When I first noticed “boneless chicken wings” on a menu, I was gullible enough to think that we were beneficiaries of some miraculous advancement in chicken deconstructive science.
Not. Boneless chicken wings are actually re-formed and renamed pieces of chicken breast. And that’s been a very good thing for Buffalo Wild Wings (Nasdaq: BWLD). In recent months, the St. Louis Park–based restaurant chain has moved aggressively in recent months to build up that item on its menu. It’s now about 19 percent of its total restaurant sales.
An important part of that strategy: Buffalo Wild Wings has locked in the wholesale price it pays for boneless wings through fixed-price contracts.
That’s also a very good thing. Buffalo Wild Wings hasn’t been locking in prices on its original menu item: namely, “bone-in” wings. And it paid a hefty price for that. In fact, the wholesale cost of “original” wings is one reason why the chain has been introducing more and more of the boneless wings: The boneless variety has helped keep its costs under control.
For Buffalo Wild Wings and every other major restaurant chain, food costs can make up as much as a third of its “prime costs,” which also encompass all beverages, payroll, and benefits. When Wall Street looks at prime costs—when it glances at prime costs—it likes to see a number in the 60–69 percent range relative to sales. The closer to 60, of course, the better.
Restaurant chains have two choices in managing food costs: locking in prices using long-term contracts or floating with the market. For instance, Famous Dave’s of America, another big Minnesota-headquartered chain, signs long-term contracts not only for meat and grains but even for barbeque sauce and seasonings. At Granite City Food & Brewery—a restaurant chain that, like Buffalo Wild Wings, is headquartered in St. Louis Park—purchasing czar Onesimo Aleman has doubled his contract buys since early 2008. Buying food without contracts, Aleman says, “is like going to the grocery store without coupons.”
To lock or not to lock isn’t a simple decision. Locking prices can conceivably raise them, since commodity suppliers often bump up prices to hedge their costs. Floating with the market allows a chain to take advantage of price dips. But it also exposes it to the vicissitudes of supply and demand.