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Thursday, September 30, 2010

Lower Food Costs Provide Edge

In an article written by Jeremiah McWilliams in Tuesday's Atlanta Journal Constitution, Sara Senatore, an analyst with Sanford C. Bernstein, is quoted regarding the impact of rising corn prices. She said "eventually that's going to trickle into protein..." in a discussion about poor crop conditions and rising demand for corn.

The article also mentions the ability of major chains to dampen the impact of rapid price increases through use of future contracts. However, many of these long term contracts will be expiring in the months ahead.

There is some speculation regarding the expected reaction on the part of major chains. Will they be able to continue to win the futures game? Will they pass along the impact of rising prices to their customers through higher menu prices? Will they simply eat the higher prices they will pay for food?

Most likely, we will experience all three reactions. The industry leaders will continue to sign long term contracts with farmers and food producers. Menu prices will likely increase and companies may need to absorb the market price spikes on their second tier food items.

Companies with tight cost controls will enjoy a major advantage. They will benefit from clear reports which will help them manage the inflationary environment. By measuring the impact on their specific operations, higher protein and grain prices can be managed effectively.

You may find less customer resistance to higher menu prices as the chains react to the higher corn prices. If you successfully raise prices, retain customers and control your food cost, you will gain a huge edge over your competition.

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