Recipe For Disaster

Most food gifts catalogers are usually giddy with anticipation this time of year as they gear up for the season that typically brings in the lion’s share of their sales. This year, not so much.

On top of significantly higher postal prices and increases in paper costs, food merchants have had to swallow serious hikes in the cost of raw goods to make their products — namely, wheat and cocoa. And when you combine these rising costs with the general slowdown in consumer spending, the holiday season is not looking so tasty.

For instance, soaring wheat prices have hit hard at King Arthur Flour, which mails the King Arthur Flour Baker’s Catalogue. Karen Colberg, vice president/general manager, says global wheat prices are at an all-time high — well over triple the cost per bushel since last year.

“The number-one ingredient in nearly everything we make is flour, and with the record price increases for wheat, that’s a major contributor,” she says. “This has a very direct and dramatic impact on our cost of goods, be it flours or mixes.”

Beyond wheat, King Arthur is also seeing significant increases in other ingredients, particularly organic flours and grains, dairy products and dried fruits. “Everything seems to be rising along with wheat,” Colberg notes.

Just ask the chocolates merchants. For Harbor Sweets, which specializes in handmade chocolates, cocoa prices have risen 18%, says president/CEO Phyllis LeBlanc. Chocolate accounts for more than 50% of all the ingredients the cataloger uses, “so that’s a huge impact for us,” LeBlanc says.

Rudi Hauser Jr., president of Hauser Chocolatier, says the cataloger’s prices for supplies have risen anywhere from 5% to as high as 20%. “Cocoa prices are at an all time high,” he says, “and many in our industry believe prices are up artificially by as much as 30% due to speculation.”

Indeed, Ken Kellerhals, CEO of European-style chocolates cataloger Bissinger’s, notes that “last year at this time you could buy raw cocoa beans at $1,800 a ton, but right now it’s at $3,200 a ton.”

“What’s happened is all the people who got out of the stock market have gone into the commodities — oil futures, cocoa futures — and they’ve really driven those prices up,” Kellerhals says. “And that’s something that’s really been under reported in terms of its impact on companies such as ours.”

Worse yet, prices for other ingredients, such as nuts and butter, have surged as well. Bissinger’s has seen the cost of nuts rise on average from about $3.75 per lb. a year ago to about $6/lb. now, Kellerhals says.

For Harbor Sweets, the price of nuts is up 21%, while butter has increased 9%. “Our sugar prices are holding, which is helpful to us, but we’re expecting those to go up as well,” LeBlanc says.

David Kravetz, cofounder/catalog and Web team leader for Fairytale Brownies, says the company’s price for baking chocolate is up 9%, butter has gone up 19%, sugar has increased 6%, and flour is up 6%. “We use a lot of butter, so our overall ingredient costs are going to be up about 15%,” he says.

The price is not right

Most food mailers have little choice but to raise their prices. As a small employee-owned company, King Arthur Flour has had to raise prices to stay afloat, Colberg says. “Despite our best efforts, there was no way for us to entirely absorb the impact of the current record-breaking wheat market.”

Fairytale Brownies had last year raised its merchandise prices by approximately 6% while keeping the shipping charges unchanged, Kravetz says. “We had hoped to avoid any price increase this year, but we have decided to raise our shipping rates modestly” by an additional $1 per shipment.

John and Kira’s Chocolates, which specializes in artisan chocolates, has seen the cost of raw materials increase about 9% in the past year, says cofounder John Doyle. “The year before that it was about 4%,” he says.

Doyle says his company will increase prices about 12% with the September catalog drop.

“Our primary ingredient is chocolate and we buy European chocolate, which is expensive to get over here,” he says. “Along with the drop in the dollar, it’s been very difficult for us.”

Bissinger’s is trying to keep prices down, Kellerhals says. “But everybody around is going up 10% to 15% to 20%. I just hope that we can get things under control on the freight end, and the commodities side of it should eventually correct itself.”

