- The Washington Times - Saturday, September 1, 2001

The cheese still goes on thick, but pizza parlor bosses are giving employees a new edict when it comes to managing the mozzarella — don't waste, it's not so cheap, capisce?
"Yeah, I hear that a lot," said Sherwin Kannukkaden, wiping his brow as he waited to pull another pie from the pizza oven at a Mellow Mushroom pizza restaurant in Georgia.
Cheese prices fluctuate like any other commodity — because of weather, energy prices, supply, demand, herd conditions and countless other factors — and high costs this summer are eating into the pizza industry's bottom line.
"Oh, man, I can cry for a week on that," said Jim Fox, founder of Pittsburgh-based Fox's Pizza Den, with 215 franchises in 17 states. "It's just brutal."
Cheese accounts for nearly half of a pizza's cost, which makes restaurateurs sensitive to price changes. And few in the industry are willing to buy in advance because the market is so volatile.
In their second-quarter earnings reports, Pizza Hut and Domino's cited higher cheese costs as a factor for lower operating margins. Papa John's International said it expects to pay more for cheese later this year, which will pressure margins.
Smaller players have been squeezed even more.
Michael Chmar, manager of Geppetto, which has a restaurant in Bethesda and a carry-out shop in Georgetown, said he was depressed when he bought mozzarella and provolone this week.
"It's way high," he said. "That means that I don't make as much money — it's pretty simple. I'm not nearly as able to be profitable because you can't pass on that increase to the guest. I can't raise my price of pizza."
A year ago, Mr. Chmar could buy a pound of cheese for about $1.30. This week he paid $2.10.
But prices of the pizzas will stay the same.
"You just eat [the loss]. There's nothing you can do about it," he said. "You just wait until the market gets more normal."
But others aren't waiting.
Craig Lorch, co-owner of Country Fair Group, which owns seven local restaurants, including two pizzerias, said cheese prices typically rise this time of year but that the increase this summer was significant.
The company raised the price for a slice of cheese pizza a quarter to $2 at its Enrico's parlor in Baltimore's Inner Harbor, "directly because of the price of cheese," Mr. Lorch said.
Pizza operators are accustomed to swings in cheese prices. They typically jump in midsummer, when dry weather often curtails supply, and again during the winter holidays, when Americans tend to buy more cheese.
Cheese is traded in 40-pound cheddar blocks and 500-pound barrels on the Chicago Mercantile Exchange. The spot price of a pound of cheddar on the East Coast was $2.01 this week, up from $1.24 in November. Mozzarella is up to $2.14 from $1.83.
Many pizza people say they are bracing to pay high prices for several more months because of lagging supplies.
Prices at Enrico's in the District, on 11th Street and Pennsylvania Avenue NW, remain the same at $1.75 per slice.
The cheese spike "costs to the profit tremendously," said Hoss Goal, general manager of Al's Gourmet Pizza on 14th and North Capital Street.
But Mr. Goal said he won't raise prices — for now.
"We'll stick through it and see, really, what happens, and if the price is going to adjust itself," he said. "If not, we'll have to make some move. But we're being patient with this issue."
Alfonso Orefice, who owns Alfonso's Pizzeria in Tampa, Fla., raised his price for extra cheese to $3, nearly double the $1.60 for other toppings. Mr. Orefice says he likely will raise pizza prices, too, if the cheese stays pricey.
"It's getting tough," he said. "The cows, they are driving us crazy."
Market research shows sensitivity to "three-digit pricing," said Tim McIntyre, a spokesman for Domino's Pizza, based in Ann Arbor, Mich. — people buy more pizza at $9.99 than at $10.99.
"The price of everything else in the world seems to go up, but a pizza has always been between 9 and 11 bucks," Mr. McIntyre said. "That's what people think they cost."
Pizza Hut, based in Dallas and the nation's largest pizza maker, and Papa John's, based in Louisville, Ky., have begun cooperatives to handle purchasing for their franchises.
The co-ops help franchise owners smooth price swings by pooling members' funds when cheese drops and absorbing costs when it rises, although "in the long-term that buying co-op doesn't change what the system pays for cheese," said Barry Stouffer, an analyst with BB&T; Capital Markets in Nashville, Tenn.
To help combat squeezed margins, pizza chains are pushing new products to add to their delivery mix: sandwiches, chicken wings and salads.
Pizza makers say they won't skimp on cheese because customers would notice and might not return, but some concede that high prices have prompted some to look for bargain alternatives.
"We work hard not to have the commodity drive the price of the pizza," Pizza Hut spokeswoman Patty Sullivan said. "You have to learn to manage your business in other ways."
Kristina Stefanova contributed to this report.


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