restaurants respond to rising meat costsResponses to rising meat protein costs are similar
at all fast food restaurants, according to Hoffman, but
a chain’s menu pro! le and other factors in# uence ex-
ecution of strategies.
“There are basically only two options for respond-
ing to rising protein costs,” he said, “raise the top line
of the P&L through price increases, or reduce costs.”
He outlined possible responses to rising protein costs:
» Raise the P&L’s top line (sales). This means pass-
ing through higher costs of goods to customers with
higher menu prices, either by raising prices for menu
items directly impacted by cost increases (burgers)
or raising menu prices, generally on all or many
menu items.
» Reduce expenses by targeted cost-reduction initia-
tives on the menu items whose costs have escalated,
by either reducing costs of the ingredient with cost
in# ation or reducing costs of other ingredients in the
menu item to offset.
» Reduce costs of other food items to maintain gross
pro! t margins.
» Reduce the cost of non-food items to maintain bot-
tom-line restaurant pro! tability.
“Depending on the restaurant brand, and depending
on its concentration of the different protein products,
a brand may respond in a slightly different way or at a
different pace, but all of us are dealing with the same
dynamics. For Burger King, with almost 20 percent of
our cost of goods in the beef category, the increase in
beef costs is really a big deal,” he said.
Factors infl uencing profi t margin managementAt least four factors play a role in any fast-food
chain’s actions to maintain bottom-line restaurant
profitability in the face of cost increases in meats
and poultry:
Source: George Hoffman, Oilseed & Grain Summit, 2014
0.95
1.05
1.15
1.25
1.35
1.45
1.55
2010 2011 2012 2013 2014 2015
All foodBeef-Veal Pork Poultry Dairy
Escalating protein costs for fast foodersConsumer price indexes January 2010 = 1.00
» The Consumer Price Index for meat, poultry and eggs is
up 27 percent since 2010, while the CPI for beef and veal is
up 45 percent.
Related story: Quick-service restaurants adding more chicken to menus, www.WATTAgNet.com/157219.html
www.WATTAgNet.com ❙ December 2014
18 ❙WATT POULTRY USA
■ CUSTOMER PROFILE/MARKETS
» General economic environment (national and local)
» Timing factor: Are cost increases expected to be short
lived or long term? Short-term increases in costs tend
not to be passed through in retail prices.
» Pricing power (global and regional/local) in the
economy, the region and at the restaurant-level in the
community plays a role. Emerging brands like Chipotle
or Five Guys, for example, have pricing power. Mature
brands like Burger King and McDonald’s do not and
can’t easily pass cost increases through to the customer,
Hoffman said.
» Competitive environment: What is the competition’s
expected response?
“These factors play out in different ways for individual
restaurants and the overall brand,” Hoffman said. “Margin
management occurs on the part of the restaurant opera-
tors with the brand in tow as operators attempt to offset or
compensate for cost increases by making adjustments in
their restaurants’ P&Ls to try to protect the bottom line.”
Competitive environment impacts marginsMargins at Burger King restaurants have been
squeezed over the past two years due to the relatively high
percentage of beef on the menu. Not all competitors have
experienced the same degree of commodity cost pres-
sures during the period. For example, a competitor such
as KFC, with a chicken-oriented menu, would not have
been subject to the same cost pressures as Burger King at
a time when beef prices are escalating more rapidly than
chicken prices.
Beef’s share of the cost of goods at Burger King, for
example, is 19 percent but might be closer to 15 percent
at many quick-service restaurant (QSR) hamburger chains
and 10 percent in some other types of QSR chains.
Nonetheless, passing through cost increases in the
form of higher retail prices is not always an immediate
option.
“If a restaurant takes its menu prices up, its competitor
might not, and it could be at a disadvantage in the mar-
ketplace. So the options for raising prices or just passing
through cost increases may be limited,” he explained.
Timing of price changes in the prevailing economyHoffman said, however, that foodservice retail prices
– after being stuck in neutral for months – may be poised
Breakout of purchases for Burger King in USACategory share of system purchases
Source: Presentation by George Hoffman, Oilseed & Grain Summit, 2014
Everything else
Beef
Pork
Chicken
Dairy
» Beef, chicken, dairy and pork account for 40 percent of
Burger King system purchases.
Purchase for Burger King in USA Food and packaging products
$ Million % of total
Beef 495 19
Soft drinks, other drinks 353 13
Chicken 280 11
Fries, onion rings 244 9
Packaging 240 9
Bread 202 8
Dairy 167 6
Condiments 122 5
Pork 111 4
Produce, vegetables 109 4
Oils 74 3
Premiums, promotion items 40 2
Fish 18 1
All other 168 6
TOTAL $2,623 100%
Source: Presentation by George Hoffman, Oilseed & Grain Summit, 2014
» Beef purchases at $495 million account for 19 percent of the
total spending for food and packaging with chicken purchases
at $280 million accounting for 11 percent of spending.
www.WATTAgNet.com ❙ December 2014
20 ❙WATT POULTRY USA
■ CUSTOMER PROFILE/MARKETS
for a signi!cant rise.
“Particularly in the last 24
months, food-at-home prices expe-
rienced signi!cant year-over-year
increases, and the pace of those
increases have accelerated in the last
six months. The restaurant industry,
however, has been absorbing these
cost increases, and when it’s clear
these commodity pressures are not
going to back off, restaurants will
begin to pass through some of these
increased costs with price increases.
My expectation is that restaurant
menu price increases are about to
start. Probably over about the next
six months we will see some signi!-
cant menu price in#ation,” he said.
