Before 2007, wheat prices didn’t have a pulse. We’d buy for the next six months and the price would be plus or minus 10 cents a bushel over the last six months. Then one day in 2008 wheat shot up $24 a bushel! Now, as a norm, we strategically consider corn, dairy, and wheat to better leverage our supply chain expertise and improve store economics. — John Macksood, executive vice president, Domino’s Pizza On the morning of August 22, 2011, John Macksood, executive vice president for supply chain services at Domino’s Pizza, Inc.
(Domino’s), was reading the daily headlines while sitting in his office at the Domino’s World Resource Center, the company’s global headquarters in Ann Arbor, Michigan. Domino’s was the world’s second-largest pizza company and the largest pizza delivery quick-serve restaurant (QSR) chain. One item in particular jumped out at Macksood. An article, titled “Quiznos chain faces tough finance issues,” indicated that Denver-based Quiznos, a privately owned QSR sandwich company with 4,000 U.
S. stores, was nearing bankruptcy due to “sharpening competition, waning sales, and debt woes.
”1 One of the problems cited was Quiznos’ “protracted battle” with its franchisees over operating costs and profitability, with some franchisees blaming low or nonexistent store profit margins on Quiznos’ requirement that they buy food at “allegedly above-market prices from a Quiznos-mandated supplier network. ”2 Analysts also blamed Quiznos’ problems on rising commodity prices, which had dramatically increased the cost of raw ingredients. As Macksood finished reading the article, he felt proud to have been part of a team at Domino’s that had proactively responded when the prices of wheat, corn, and dairy soared in 2007 and 2008.
Since then, Domino’s senior leadership met on the last Thursday of every month to discuss the commodity market outlook and decide how purchasing decisions and supplier relationships should be managed in an increasingly volatile market. The goal of this strategic effort was to maintain an efficient supply chain, competitive prices, and quality menu items. “Now in 2011, we have become a well-informed group that is more comfortable with how we manage risk,” Macksood remarked. Domino’s approach to managing risk and costs both within the company-owned domestic supply chain system and at the store level was critical to its approximately 1,150 U.
S. franchisees that collectively owned and operated 4,475 domestic stores in 2010. As a company built around a franchise model, Domino’s—which itself only owned 454 stores, all in the U. S. —was at the heart a supply chain and brand management business focused on supporting the franchised stores. “We call our headquarters the World Resource Center because Domino’s truly operates as a support system and resource for all of our franchisees,” said J. Patrick Doyle, CEO and president of Domino’s. “There is a reason we drilled through four floors of concrete to construct a pizza store as the centerpiece of a Professor David E.
Bell, Research Associate Phillip Andrews, Global Research Group, and Agribusiness Program Director Mary Sh elman prepared this case. HBS cases are developed solely as the basis for class discussion. Cases are not intended to serve as endorsements, sources of primary data, or illustrations of effective or ineffective management. Copyright © 2011, 2012 President and Fellows of Harvard College. To order copies or request permission to reproduce materials, call 1800-545- 7685, write Harvard Business School Publishing, Boston, MA 02163, or go to www. hbsp. harvard.edu/educators.
This publication m ay not be digitized, photocopied, or otherwise reproduced, posted, or transmitted, without the permission of Harvard Business School. 512-004 Domino’s Pizza new atrium inside the World Resource Center. Not only do we use it to train all of our corporate employees to operate a Domino’s store, but its visibility serves as a constant reminder that our business hinges on the success of each and every one of our franchised stores. ” Maintaining cost control was vitally important for Domino’s and the success of its franchisees’ stores.
The U. S. pizza market was highly competitive, with both chains and independent “mom and pop” pizza stores battling for customers. The recent economic conditions had made the fight even fiercer with some recession-weary diners trading in pizza delivery for less-expensive frozen offerings from the grocer. 3 As such, companies like Domino’s could not simply pass increased costs on to consumers by raising the price of a pizza. “Domino’s was ahead of the curve when we first reacted to how a changing market would affect our supply chain costs,” Macksood said.
