High chicken wing prices and low feed costs are causing a disparity in the market at, perhaps, the worst possible time for restaurant operators: the five weeks leading up to the Super Bowl, when demand is highest for chicken wings.
Typically, when feed prices are low, poultry farmers can purchase more feed and fatten their chickens quickly. If there's an ample supply of feed at a low price, then economic theory suggests prices for chicken—and subsequently chicken wings—will also drop.
But the cycle of chicken pricing doesn't always move harmoniously with supply and demand, and the opposite is occurring. Chicken prices are rising, feed costs are low, and the market's movement is creating what some are dubbing a chicken wing shortage: Chicken wing prices are trending upwards of 30 percent from where they were earlier this year, causing restaurants to rethink their offerings.
"You see a lot of operators have gone to wings by the pound instead of a certain number of wings [per order]," says Andy Wiederhorn, CEO of Buffalo's Cafe, a wings restaurant that has more than 15 U.S. locations and is growing internationally. "You have to make a decision when you do that, which is either raise prices or make the order smaller in some way."
Up more than 30 percent from their January position, wing prices will remain steady at their high rate until March, Wiederhorn estimates, as demand drops off after the Super Bowl.
What’s Causing the Shortage
This spring and summer, chicken wing prices hovered around $1.50 per pound, up about 13 percent from January, when costs were $1.33 per pound. A record-breaking corn and soybean harvest in 2014 caused a drop in the cost of feed, and many analysts expected that to push the price of chickens back down; instead, however, average prices for chicken wings have remained high.
According to the U.S. Department of Agriculture, chicken wing prices in September hit $1.66 per pound, up 3 percent versus the previous year; chicken wing prices in October averaged $1.87 per pound, up 27 percent from the previous year; and in November, prices for wings averaged $1.79 per pound, an increase of 46 percent from a year earlier.
While feed prices impact the pricing of chickens, so does the supply of competitive commodities. Beef and pork, for example, rose to record prices in 2014, causing some operators and consumers to shift to chicken consumption instead. Unfortunately, the shift coupled with a decrease in chicken production, yielding a shortage buoyed by higher chicken prices.
"This year, we were not seeing the same levels of chicken production that we had seen before," explains Jason Moser, senior analyst at financial services firm Motley Fool. "What that ultimately resulted in were fewer chickens, which resulted in fewer wings. Fewer wings bid the price for those wings up."
The timing dovetailed with chicken wings hitting the season when they are in highest demand, which begins in September when football kicks off and culminates during the first weekend of February with the Super Bowl.
The price increase in chicken wings was so drastic that toward the end of December, some restaurants were paying up to $2.16 per pound for chicken wings, according to Wiederhorn.
One silver lining for operators, however, is that economic analysts expect higher year-over-year production of chickens in the fourth quarter of 2014 heading into 2015, which means prices should see some downward pressure, according to the USDA’s Economic Research Service.
How Restaurants Respond
For restaurants, maneuvering through the commodity market requires savvy financial strategy. As Wiederhorn noted above, restaurants have multiple options: they can charge customers by the pound, rather than the quantity of wings; they can continue to serve wings by quantity but raise prices to offset the higher cost of acquiring the chicken wings; or they can manage their menu mix to point guests toward alternative offerings.
"We have franchisees who are doing all of the above," Wiederhorn says. "What's critical to us is the profitability of our franchisees, because if they're not making money, they're not going to be able to build more stores or stay in business."
While some Buffalo's Cafe stores now offer a slightly smaller order size of wings, others raised prices, and Widerhorn says the decision has been based off each individual market. Franchisees observe what competitors in the market are doing, study the reactions and expectations of customers, and adjust their offerings and pricing strategy accordingly.
"A lot of customers want to know they're getting a certain number of wings because they intend to split them with people in their party; other customers don't seem to care," Wiederhorn explains. “It’s oddly enough market-driven.”
In 2013, Buffalo Wild Wings began testing a pricing strategy to sell wings by the pound rather than quantity. The approach has been adopted across all units now, and the move smoothed out the volatility in the company's quarterly earnings.
While the strategy does not necessarily result in more profit, it does deliver consistency, Moser explains. "If you buy chickens by the pound and sell by quantity, some quarters you're going to get fewer wings per pound than others,” he says. “But if you buy chickens by the pound and sell them by weight, those two elements are essentially the same: The restaurant sells its wings the same way it buys them."
Another element restaurant operators must take into account is geography: It costs more to sell chicken wings on the country's coasts, such as in New York and California, because the majority of the country's farming does not take place around there. The higher shipping costs to coastal markets can further clobber wings restaurants already dealing with the shortage, though the recent dip in fuel prices will provide some relief.
“We’re very sensitive to what our costs are, and we’ll manage our menu pricing as we go into the peak of the season,” Wiederhorn says. “We want our customers to be happy that they’re getting a full-sized order of what they want, so to the extent that commodity prices are rising, you explain that to the customer.
“But the operator has to make money, so we advise our operators to manage their margins and keep them consistent,” he adds.