Brian and Andrea get up at 4:30 AM so that their customers may get steaming hot bagels and mini-pizzas every morning on their way to work. New York Bagel & Deli (NYBD) is the wake-up call for the Santa Monica neighborhood I work in, and recently we got one heck of a wake-up.
Brian informed me that "in the last two years he has seen his cost for a 50 pound bag of high gluten flour go from $8 to $16". After that huge rise, he recently was hit with a bigger shock to his business -- "the price went from $16 to $32 in just 3 weeks!"
He said "in some places in the country the price has reached as high as $36." Brian is very sensitive to the needs and desires of his loyal customer base and feels terrible about this increase. He is struggling with how to moderate the increases and the sticker shock on the cost of a dozen bagels. This is very difficult for him. This is a major blow to the heart of his business.
He has done some very smart things as a small business owner with little control over his major expenses. The most important thing is communicate with his customers and share his concerns about this dilemma. This includes posting and distributing information about the situation.
Last year I posted Serious Money: ADM, Bunge, Potash Corp. -- it's a hungry world believing that food prices were very tight and looked to be a prudent investment going forward even though there had been major run-ups in the past few years. I guess what I really should have said is -- Folks, you haven't seen anything yet!
When it came time to select my stock picks for this year, I included Bunge (NYSE: BG) -- Chasing Value: Bunge Limited (BG) in name only. Although it has been up and down in the early going this year based on word on the street (in this case Wilshire Boulevard), it is probably still a good bet. Rising bagel and pizza prices is sure to affect Wall Street traders at their core.
Sheldon Liber is the CEO of a small private investment company and the principal for design and research at an architecture & planning firm. He writes the columns Chasing Value and Serious Money. Disclosure: I do not own shares of the stocks mentioned.
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Reader Comments (Page 1 of 1)
3-05-2008 @ 6:06PM
al coholic said...
Unfortunately for Brian and Andrea the demand for bagesl and pizza is elastic, whereas we all have to buy gas.
3-05-2008 @ 7:51PM
Ross said...
A batch of large bagels takes about 8 cups of flour (makes abou 18 HUGE bagels). How many cups of flour in a 50lb bag? About 200. Now do the math, that 50lb bag makes how many bagels? That's right,
450 big yummy bagels. Sure, add the cost of salt, sugar, yeast, and well water, but the truth is, your buddy Brian is making bagels for a little over seven cents each! Are you really going to let him tell you that he needs to charge you more? I guess that would be ok if the cost of his bagels go up four cents. But I'm sure he's thinking dollars.
Good luck buying your overpriced bagels.
3-05-2008 @ 8:32PM
Sheldon L said...
Ross,
Thank you for your comments and the math lesson. Here is some additional math to consider.
The ingredients are only a fraction of the cost. After labor, equipment, power, rent, insurance etc. the bagels are sold for 70 to 80 cents around the country. If your making an 8% to 10% profit margin than at the high end your making 8 cents a bagel before the price increase.
That means a 50% attack on your margins even using your 4 cent figure.
The whole business is based on pennies per sale. That is for an established business. Now, if you opened up your shop in the last six months after huge up front costs you may not be profitable yet at all. So even though your business plan may have included a contingency, 100% increase in flour costs creating a 50% reduction in your margins was not in the plan.
You raise some very good points but they are overly simplistic.
3-06-2008 @ 1:29PM
Ross said...
I concede that my comments were rather simplistic, and to be honest I do not have the business expertise to respond with much. Not to mention I already have so much homework to do. However, the fact that wheat bushel prices are increasing because of ethanol subsidies is alarming. Looking at a bigger picture though, wheat is a crop generally safe from cattle feed production. Also, wheat is mainly refined for human consumption. So, if there is such great demand, why not produce more for the demand? There must be some other reason for a price hike. Not only can it be ethanol crops like corn, for government subsidy. Although the negative effects of corn overproduction may be exacerbated by a subsidy. Consider that corn is often used to make all types of livestock feed and many other products. It is a versatile crop, while wheat is not nearly as dynamic. Still, that shouldn't keep production down, as the demand for wheat is ever-increasing.
So what is causing this increase in wheat prices? Interestingly, the acreage devoted to wheat production in the U.S. is on the rise, contradicting the idea that ethanol subsidies are causing the price increase. According to the Southwest Farm Press, reasons for lack of supply point to planting problems (dry top soil) and low quality seed.
I had never thought of seed production being a problem. This issue will require more research, but right now, I just don't have the time. Let me know if you have any insight on what is causing the problem besides ethanol subsidies.
3-06-2008 @ 1:50PM
Sheldon L said...
I will give that some thought Ross, thank you for your interest in my stories.