“Chains that didn’t take a preemptive approach are hurting and independent pizza shops that have little influence over the price they pay for goods are really suffering. ” In 2010 Domino’s recorded annual global retail sales of $6. 2 billion, the highest in company history and a 23% increase since 2006. 1 Domestically, the company saw room for another 1,000 stores in the U. S. market and the opportunity to increase sales through the addition of new menu items and by targeting different eating occasions.
For example, Domino’s had begun to pursue a larger share of the lunch market by introducing sandwiches and pasta dishes to compete with Subway and Pizza Hut. This, however, meant that Domino’s historically simple menu would continue to expand with new ingredients, complexity, and costs that Macksood’s team would have to manage. (See Exhibit 1 for U. S. same-store sales growth and store counts. ) Outside the U. S. , Domino’s had identified many markets where the number of stores could be increased significantly. Internationally, Domino’s used a “master franchise” system that awarded a franchise for an entire country or region to one entity.
This included the master franchisee’s right to operate its own supply-chain system. Macksood and his team had to determine how to bring the company’s domestic purchasing and supply management capabilities, and particularly its commodity pricing knowledge, to the rest of the world. As global commodity prices showed no signs of dropping, Macksood and others at Domino’s wondered if they should attempt to implement global buying for some product categories or develop supply chain partnerships with some or all of the master franchisees in order to control costs and reduce risks across the global brand.
Company Background In 1960, brothers Tom and James Monaghan borrowed $500 to purchase the Dominick’s pizza store in Ypsilanti, Michigan. 4 After just a year in the pizza business, James traded his interest in the business to Tom for a Volkswagen Beetle. As the sole owner of the company, Tom renamed the business Domino’s Pizza, Inc. The company awarded its first franchise license in 1967 and the first franchised store was opened in Ypsilanti. Domino’s continued to license an increasing number of franchisees which led to the brand’s growth regionally and then nationally.
Domino’s first international franchise license was granted in 1983 for a store in Winnipeg, Manitoba, Canada. By the end of 1983, 1,000 Domino’s stores were in operation. When Macksood joined the company in 1986 as the general manager of the North Carolina regional supply chain center, Domino’s had just opened 954 U. S. units during the previous year, making it the fastest-growing pizza company in the country. Unlike its primary competitor Pizza Hut, Domino’s focused on pizza delivery and customer carryout and did not traditionally offer dine-in seating areas.
As such, Tom Monaghan was dedicated to 1 Global retail sales represented sales by company-owned stores and franchised stores. 2 Domino’s Pizza 512-004 ensuring the efficiency of Domino’s delivery service. Despite the brand’s rapid growth, Monaghan kept the menu simple compared to other quick-serve restaurants. From Domino’s founding until 1989, the menu consisted of just one type of hand-tossed pizza dough available in two sizes (12-inch “small” and 16-inch “large”), 11 topping choices, and bottled Coca-Cola as the only beverage option.
The first menu expansion occurred in 1989 when Domino’s introduced “deep-dish” pizza after market research showed that 40% of U. S. pizza customers preferred thicker crusts. The company’s first non-pizza item, breadsticks made from Domino’s hand-tossed pizza dough, was added to the menu in 1992. In 1993 industry trends led Domino’s to add medium and extra-large sized pizzas and to introduce thin-crust dough; in 1994, the menu was diversified even further with the introduction of chicken wings. Still, the menu remained simple so as to streamline production and maximize economies of scale on purchases of principal ingredients.
While changes to the Domino’s menu were in response to consumer preferences and competitors’ offerings, Domino’s had led the competition in innovations that with time became standard in the industry. Domino’s was the first to utilize the belt-driven pizza oven, which had one temperature setting and a conveyor belt that continuously moved items through the oven, which resulted in consistent and effortless baking. Domino’s invented the “spoodle,” which was a cross between a spoon and a ladle, in 1985 to help reduce the time it took to “sauce” a pizza (see Exhibit 2 for photos).