Non-price actions to improve sales marginsNot every response to higher
meat and poultry prices will be
passing through costs to the foodser-
vice consumer. Hoffman named two
actions that can improve foodservice
margins without resorting to prices
increases:
» Change the menu mix to products
with lower relative costs
» Introduce new “premium prod-
ucts” that have better pro!t mar-
gins (even beef) due to higher
menu prices
Burger King and other fast food
chains have been taking advantage
of these kinds of approaches in
recent months. Chicken has been
the “turn to” product in some menu
changes but not all. Examples in-
clude the following:
Purchases for Burger King in USRestaurant Services Inc. purchasing scope
$ Million
Food and packaging 2,584
Premiums (toys) 39
Equipment and décor 130
Distribution services 190
TOTAL $2.05 bil.
Source: Presentation by George Hoffman, Oilseed & Grain Summit, 2014
PoultryStar®
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Naturally ahead
» RSI’s purchases of food and packaging
items amount to $2.6 billion annually.
See us at IPPE booth A1029
December 2014 ❙ www.WATTAgNet.com
WATT POULTRY USA ❙21
» McDonald’s launched a limited-
time breakfast burrito using
chorizo made with chicken and
seasonings including paprika,
chili and chipotle pepper. The
burritos, which were available at
about 2,000 restaurants in three
markets, included scrambled eggs,
Roma tomatoes, green chilies, on-
ions and white cheddar cheese.
» Wendy’s tested and rolled out a
menu of premium-priced pulled
pork items to 6,000 restaurants
nationwide.
» White Castle was surveying its
regular customers this fall to
!nd out if the 180-calorie vegan
burgers they began testing in
July would be more popular with
spicier toppings such as harissa or
chipotle lime sauce.
» Burger King featured the return
of chicken fries to the menu this
summer along with the slogan,
“Get ‘em while they’re here!”
Impacts of soaring beef prices on product development
“High-cost products are going
to get less new product focus than
relatively lower costs ones,” Hoffman
said. “In the Burger King system,
for example, today, we have two
burger-related SKUs in the kitchen.
We have got a large burger and a
small burger. On the other hand, we
have 11 different chicken SKUs in
the restaurant and they’re dynamic.
We’ll add new ones and discontinue
some older ones. But you’ll see fewer
burger-related new product introduc-
tions, promotions and discounts.”
Foodservice cost reductions to protect the bottom line
In the face of continued high
prices for meat proteins, foodservice
companies are reducing costs to pro-
tect their P&L’s.
“There are dozens of ways to
reduce costs,” Hoffman said, “any of
which depends on marketing strat-
egy, relative costs and timing.”
He described the following cost-
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22 ❙WATT POULTRY USA
■ CUSTOMER PROFILE/MARKETS
reduction strategies:
» Resize portions of the product that
is causing the cost increase
» Modify the speci!cation of the
offending product and/or other
unrelated products
» Use ingredient “extenders”
(cheese, seasonings, etc.)
» Apply pressure on suppliers to
control costs
» Increase the intensity of commod-
ity hedging and risk management
activity
» Reduce costs of other non-food
items in restaurant P&L – cost
reductions of last resort are la-
bor (second to last) and facilities
maintenance (last resort)
» Combination of the above
Cost-reducing product modi!ca-
tions can, in some cases, be attrac-
tive to foodservice patrons.
“One such offering at Burger
King is a stuffed burger that in-
cludes cheese, pickles, pimentos,
and a number of other things in the
burger sandwich. There’s a lower
percentage beef and higher percent-
age of other things. The sandwich
actually has a higher weight, but
cost is reduced and it can be sold as
a premium product.”
More hedging and risk managementIn the current cost-in#ationary
environment, Burger King has
stepped-up activity in purchasing or-
ganizations for forward contracting
and hedging of raw materials. This
is usually done along with manufac-
turers of !nished goods. It includes
cross hedging raw materials with
futures contracts plus buying and
holding of raw materials for future
manufacturing.
“RSI is doing a lot more pro-
active forward contracting for
raw materials, particularly on
non-beef products like chicken
and eggs, dairy products and oth-
ers,” Hoffman said, “However,
opportunities to cross-hedge, for-
ward contract or implement fixed-
pricing contracts are more limited
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December 2014 ❙ www.WATTAgNet.com
WATT POULTRY USA ❙25
on beef than almost any other
product,” he explained.
It’s all about margin management“In summary, it’s all about mar-
gin management through a combina-
tion of possible actions to protect the
bottom line,” Hoffman said.
He explained the hierarchy of
margin-protection action moves
from the top of the P&L to the bot-
tom, with the ! rst action preferably
taken in the sales area and the last in
facilities maintenance. However, in
most cases, foodservice restaurants
take a combination of margin-pro-
tection actions.
Relief in sight for QSR chains in 2015?Lean beef trimmings prices in
2015 are critically important for
Burger King restaurants, Hoffman
said. This means, among other
things, little or no new product de-
velopment involving beef items, he
added.
“Given the supply and demand
and price pattern in place, RSI ex-
pects another serious increase in
lean meat trimming prices in 2015.
With more price increases in the
queue, and likely to be sustained for
some period of time, this is being
built into the marketing calendar,
brand strategies, new product devel-
opment and marketing programs for
the entire year ahead.”
Hoffman, however, told listeners,
“We think we’re going to get some
price relief on pork and chicken
products in 2015.”
Not surprisingly, he indicated
new product development will con-
tinue to be almost entirely non-beef
but instead focused ! rst on chicken
and secondly on pork products.
The Oilseed & Grain Trade
Summit 2014 was hosted by
HighQuest Partners and Informa
Economics. ◼
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LAYERS & TURKEYS
■ CUSTOMER PROFILE/MARKETS
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