The Real Cost of Foodservice

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The Real Cost of Foodservice

By Don Longo, Convenience Store News - 08/01/2008
I hope you come away from reading this special foodservice issue of Convenience Store News with a feeling for the excitement this category offers c-store operators, while at the same time a solemn appreciation for the depth of commitment and study needed to be successful selling fresh, prepared food to consumers.

CSNews reported in its 2008 Industry Report (May 2008) that foodservice was the fastest-growing in-store category last year, increasing a whopping 10.1 percent on a per-store basis. It was also the highest profit category in the store, accounting for 21.63 percent of gross margin dollars. This issue is full of examples of c-stores that are capitalizing on foodservice as a growth driver for their business.

However, foodservice is not for the faint of heart. Just last month, the National Restaurant Association said its monthly survey of restaurants showed operators were greatly worried about increasing wholesale food and commodity prices, with 21 percent of respondents identifying food costs as their top challenge.

C-store retailers are facing the same huge increases in ingredient costs. Senior writer Linda Lisanti reported earlier this year ("Rising Costs Take Bite Out of Profits," CSNews, May 5) skyrocketing commodity prices, as well as increased packaging and transportation costs, were eating up retailer profits in foodservice. Lisanti reported on how retailers all over the country -- from large chains like Kwik Trip and Village Pantry to single-store owners -- were scrambling in the wake of the highest annual food price increase since 1990.

And food prices aren't likely to go down this year. With farmers unable to plant as much corn due to the heavy flooding in the Midwest, corn prices are soaring to record levels. According to the U.S. Department of Agriculture, September-dated corn contracts zoomed to more than $7 per bushel, up from about $6 in June. Federal policies encouraging the diversion of a large share of the corn market from food to fuel production just exacerbates the problem.

There is no question the current short-sighted policy of giving massive subsidies for ethanol production needs to be re-evaluated as part of an overall energy policy that balances environmental concerns with the real food, fuel and economic needs of American consumers. Cripes! China is bidding on rights off the coast of Florida, where U.S. oil companies are forbidden to drill. Unfortunately, neither of the current presidential candidates have articulated an intelligent strategy that deals with both the immediate fuel price problem and the long-term energy needs of the nation.

But I digress. Let's return to the store. After cost of goods sold, labor is the next highest expense in the foodservice arena. In fact, foodservice labor as a percentage of foodservice sales increased from 22.4 percent in 2006 to 25.6 percent in 2007, according to CSNews' exclusive 2008 Foodservice Study (see page 37). CSNews' foodservice expert columnist Dean Dirks wonders why c-stores don't have a category manager for labor. "We have category managers for everything from cigarettes to candy," Dirks said. "But the money blown in labor far offsets rebates in candy."

Restaurants may be suffering more than c-stores from the impact of rising food costs, but they also tend to watch below the line more closely, according to Dirks. "They have people managing all expense categories, from labor to electricity," he pointed out.

So, by all means, invest in growing your foodservice sales -- but do so with your eyes wide open to all the potential costs.