Harbor Sweets has had to raise prices from 4% to 10% across the board, LeBlanc says. “For years everybody has been fighting price increases, and trying to hold prices and be more efficient, but I think finally people feel like they have permission to raise prices.” Some merchants might actually be catching up a little bit from holding prices for so long, she notes.

Not that catalogers want to raise their prices, of course. “We are raising prices because we have to,” LeBlanc says.

“There’s just no way you can continue to hold your prices with these kinds of increases,” she continues. “But we feel that the consumer is going to understand because they’re dealing with these same issues.”

Still, cash-strapped consumers may balk at having to spend more for the same product. Another issue, says Lois Brayfield, president of consultancy J. Schmid & Associates, is that many of the holiday books will be put to bed by late July, so catalogers won’t be able to adjust pricing as needed. “This hit a few of our clients this past holiday,” she says.

Shipping happens

In addition to raising product prices, food merchants may have to hike their shipping and handling charges, Boyle says. “This will certainly hurt catalogers in an economy in which consumer confidence is so low in the first place.”

Many food mailers are further challenged with shipping because their products tend to be heavy. And if the products are perishables, they need special packaging, says Tony Cox, founder of food catalog consultancy 5th Food Group. So it’s hard to offer free or reduced shipping offers on food gifts. “L.L. Bean can ship a sweater across country in a Tyvek bag for $3,” Cox explains. “You can’t do something like that with perishables.”

Cox is now trying several different tactics to save his clients money. For instance, he’s having his clients test a $4.95 flat-rate shipping charge. “Desperation spawns a lot of creative thinking,” he notes.

Cutting back

Hauser Chocolatier is searching for ways to cut costs without sacrificing product quality. “We just recently reworked some of our product catalogs to reduce the number of pages and, therefore, drop the cost of our postage as well,” Hauser says.

“We no longer print copies of our invoices since they are easily viewed on screen when needed,” he notes. Instead, “we routinely send invoices electronically either by e-mail or direct from our computer system via fax.”

King Arthur Flour has looked at every aspect of its business, Colberg says. “We are making changes in our marketing and circulation strategy, fulfillment operations and manufacturing facility — all aimed to increase efficiencies and reduce expenses.”

It won’t reduce circulation, however. King Arthur Flour’s marketing plans call for shifting some circulation “into this very critical time of year so that we can increase prospecting,” Colberg says.

Through a combination of buyer reactivations, co-ops and outside lists, “we’ll increase what I consider to be prospecting efforts by 8% over the prior year with our early November mailing,” she says.

John and Kira’s Chocolates is trying to offset some expenses by condensing bookkeeping procedures. This has saved about $17,000, Doyle says. The company is also now using new, less expensive packaging. “All of our business is in the first three weeks of December,” Doyle notes.

The mailer is increasing its prospecting by 50% this year, he says. “If we don’t make money, we have to cut our costs. It’s more expensive to do business now.”

Fairytale Brownies is trying to save money on printing costs. How? “We’re trimming a half-inch off the catalog width,” Kravetz explains.

But he notes that it’s been nearly impossible for the cataloger to make up for the higher cost of raw goods.

“We’ll still be paying more for paper than last year” at the same quantity, Kravetz says. “We’re also increasing circulation so we’ll see an additional paper/postage hit from that.” The cataloger plans to hike circulation this year by about 23% to 1.75 million this year, he says.

But gourmet food mailer Zingerman’s, which imports most of its goods from Europe, cut prospecting altogether, says president Mo Frechette. The cataloger will mail only to its house file.

“With the nervousness about the economy, it’s just too scary to mail and not know what’s going to happen on the other side,” Frechette says.

Hoping for the best

Frechette’s fear of mailing is a sentiment shared by many food gifts purveyors. “Food merchants who are looking to go direct-to-consumer don’t even have catalogs on their radar screen,” Cox says. “They are looking to sell on the Web, and looking at pay-per-click advertising, Google ads and SEM to get the exposure.” The merchants who started as catalogers are trying to catch up on Web marketing tactics, he says.