Domino’s was also the first major pizza chain to replace wooden and stainless steel pizza cooking trays with pizza screens that allowed for more even baking. To make sure that its pizzas arrived hot, the company was the first of the major pizza chains to use corrugated cardboard pizza boxes in the 1960s rather than thinner (and less expensive) boxes. Domino’s took its commitment to hot pizza a step further in 1998 when it developed the “Heat Wave” electrical delivery bag to keep pizza hot during transit.
Between 1986 and 1993, Domino’s guaranteed that customers would receive their pizzas within 30 minutes of placing an order or they would get $3. 00 off. In 1999, with more than 6,500 stores in operation—including more than 1,700 stores outside the U. S. —Monaghan sold 93% of the company to Bain Capital for almost $1 billion and retired as CEO. 5 Bain installed David Brandon, the former head of Michigan-based marketing firm Valassis Communications, as president and CEO. While Brandon continued to focus on store operations, he also emphasized the importance of building the Domino’s brand.
This included better definition and consistent execution of the consumer brand experience across every element—from stores, to trucks, to people—as Domino’s sought to accelerate its global expansion. In 2004, Domino’s was first recognized as the leading pizza delivery company in the U. S. based on reported consumer spending, a title the company held ever since. In July 2004, the company completed an IPO and began trading common stock on the New York Stock Exchange (symbol: DPZ). Over the next five years, Domino’s expanded its international footprint from 2,987 franchised stores in 2005 to 4,422 by 2010.
Changes were also made to the company’s marketing strategy beginning in September 2008 when Russell Weiner was hired from Pepsi-Cola to serve as Domino’s executive vice president of Build the Brand and chief marketing officer. Weiner guided Domino’s away from its traditional practice of using price-driven “limited time” promotional offers, which created temporary sales spikes, and instead focused on developing new permanent product platforms that could be promoted through advertising. New offerings such as “Domino’s Oven-Baked Sandwiches” and “BreadBowl Pastas” were permanently added to the menu with the intention of creating sustained sales increases.
In 2010, Domino’s delivered approximately 400 million pizzas in the U. S. , accounting for 71% of its U. S. pizza sales (the other 29% came from carryout) and generated record system-wide revenue of $1. 5 billion, of which $1. 4 billion came from domestic operations. (See Exhibit 3a and 3b for company 3 512-004 Domino’s Pizza financial reports. ) Doyle, a 13-year Domino’s veteran who took over from Brandon as CEO in March 2010, was proudest of the increase in same-store sales,2 which were up 9. 9% domestically and 6.9% internationally. “
This is a tremendous feat for any brand, especially one that is 50-years old,” he remarked. In 2010, Forbes ranked Domino’s the number one “franchise for the money” and Pizza Today, a leading industry publication, named Domino’s the chain of the year, an honor that was repeated in 2011. 6 By July 2011, Domino’s had grown to 9,436 company-owned and franchised stores in all 50 U. S. states and across 65 international markets, making it the second-largest pizza company in the world behind Yum Brands’ Pizza Hut.
Domino’s had approximately 10,900 employees, referred to as team members, spread across company-owned stores, supply chain centers, the World Resource Center, and regional offices. The company estimated that another 185,000 individuals were employed by independent Domino’s franchisees worldwide. For the first time in Domino’s history, international retail sales eclipsed U. S. sales in the second quarter of 2011 when overseas markets generated 51% of total company sales.
The U. S. Quick-Serve Pizza Industry In 2010 there were 67,554 pizza stores in the U.S. , which represented 12% of all restaurants in the market. 7 Franchised or chain stores made up 60% of the units and generated half of the revenue; the remainder came from independently owned stores, which were often referred to as “mom and pops. ”8 (See Table A for a list of the top U. S. -based chains. ) Independent pizza shops had always been a strong source of competition for consumer dollars even though these (usually) single units did not have the purchasing power or the advertising ability of the large chains.
