There’s a reason that Pizza Hut (YUM) charges extra for stuffed crust. Cheese is generally the costliest ingredient for pizza restaurants—it’s 35 percent to 40 percent of Papa John’s (PZZA) food costs, for instance—and it’s getting more expensive.
The price of mozzarella cheese is up about 16 percent since the beginning of December, and the price of cheddar cheese has jumped about 25 percent, according to data from Bloomberg.
Bad weather in Europe and New Zealand and high feed costs hurt global milk production in 2013, especially in the first half of the year, reported agriculture news site Capitalpress.com (pdf). As a result, American dairies sent more cheese overseas: In the first 10 months of 2013, cheese exports were up 17 percent over 2012, leaving less for cheese-loving Americans, according to the U.S. Department of Agriculture (pdf). A large share of the exported cheese went to South Korea, Mexico, and China. Domestic consumption is expected to increase about 2 percent this year, and by the end of 2014, inventory is projected to be its lowest in a decade.
Pizza chains should not be affected much. Other costs, such as meat and wheat, have dropped—though the winter weather and the spread of a pig virus aren’t helping. Domino’s (DPZ) chief financial officer, Michael Lawton, said at an investor event in January, “In the last couple of days, I’ve had a lot of questions about cheese because it spiked up, and cheese is the biggest commodity. Even taking that into account when you look at the whole basket, and you look at the projections on cheese for the year, we are still projecting that we would be down in the range of 0 percent to 2 percent.”
While the costs of commodities don’t directly affect the retail price of pizza, they can trickle down. Franchisees, for instance—who buy ingredients from the chain company—may offer fewer discounts or promotions if ingredients cost more. “In the commissary system, we have a relatively fixed penny profit per pound,” Lawton explained. “We adjust prices up or down as commodities move up or down. This obviously does impact us in our corporate stores. Longer term, commodities like any cost are an issue, because we want our franchisees to enjoy some good financial returns.”