Instead of catalogs, more merchants may be looking at mailing postcards or fliers, Cox says. But it’s likely that list rental will be down due to the cost of postal names vs. prospecting online.

So will food gifts merchants be able to survive what is shaping up to be a treacherous season? Those with the right offer at the right price probably will. “This is a resilient industry,” Cox says.

Some mailers have adjusted their offerings accordingly. Fairytale Brownies, which just completed a major rebranding effort, has added many gifts at a lower price point, Kravetz says. “Our feeling is that customers will be looking for lower priced gifts this season,” he says. The fall catalogs will feature a cover callout promoting “Over 30 Gifts Under $30.”

Indeed, says Cox, many food retailers believe the customers who traditionally buy holiday gifts will continue to do so, even if they spend less. “So we hope the consumers who spend $70 on a gift will instead spend $50,” he says.

After all, food-gifts buyers tend to be a fairly loyal bunch: “The people who buy Aunt Martha a fruitcake every Christmas may wonder what she will do without one,” Cox says.
— Additional reporting by Tim Parry

Fueling matters

Compounding the cost of raw goods is the price of fuel. “We pay freight to have raw materials for manufacturing and finished product for resale brought to our facilities,” says Karen Colberg, vice president/general manager of King Arthur Flour, which mails the King Arthur Flour Baker’s Catalogue.

“We then pay freight to ship the packages to our customers,” Colberg says. These freight costs, plus the fuel surcharges — which are out of the mailers’ control — have been seeing double-digit increases. “Fuel costs are hurting in every possible way.”

“Most of our freight charges have gone up nearly 60% because of fuel,” says Dan Abel Jr., a sales manager for Chocolate Chocolate Chocolate Co. “Shipping packages to customers has increased because of high fuel surcharges on air packages as well.”

Jady Regard, “chief nut officer” for Cane River Pecan Co., says the price of gas is affecting his company across the board. “There is not a service out there that is not tied to gas in one way or another.”

Whether it is the cost of postage, the cost of shipping finished goods, or receiving bulk wholesale goods, gas prices have an effect, Regard says. “Raw materials are no different. At some point my vendors are going to raise the prices of their services because of inflated gas prices. There is no way around it.”

The energy costs aren’t just about getting goods into and out of the warehouse, says Tony Cox, founder of food catalog consultancy 5th Food Group. It also means it’s more expensive to refrigerate a warehouse to keep perishables like meat cool or frozen.

“So it costs more to bake the brownies, to bake the bread, and even to cool the plant to keep the steaks cold,” he says.

Dollar daze

The dollar’s devaluation has also been rough on food catalogers. Tim Harris, co-owner of Spanish food merchant, says most of his suppliers in Spain have increased their prices by about 10%. “This increase, coupled with the falling value of the dollar, has made things very difficult,” he says.

“We are trying our hardest to weather the storm while we wait for the dollar to gain strength, but we have had to increase prices,” Harris says. “We do not predict that the raw material prices are going to decrease in the near future.”

Chocolates mailer Bissinger’s imports cashews from South America, and “the weak dollar has hurt us on that part,” says CEO Ken Kellerhals. “We import our apricots from Australia and our oranges from Germany, and we got caught in the weak dollar on that, too.”

Zingerman’s imports gourmet food items from Europe, so it’s getting hit hard, says president Mo Frechette. “We’ve asked the Europeans that we’re importing from if they are willing to work with us on price. And they completely understand where we’re at with our currency right now, and most of them are willing to extend some sort of a discount.”

But those are the suppliers Zingerman’s is dealing with directly. “Most of the foods we sell, we don’t buy directly, so we’re at the whim of oil, currencies and everything else.” Frechette says.

How bad is it? “We have olive oil that was $13 a bottle a year ago and it’s $20 or more per bottle now,” Frechette says. “That’s almost 100% due to currency devaluation.”

European vendors aren’t raising their prices — that’s just the devaluation of the dollar, he notes. “So the dollar is just crushing us on the European side.”
— PB

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