Let's look at some of the major food categories for 2006. First, of course is the cheese market. The CME appears to be at a balanced point at the end of 2005. One of the reasons for the volatility the past few years is that the cheese and milk futures markets are "thinly-traded." This means that very few trades occur in a day and one or two can swing the market. Because of these big price swings, many large pizza chains are buying milk futures for the first time in order to smooth out the ups and downs. This means a less thinly traded market so some stability will return. For many years, cheese prices ran a very predictable pattern. We may be returning to such a time. I predict generally low cheese pricing for the first half of the year, but as the industry manages the herd numbers to account for lower pricing, milk production levels will decrease, causing higher prices in the fall.

Tomato Market

In general, the 2005 pack for tomatoes was a difficult one. A very wet winter, followed by excessive heat this summer in California's Central Valley resulted in a "short" year for the tomato crop. While the industry expected 10.5 million tons, the final numbers were 10 percent less. However, raw material shortages were only part of the story. Tomato farming and processing is very energy intense. Most of the harvesting and canning occurred during the height of the energy price spike. Couple that with rising steel prices for cans and you can expect to pay more this year for tomato products.

Beef and Pork

Beef offers an interesting picture for 2006. Beef consumption is strong for American consumers. The Canadian border remains closed due to a "mad-cow" scare a few years ago. Many of the young cows entering the food system traditionally came from Canada. With supply limited and demand strong, beef prices have been high. There is rumor of the border opening up this spring, which would bring pricing down; however, the Japanese market may open to American beef, offsetting this downward pressure. I would predict that beef would back off these levels, but not by much. Pork pricing has been very stable and I would predict this to remain. Look for no change in pork pricing.

Chicken

The wild card for pizza proteins this coming year is in poultry. Chicken use in pizzerias has risen faster than any other product the past ten years. Between chicken wings, chicken toppings, Chicken Caesar salads and chicken sandwiches, we are awash in chicken. The bird flu poses a serious threat to the chicken (and people) population worldwide. Asian chicken farmers have destroyed millions of birds in the past year to head off an epidemic. To date, this problem has not reached our shores. With the immense amount of world travel, we are one plane ticket away from potential disaster. If this disease becomes a factor in America, chicken pricing will soar, but worse, I predict Americans will dramatically slow down their chicken consumption. Even if a chicken has the disease, once it is fully cooked, the flu cannot be passed to humans, this will not matter to a panic-stricken populace. Given the risk in chicken prices and general inflationary pressures, I would predict higher prices for chicken in 2006.

Flour

World stocks on wheat appear to be adequate for now; however, the quality of that wheat is less than average. Quality of U.S. stocks is very good, which has kept upside pressure on pricing because of exports. The effects of Katrina on wheat prices were short-term, as the Port of New Orleans has reopened. Weather predictions for this coming winter are for wetter than usual, meaning that the two-year draught in the mid-west may be ending. The above-mentioned Avian bird flu could affect wheat pricing if millions of birds are destroyed, the demand for corn would soften, also driving down wheat prices. If you put all of these factors together, I would predict a softening of wheat and flour prices, beginning in the second quarter of 2006.

Pizza Boxes

World paper prices have came down the past six months, easing pricing pressures on corrugated in general and pizza boxes particularly. On the other hand, (Ronald Reagan once said, "All I ever wanted in this job was a one-handed economist.") two of the largest paper companies in the country are going through serious changes, one is going private and leaving Wall Street and one is so loaded with debt they are rapidly closing plants and exiting certain businesses. Paper companies have recently raised prices and will have an incentive to continue raising prices if they can. I would predict pizza box pricing to be up this year.

Pizza Products

If you look at the broader food industry, one unmistakable trend is that consumers are choosing better quality products. The major grocery chains are all in financial trouble, but Whole Foods, Trader Joe's and the specialty independents are doing very well. Starbucks and Panera Bread are booming, Burger King and Wendy's are not. Anything organic is flying off the shelves. American consumers are changing. They are opting for healthier choices, gourmet and specialty foods and cleaner (perceived food safety) shopping environments. The pizza industry, largely is not keeping up. Pizza's popularity historically rests on its simple approach; a good crust, sweet tomatoes, cheese and toppings. While plain and pepperoni remain vastly popular, especially among kids, America's aging population clearly wants more.

Healthier Choices

We are a long way from organic pizza, but if the industry is to continue growing, pizzerias must develop healthier alternatives so that consumers feel good about choosing pizza several times a month. Fresh toppings, more salad choices and other menu expansions that attract healthier buyers will combat pizza's stogy reputation. None of this is new, yet the pizza trade has stubbornly clung to its past, rather than push forward. I predict very little will change with pizza's overall response to a changing consumer.

Gourmet and Specialty Foods

One trend that is gaining momentum is artisan crust. The adage in our business is that you can't make pizza without good crust. With the Atkins Diet deep in the rear-view mirror, American's are again discovering artisan breads. Fresh crusty loaves made with interesting flours and seeds are rising in ovens all across the land. Some innovative pizzaiolas have begun incorporating this idea into their product. Multiple cheese blends, capers and artichokes and other "break the mold" toppings are breaking the bank. Ted Rowe won "The Food Network's" best pizza contest with a butter based, mushroom pizza with a red wine reduction.

California Pizza Kitchen is once again in a growth mode. After several years of tepid growth, originators Flax and Rosenfield have retaken control of the chain. Their philosophy for growth is simply to focus on the food. Goodfella's in New York continues to expand with their gourmet topping approach. A new chain in the Pacific Northwest, called Garlic Jim's has 44 stores sold with nearly 25 open. They are growing by combining gourmet pizza and fast delivery and carryout, which they call "Gourmet...Right Away." Similarly, Pizzicato in Portland, Oregon, markets very upscale pizzas from their 24 locations. The trend is unmistakable. Nearly every pizzeria in the country can add one or two gourmet or specialty pizzas without changing their entire concept. I predict that this trend will grow and that operators that execute will take market share from those that do not.

Cleaner and Better Shopping Environments

As I travel the country visiting pizzerias, the environment sometimes appalls me. I have been in pizzerias where I would not even buy bottled water, much less eat their food. Consumers are well aware of food safety and cleanliness issues. The number one reason why families do not return to restaurants is the cleanliness of the restroom. People think if public areas look this bad, the kitchen must look worse. American restaurants have raised the bar. Visiting a Starbucks or a Panera Bread is like going into someone's living room. Papa Murphy's, the 900-unit take-and-bake concept, is spending a huge amount of money painting and refreshing stores. Franchisees I have spoken with, report the investment has been well worth it, as same-store sales definitely increase after the refurbishment. Many pizzerias in America need a good cleaning and a fresh coat of paint. I predict that operators who ignore cleanliness will suffer declining sales. In summary, the economy is in pretty good shape, some costs are rising, while others are falling. On balance, 2006 should be a good year for the industry. Individual pizzerias who improve their food quality and offer it in a clean attractive environment will improve their sales and profits at a greater rate than average. I wish you a successful year.

– PMQ –