Pizza Makers Face Higher Cheese Costs

But Franchises Are Better Able To Absorb Price Fluctuations

Along with many other commodities, cheese prices have surged. And pizza makers, whether independant or chains, are feeling the pinch as outlined in an AP story. It seems to be an unanticipated result of the headlong rush into all things ethanol which has pushed up prices from tortillas to chocolate.

I came across the story whilst trying to get a bead on what was happening to cheese prices and to see how the industry was dealing with it. I then started looking for comments and financial results of publicly traded Pizza companies. Of interest to me was the methodology one of the largest Pizza Franchise Systems uses in dealing with price fluctuations of this key commodity.

Papa Johns is a listed company and whilst I was looking through their most recent SEC quarterly filing I was impressed to discover that they have a seperate franchisee controlled entity called BIBP which buys cheese. (The system uses about 100 million pounds per year.) It smoothes the price fluctuations in the way it prices to franchisees. In 2006 the cheese price was lower than normal and resulted in an over recovery of some 18 million dollars for the listed holding company, however with the current and projected pricing it will cost the holding company about 20 million dollars by end 1st quarter 2008. The explanation is in their 10K filing (see page 21). This cheese purchasing entity has apparently also in the past provided loans to franchisees.

This seems to show real benefits to franchising - there is no way an independant pizza parlor operator could hope to be able to deal with commodity price moves in this way. They experience feast or famine.