The pizza business in the U. S.generated $34 billion in sales revenues in 2010, accounting for 10% of all food industry sales. 9 Roughly two-thirds of the annual pizza segment revenue came from the pizza delivery business where Domino’s led the competition with 19. 8% of delivery sales. Table A Leading U. S. -based Pizza Chains, 2010 U. S. Sales ($ billions) $5. 0 $3. 3 $2. 1 $1. 1 Share of U. S. Market 14% 8% 6% 3% U. S. Units 7,566 4,929 2,781 2,500 International Units 5,715 4,475 688 200 Percent Franchised 84% 95% 82% 81% Company Pizza Hut Domino’s Pizza Papa John’s Pizza Little Caesars Source:
Jonathan Maze, “2010 Franchise Times Top 200 Franchise Systems,” Franchise Times, October 2011, http://www. franchisetimes. com/content/page. php? page=00138, accessed September 2011; and, Domino’s company documents. Domino’s U. S. Franchise Structure From the time Monaghan signed the first Domino’s franchise agreement in 1967, a central tenet of its strategy was to make it as easy as possible for franchisees and store managers to run their stores. 2 Same-store sales growth was a statistic used by retailers and industry analysts to compare sales at stores that had been open for a year or more.
It allowed investors to determine what portion of sales came from sales growth and what portion came from the opening of new stores. Although new stores were a positive factor, a saturation point—where future sales growth was determined by same-store sales growth and not simply the addition of new units—eventually occurred. 4 Domino’s Pizza 512-004 Domino’s had developed a cost-effective business model with low capital requirements, a focused menu of affordable pizza and other complementary items, and an interior specially designed to support delivery and carry-out.
“At the store level, we believe that the simplicity and efficiency of our operations gives us significant advantages over our competitors, who in many cases, like Pizza Hut, also focus on dine-in,” said Stan “The Pizza Guy” Gage, vice president for training and development. Domino’s domestic stores and the majority of its international locations did not have extensive dine-in areas which cut costs for space, furnishings, and staff. As a result, Domino’s stores were small, averaging approximately 1,200 to 1,500 square feet in size with 15 to 20 employees.
The units were relatively inexpensive to build, furnish, and maintain. The amount of capital investment required to open and operate a new Domino’s franchise location averaged $150,000 to $250,000, which was considered low in the QSR segment. The average Domino’s U. S. franchisee owned and operated three to four stores, and many had only one or two. At the end of 2010, only seven franchisees owned 50 or more stores with the largest domestic franchise operating 144 stores.
This was different from many QSR franchise models in the U. S., which often awarded franchises on a regional basis with one franchisee owning many or all of the locations in a metropolitan area or state. Rather than controlling a region, a Domino’s franchisee was granted a specified delivery radius. The size of this delivery area was based on the ability to deliver a pizza from the store to the customer’s door in 10 minutes or less. To protect the brand, Domino’s placed rigorous standards on its franchisees such as usually requiring prospects to manage a Domino’s store for at least one year before they were granted a franchise.
Generally, Domino’s also restricted franchisees from pursuing active, outside business endeavors so as to align the interests and success of the franchisees with that of the brand. Based on these two factors, the vast majority of Domino’s U. S. franchisees had historically come from within the Domino’s system; many started as a Domino’s delivery driver. Under a Domino’s franchise agreement, the owner was granted the right to exclusively operate in a particular area for a term of 10 years with an option to renew for an additional 10 years.
In 2010, the average length of Domino’s relationship with its top 50 franchisees was 19. 5 years. Domino’s franchise contract renewal rate was over 99% and its collection rate on domestic franchise royalties and supply chain receivables was also over 99%. Each franchisee had discretion over the prices charged to its customers with some national sales promotions set at the corporate level. Domestic franchisees paid Domino’s a 5. 5% royalty fee on weekly sales3 and until 2009 made contributions to fund marketing and advertising at the national and local level, which varied by market.
