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Man the torpedoes

Food costs hit sub chains


Sure food prices are high, but creative chains have found innovative ways to counteract the economy. First the problem, then keep reading for the solutions.

A few years ago, the special mayonnaise Firehouse Subs uses on the majority of its sandwiches cost $11 or $12 a case for four, one-gallon containers. Today that same case costs $20, thanks to a 70-percent price spike last year.

When you consider that Firehouse, as a 340-unit chain, goes through 250,000 cases of mayo a year, the increase is significant. But it's nowhere near the "street price" Firehouse would have to pay for that mayo: $35 a case.

"We're definitely under attack," said company CEO and co-founder Robin Sorensen. "In my 16 years in the restaurant business, this is the worst attack on costs that I've seen."

Just about every restaurant in the world must fend off rising food costs, thanks to increases in gas and commodity prices. Sandwich chains are no exception, and those increases can be seen in every layer of the meal, trimming store profits at a time when people are reconsidering whether to eat out at all.

To be sure, this is a good time to be in sandwiches. Demand remains high thanks to consumers' desire for convenience and the perception that sandwiches are healthier – especially now that the low-carb craze is over. Growth in sales at sandwich chains is outpacing growth in the number of units being opened, according to the research firm Technomic.

Many chains report sales are increasing despite intense competition and a continued influx of new concepts. "It's a mature category that is on trend with growing prospects," said Steve Romaniello, CEO of Focus Brands and owner of the sandwich chain Schlotzsky's Deli.

Robin Sorensen quote

Mike Liautaud, president and founder of the 50-unit Midwest sub chain Milio's, credited Subway's landmark Jared campaign with focusing attention on the healthier possibilities of sandwiches, which has lured diners from other quick-service options. "The sandwich segment is strong right now," he said. "Subway got the whole thing going. More customers are coming from hamburger and pizza into the sandwich world. The pie keeps growing."

Still, sandwich chains, like other restaurants, have a limited ability to raise prices because consumers are increasingly price conscious.
While market growth can shield chains from the dangers of departing customers, its competitiveness also gives diners other options. And Subway's recent promotion of $5 foot-long sub sandwiches demonstrates the risk in raising prices. "We're just going to have to take it on the chin," Sorensen said.

Soaring commodity prices, affecting everything from pickles to wheat, can be traced to three events: demand for corn because of the production of ethanol, the booming economies of India and China increasing demand for food and a two-year drought in Australia.

Wheat prices are having a notably strong effect on sandwiches. "Our product at Subway is foot-longs," said Dennis Clabby, vice president of purchasing at Subway's Independent Purchasing Cooperative. "That's a lot of bread." To meet the demand for ethanol, many farmers are switching from wheat to corn, leading to a wheat shortage and a spike in prices earlier this year.

Panera Bread, the St. Louis-based fast-casual chain, said wheat costs hit $13 a bushel in the first quarter of this year, more than double the cost last year of $5.80 a bushel. That increase cost the company $4.7 million in the first quarter alone.

Clabby said that at one point, the flour used to make Subway's bread was unavailable. The company had some in stock, but had it needed to get flour on the market, the prices would have been exorbitant, he said.

At Firehouse, the flour used by its vendor to make the company's bread cost $50 a bag at one point this year, Sorensen said. It used to cost $8.

It's not just flour. Growers of items like lettuce, tomatoes and cucumbers are switching to other items with higher prices and because of concerns over liability, following recent e-coli outbreaks in spinach. And because corn is used as feed for chicken and turkeys, the price for chicken and turkey is going up, too.

"I've never seen commodity prices like this, on such a broad array of commodities," said Clabby, who has been in purchasing 14 years. Other purchasing agents echoed those sentiments. The food prices are coming just as other costs are going up, like labor, energy and rent. Even the price of straws is going up, Sorensen said, because they're made of plastic, which comes from, of course, oil.

"The everyday balancing of operations is going up," Liautaud said. "It's a tough environment as a business owner to manage fast inflation." He believes that the economy is filtering out some of the more poorly run franchises and favoring companies of all sizes with strong financials. And, said Clabby: "There's a lot more risk in doing business these days than ever before."

There is good news in all this for sandwich shops: the commodity prices are motivating companies to look for cost savings elsewhere.

Getting out of a pickle

Some companies, including Subway and Firehouse Subs, had foreseen the cost hikes and entered into longer-term contracts that held down prices, at least temporarily. Many chains are also looking for efficiencies in other areas to offset the price increases.

At Firehouse, the chain is now delivering its frozen bread dough in larger
shipments every two weeks instead of every week. The fewer shipments save on delivery costs. In addition, the company has reformulated packaging to fit more dough in every box.

Subway has three strategies to offset the rising price of pickles, a popular condiment on its subs. It has reduced the amount of brine in containers of pickles so they can hold more pickles. It uses a different type of box for those containers that requires less cardboard, is cheaper and can fit more pickles. It is also putting more boxes on every truck – all in an effort to reduce pickle shipments.

"We have about 30 little projects like that," Clabby said. "If we didn't do that, our food costs would go up substantially. We're motivated to do that, because who likes bringing cost increases into the system? We're always under the gun to find opportunities to reduce costs."

The 350-unit Jersey Mike's sandwich chain has taken a different approach toward its food cost issues. It has shortened its contracts with manufacturers for commodities like turkey, pork or cheese while in some cases guaranteeing an amount it will purchase. That has enabled the company to take advantage of the commodity volatility. "It helps us float with the market," said Mike Manzo, Jersey Mike's chief operating officer. "We buy at certain valleys and try to even out the peaks."

He said the company beat the markets in the first quarter of this year. He added that the chain tries to absorb any commodity price increases to avoid raising prices and lower quality, increasing pressure to keep food costs down.

But Manzo doesn't seem to feel that pressure. "It's a lot of fun," he said. "We value that every decision has a risk proposition. It's the degree to which you are wrong that impacts the bottom line. Franchisees' profitability is our focus. When they're profitable, that makes for a happier franchisee."  

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