Case study

Costs of food sold

A funny thing happens when you decide to eathealthier—the food is sometimes not quite as tasty, yet usuallymore expensive. When Boston Pizza decided to address the emerginghealthy eating trend with its Smart Eats menu, the challenge wasthreefold. First, the food had to be up to the delicious standardsheld by the brand for 50 years. Second, the meals had to haveevident health benefits. Third, despite the cost of providinghealthy ingredients, the prices had to be congruent with familycasual dining. The same three challenges existed to an even greaterextent with BP’s GlutenWise line of products catering to thegrowing gluten-intolerant market. Although in this situation, afourth challenge—developing a pizza dough that would adequatelyadhere to the “hand-kneaded” texture BP’s customers are accustomedto—introduced a direct and significant variable cost to the mix.Anyone on a gluten-free diet will tell you that any gluten-freebaking with any quality of flavour and texture is going to costmore. While Boston Pizza offsets the costs of making gluten-freepizza by marginally increasing its price, that product line, alongwith Smart Eats—and the entire menu, for that matter—are exposed tothe ups and downs of economic cycles as well. Since the nature ofhealthy eating is often defined by fresh versus processed food, thecost of goods sold is very difficult to predict, given that it’smore prone to fluctuations in global supply and demand and, inCanada’s case, often volatile swings in the exchange rate. Aspresident and CEO Mark Pacinda says, “A lot of our vegetables comefrom California, so a) we’re dealing with the exchange rate, whichcreates an uptick in costs, and b) yes, there has been an increasein the price of vegetables over the years.” He adds, “We monitorour costs, so we tend to know what’s going up and we work with oursuppliers and try to lock that [price] in.” The other silver liningfor BP is that 50 percent of its business is either pizza or pasta,“so we’ve been able to hold pricing across our chain,” claimsPacinda. The cash-cow nature of BP’s biggest sellers also allowsthe brand to provide the healthier, costlier menu items at pricesthat are consistent with standard BP fare.

QUESTIONS

1. If Boston Pizza’s profit margin is less on its SmartEats and GlutenWise menu offerings, why doesn’t it just increasethe price of these items more significantly to create greaterprofit margins?

2. Based on the theory outlined in this chapter, howwould you classify Boston Pizza’s overall pricing strategy? Supportyour response. 3. How does demand affect the price of BostonPizza’s products?