Finance | May 2016 | By Brendan O’Brien

Quality at a Cost

Raising the bar on ingredients comes at a premium. Find out how some operators are making it work.
QSR and fast casual chains balance high food costs with quality sourcing.
Chef Jason Kupper (left) and cofounder Ben Koenig buy in-season produce to control the cost of local ingredients. Heritage Eats

Less than a decade ago, the Alfredo sauce at Fazoli’s, a quick-service brand that prides itself on classic Italian items, was more water than dairy.

“It was mainly water and some dairy and some … voodoo stuff,” says Fazoli’s CEO Carl Howard with a laugh.

The weakness of the Alfredo sauce was one of several menu issues uncovered in 2008 when the brand set out to determine why it was experiencing double-digit declines in sales at the time. Some help from a consultant and consumer surveys found that a menu rampant with low-quality ingredients was to blame, Howard says.

Over the past several years, the brand has worked to revamp its offerings with premium ingredients. And it isn’t alone; a growing number of limited-service concepts are striving to meet consumer demand for fresh and healthy fare.

But these high-quality ingredients come at a cost. Fazoli’s now spends 30–50 cents more per dish than it did before the changes.

“We are able to far exceed that in what we have been able to charge based on the changes that we’ve made in product, service, and environment,” Howard says. “We were running record-low food costs … before we made the changes, but we don’t have to be record low.”

Overall, food costs are at least 1 or 2 percent more for brands that focus on quality ingredients such as antibiotic-free poultry and fresh produce, says John Nicolopoulos, the head of the retail and restaurant practice at Chicago–based consultancy RSM US. He adds that the long-term cost difference has yet to be fully realized.

One large and often unexpected cost associated with premium ingredients involves food-safety training and quality protocols for farmers, producers, suppliers, and the restaurants themselves, Nicolopoulos says.

“Those protocols have to be continually re-enforced and monitored, and when you have turnover rates as high as fast casual and traditional [quick service] have, … that training costs a lot of money,” he says.

Just a decade ago, prices for organically grown produce were double that of conventional produce. Now there is a 10–20 percent price difference, says Jason Kupper, chef and cofounder of Heritage Eats, a Fast Casual 2.0 establishment in Napa, California, specializing in sustainable meats and organic produce.

Kupper says a wide range of factors is driving the price of farm-to-fork ingredients higher than conventional items, including the production costs associated with growing fruits and vegetables and with raising protein sources free of pesticides, hormones, and antibiotics.

“As demand continues for knowing where fruits, vegetables, and meats are grown or raised by the consumer, the supply is going to loosen up, so we should see more balance in what we are paying for these products,” Kupper says.

Buying premium, in-season, and readily available produce is one way Heritage Eats cuts costs, Kupper says. For example, the restaurant offered seasonal vegetables in a ratatouille-style dish consisting of bell peppers, squash, zucchini, fresh herbs, and lemon last summer. This practice allows Heritage Eats to lock in commodity prices for a period of time.

Weekend specials also help Heritage Eats feature premium items without breaking the bank. For instance, the restaurant found a farm in British Columbia to source sustainable salmon as a weekend special—even when it was not in season. This way, the guests feel that they are getting something truly unique.

It is a delicate balancing act for brands that source organic, local, and premium ingredients. Kupper says he is acutely aware of the demands of his diners and the economic needs of local producers while he tries to protect the bottom line of the year-old fast-casual concept.

“The challenge here is how we serve high-quality ingredients and not lose our shirt in the process,” Kupper says, noting that his restaurant has a goal of 30 percent food costs. “Volume has a lot to do with that. We depend a lot on the volume of guests coming through the door.”

That challenge is playing out across the Fast Casual 2.0 space, where brands like Heritage Eats are trying to meet the growing demand for “better” foods while controlling costs. The strength of that demand is countered by a consumer base still focused on value, Nicolopoulos says. If brands try to maintain their margins by passing cost increases on to the consumer, it could stymie foot traffic.

As Fazoli’s upgraded its menu, it gathered a large amount of consumer, financial, and operations data to determine what effect the changes had on the brand. That data-gathering effort was key to determining how consumers, in-house operations, and the bottom line would be affected by the changes, Howard says.

The consumers need to feel that they are getting value with a more expensive, fast-casual meal, Kupper says. To accomplish this, Heritage Eats describes the source of its beef, pork, and chicken on a menuboard in the front of its restaurant.

“We pass that knowledge on to the consumers, so they almost become ambassadors for us,” Kupper says.

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