In 2009, all domestic franchisees amended their franchise agreements to include a flat marketing contribution of 5. 5%. As such, franchisees were no longer required to contribute to regional or local level advertising campaigns, although they were allowed to if they desired. (See Exhibit 4 for details of initial and ongoing franchisee costs). In 2010, average reported annual EBITDA per domestic franchise store was between $50,000 and $75,000 on average annual sales volume of $650,000 per unit.
3 The royalties generated by Domino’s franchise system, which included its U.S. and international franchisees, generated a steady stream of free cash. Domino’s used this free cash flow to reinvest in the company, such as funding technology enhancements and supply chain improvements, and also to buy back debt, repurchase stock, and pay dividends.
5 512-004 Domino’s Pizza U. S. Supply Chain System The supply chain system was the hub of Domino’s U. S. franchise model. Domestic franchisees were free to source and purchase their own menu ingredients and supplies as long as the items were approved by Domino’s and sourced from approved suppliers.
However, the system had earned Domino’s a strong and dedicated following among its domestic franchisees; in 2011, over 99% of them choose to be customers of the Domino’s supply chain. As such, Domino’s provided virtually all of the company’s 4,900 U. S. stores with over 240 individual products including fresh pizza dough, menu ingredients such as cheese and pepperoni, and store supplies ranging from delivery boxes to cleaning products and toilet paper.
Macksood explained how the U. S.supply chain created value: Our centralized purchasing, vertically integrated dough manufacturing, and nation-wide distribution system allows us to leverage Domino’s combined volume to achieve economies of scale and lower costs, and to tightly control quality. This system allows store managers to focus on store operations and customer service rather than worrying about making dough, grating cheese, and preparing toppings and sourcing other ingredients. This enhances our relationship with franchisees and ensures that every Domino’s customer gets a great pizza. Supply Chain System.
Domino’s supply chain system was comprised of 19 facilities located in 15 states, which allowed for nationwide coverage. Of these facilities, 16 were regional dough manufacturing and supply chain centers (SCC). Domino’s also operated three other supply chain facilities, which included an equipment and supply distribution center 25 miles east of the World Resource Center in Michigan, a fresh produce facility in Georgia that supplied some franchisees with cut vegetables, and a “pressedproduct” plant in Illinois that manufactured thin-crust dough for distribution to the 16 SCCs.
4 (See Exhibit 5 for map and details of U. S. supply chain system. ) Domestic franchisees were required to purchase and use the company’s Pulse point-of-sale computer system. This system was used for taking customer orders, submitting store orders to their designated SCC, and for connecting with the Domino’s network. The Pulse system included forecasting software that allowed store managers and owners to track inventory and sales to customers.
This differed from the forecasting tools utilized by Domino’s at its SCCs, which tallied total product and raw ingredient sales made to franchisees. This information was then used by a group of team members at the World Resource Center who conducted centralized replenishment of all 16 SCCs in the system. Each SCC manufactured fresh dough on a daily basis and served about 300 stores located within a one-day delivery radius. Each Domino’s store received an average of two full-service food deliveries per week, amounting to 515,000 total system-wide deliveries in 2010.
Stores placed their orders for dough—which had a seven-day shelf life—and food and other supplies electronically via Pulse, usually by 5:00pm. SCCs actually began manufacturing dough at 5:00am using an internal forecast. Domino’s fleet of 200 leased tractor-trailers were loaded in the early evening and rolled out of the SCCs starting between 9:00pm and 10:00pm. Drivers unloaded food and supplies at the stores, stocked coolers and shelves (rotating items so older products would be used first), and even mopped the floor if they had tracked in mud or snow.
Deliveries were typically made in the middle of the night to 4 Domino’s “pressed-product” facility produced thin-crust dough that was parbaked (e. g. , cooked for roughly 80% of the normal cooking time and then rapidly cooled and frozen) for distribution to the 16 SCCs. 6 Domino’s Pizza 512-004 minimize disruptions to store operations. Domino’s guaranteed delivery within 48 hours of when the order was placed and the company regularly achieved an on-time delivery performance rate of 95%, with the majority of orders delivered within 24 hours.
