Food Costs Take NPC By Surprise


This year isn't quite turning out as good a year as NPC International had hoped—at least as far as food costs are concerned.

The big Pizza Hut operator on Friday said that its ingredient costs in the Pizza Hut business will be up 3 percent to 4 percent this year. That is a "stark contrast" to the deflationary environment that the Overland Park, Kansas company had expected going into 2014.

Food costs have been something of an unexpected problem this year. Many prognosticators expected protein costs to ease in 2014, thanks to lower corn prices. But that hasn't happened, thanks to a virus that has hammered pork production. That has increased the price of bacon and sausage, and has had a ripple effect on other proteins like chicken, while beef costs—already high—are at a record, as consumers shift away from pork. Cheese prices, which represent a huge percentage of pizza chains' costs, are also up.

This would be one thing if sales were going up. But NPC is a Pizza Hut franchisee, and that brand has been struggling.

Sales at NPC's Pizza Huts fell 4.7 percent in the first quarter. This is on top of a 2 percent decline in the first quarter a year ago.

To be sure, pizza is a challenging market, and Pizza Hut is coming up against some mighty tough competitors. Both Domino's and Papa John's are performing, as is the private chain Little Caesars. Also, grocery stores, convenience stores and places like Costco have been increasingly aggressive with their pizza offerings. As much as consumers like pizza, they will eat only so much of it.

CEO Jim Schwartz said the company has been working with the franchisor to address the brand's challenges. "We are evaluating all aspects of the brand including brand relevance and positioning," he said, noting that "additional work is required to comprehensively address our current consumer shortfall."

Lower sales and higher ingredient costs are a tough combination.

But NPC now has another brand to fall back on in Wendy's. For years, the company had been a one-trick franchisee, with just Pizza Hut, before it started making a big move into Wendy's last year. While NPC didn't have numbers for that brand, Schwartz said that he is "pleased with the momentum" in that business.

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