Buying chicken for Burger King: End-user perspective … December 2014 16 WATT POULTRY USA Buying chicken for Burger King: End-user perspective on protein costs CUSTOMER PROFILE/MARKETS

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




» 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%


» 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.




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.


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Naturally ahead

» RSI’s purchases of food and packaging

items amount to $2.6 billion annually.

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» 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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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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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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Buying chicken for Burger King: End-user perspective … December 2014 16 WATT POULTRY USA Buying chicken for Burger King: End-user perspective on protein costs CUSTOMER PROFILE/MARKETS

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