Gage explained that ordering through Domino’s offered one-stop shopping and other benefits: The supply chain eliminates many of the typical back-of-store activities that our competitors’ managers must undertake—such as figuring out which supplier has the best price on cooking oil or what cleaning supplies to order. The single most important person in Domino’s is the store manager and this system allows them to focus on the quality and consistency of menu items and customer service. New franchisees were exposed to the efficiency of the supply chain system long before their first fresh dough order was placed with a SCC.
The equipment and supply chain center was the first stop for franchisees worldwide. There, store owners could buy capital items such as ovens, coolers, pizza preparation areas, counters and fixtures, signage, and other large equipment as well as “re-use” items including delivery bags, uniforms, small wares, and promotional materials. “The operation was born out of the concept of selling and shipping a pizza store in a box, a model that dates back to the beginning of the company,” explained Jim Murabito, vice president of product management.
“With an inventory of over 2,500 individual SKUs, this facility is a one-stop shop able to supply our franchisees with everything they need to set-up, open, and operate a Domino’s location. ” Adding Value Domino’s domestic menu reached its largest and most diverse state in 2010 when the company offered four different pizza crusts, over 25 topping choices, eight oven-baked sandwich options, five pasta dishes, two types of chicken, two styles of breadsticks, and two baked dessert options.
(See Exhibit 6a and 6b for Domino’s menu items.) Menu prices across the highly competitive pizza delivery industry were relatively identical; therefore, the major pizza chains had to differentiate themselves based on taste, quality, and customer experience. Domino’s helped franchisees maintain consistent quality while improving store economics using various tools, including the spoodle and the pizza oven that Domino’s had designed. Another important piece of equipment was “the makeline” station, which served as the assembly line for a pizza.
The make-line, which was a metal counter with containers and refrigeration for ingredients and toppings, had been designed—and was continually being updated—to support speedy pizza making. For example, a refrigerated cheese catch tray under the counter—another Domino’s proprietary design—allowed pizza makers to quickly spread shredded cheese on a pizza without worrying about food waste. As a result, Domino’s head pizza trainer could prepare a pizza (e. g. , flatten and shape the fresh dough ball, apply sauce, and top with cheese and pepperoni) in 24 seconds.
“These tools allow stores to consistently produce menu items that meet the Domino’s standard and delivery those items in the fast, efficient manner that is required for success in the pizza delivery segment,” explained Murabito. In fact, the only piece of cooking equipment in a Domino’s store was the belt-driven oven; there were no microwaves or stoves. This meant that all of the items on Domino’s domestic menu—pizzas, chicken, sandwiches, pasta, bread, and desserts—had been designed to cook at approximately 500 degrees Fahrenheit for six minutes.
Not only were Domino’s franchisees attracted to the company’s domestic supply chain for its efficiency and consistency; their participation was also encouraged through a profit-sharing arrangement. Generally, Domino’s shared 50% of the pre-tax profits generated by its regional dough manufacturing and SCCs with the domestic franchisees who purchased all of their ingredients and supplies from the company. While franchisees were allowed to opt out of the supply chain with 7 512-004 Domino’s Pizza notice, doing so would eliminate their right to profit sharing.
Participating franchisees were allocated a profit share based on the volume of their purchases from SCCs. This profit sharing reached a record level in 2010 and “continued to strengthen Domino’s ties with its franchise network by enhancing franchisees profitability while maintaining a source of revenue and earnings for Domino’s,” noted Macksood. “The greatest advantage of this arrangement is that it brings us closer to our franchisees and encourages us to work together to reduce costs and food waste.
