The Impact of Food Prices on Small Food Businesses
Yesterday I mentioned that one of the great things about small food businesses are that they’re relatively cheap to start, especially when compared to other food businesses like restaurants or processed food mega-brands. Now for the bad news. Word on the street (and by street, I mean the Internet) is that food prices are expected to rise significantly in 2011. What type of increase are we talking about? In February the US Department of Agriculture modified their original food cost prediction from an increase of 2-3%, which was already almost double what the US experienced in 2010, to a 4% increase.
Now comes the kicker - that prediction is based on prices of processed foods. Small food businesses that make products from raw ingredients are in for an even steeper increase. Diary products are expected to increase in price more than 5%, fruits and veggies are already climbing in price, and eggs are up a whooping 11% over last year.
So the question now is what are small businesses supposed to do? Many of the big mega-brands actually hedge their commodity prices so that their prices can be kept stable for the most part. But for us small guys that’s not an option. If you have any new products coming out this year it might make sense to build a little extra cushion into your product cost analysis so that if/when your food prices go up, it won’t be as painful to your profit margin.
As for existing products, the decision that has to be made is whether to raise prices or not. Some of the big guys are already planning to do that. Infact Domino’s just announced that they anticipate a slight raise in prices to offset the higher commodity costs and the company’s stock plummeted 6.3% (as of close of business yesterday it was still down 4.7%). The unknown for us small businesses is whether a slight increase in prices will push customers away – especially since we’re still teetering on the tailend of the Great Recession.
At the end of the day it’s a very interesting time to be a small food entrepreneur and it definitely makes sense to keep a very close eye on raw ingredient costs to make sure that your profit margin isn’t widdled down too far.