” Macksood provided an example of how his group responded to franchise feedback: With nine product groups accounting for 90% of sales volume in our supply chain, our biggest challenge is managing an increasing variety of ingredients. When pasta was introduced to the menu, we began supplying a cheese sauce that was packaged in a one-pound bag. Within a few months, franchisees reported that the amount was more than needed to meet their daily sales volume, which forced them to throw away product. We experimented with smaller packaging options and eventually settled on individual portion-sized packs.
Smaller packaging is more expensive for us, but it creates less food waste for our franchisees. In addition to allowing Domino’s to work closely with franchisees to manage costs and gain product feedback, the supply chain also helped the company respond to natural disasters that could disrupt store sales. When Hurricane Katrina struck the U. S. Gulf Coast in 2005, Domino’s quickly placed trailers at stores that were destroyed or without electricity, allowing franchisees to feed rescue workers and displaced citizens.
According to Macksood, Domino’s stores in the area were the last QSRs to close before the storm and the first to re-open. In the time since the hurricane, Domino’s encouraged franchisees in the area to build new stores that would be “hurricane ready” with generators, an extra-large cooler, and the ability to reopen quickly. In February 2011, an ice storm paralyzed usually snow-free Dallas-Fort Worth, Texas, just days before the area played host to the Super Bowl. Super Bowl Sunday was historically the pizza delivery industry’s busiest day of the year.
The company was expecting to sell 1. 2 million pizzas nationwide with especially strong demand across the 123 stores serving the Dallas-Fort Worth market. 10 It was customary for SCC managers to monitor meteorological reports in their respective distribution regions. By doing so in this instance, the supply chain system was able to proactively position extra resources and make early deliveries when warned about the pending Texas storm, allowing Domino’s to meet customer demand on the day of the game. The Agricultural Commodity Market and Domino’s Suppliers.
Historically, the agricultural commodity market—although cyclical—had been relatively stable and predictable. This continued to be the case even as prices for corn, milk, soybean oil, and wheat rose steadily from 2000 to 2005. However, global commodity prices soared in 2007 and 2008 due to record high oil prices, severe weather events, food security fears, and trade restrictions. The price of wheat, corn, rice, and oilseed crops nearly doubled. Some pricing relief came in late 2008 and in 2009 when the most serious global economic recession since the 1930s dampened demand.
However, prices rose again at the beginning of 2010 as demand, driven primarily by developing countries undergoing rises in per capita incomes and population growth, outpaced supply. Reduced global inventories added to the price volatility, which was exacerbated by a high number of severe weather events. In the summer of 2010, droughts followed by fires in Russia, the world’s third-largest grain producer, reduced the country’s wheat production by 25% and led the government to stop exports.
The U. S.commodity market followed the same global trends into 2011 due to a combination of factors, including droughts in key grain-producing regions, spring flooding on the Mississippi and 8 Domino’s Pizza 512-004 other U. S. rivers, low stocks, increased use of corn to produce biofuels, and rapidly rising oil prices. In April 2011, corn futures prices,5 which had increased almost 90% over the previous 12 months, reached a record high of $7. 44 per bushel and for the first time in a decade surpassed the price of wheat futures on the Chicago Board of Trade (CBOT).
Only four months earlier, wheat had traded at a 31% premium over corn. The growing use of corn for ethanol in the biofuels industry and a rise in demand for livestock feed kept demand up and prices high. 6 Other factors, such as increased demand for corn feed in China, were also blamed for sustained high prices. 11 Rising corn prices hit protein producers particularly hard. Tyson Foods, Inc. , the largest meat producer in the world, cited higher poultry feed costs for a 21% year-on-year drop in its second quarter 2011 earnings.
12 From July 2010 to July 2011, the price that U. S. meat producers charged for chicken grew 4. 3% and was projected to increase another 5% by the end of 2011. Similarly, pork prices had increased 27% and both pork and chicken had reached record high prices. The trading price for milk, the primary ingredient in cheese, had escalated 56% 13 to a record high of $21. 39 per cwt (100 pounds) in July 2011,14 a price Macksood called “sticker shock. ” Many meat and dairy producers started to include increasing amounts of wheat as a feed substit.