Question

Case study

Costs of food sold

A funny thing happens when you decide to eat healthier—the food is sometimes not quite as tasty, yet usually more expensive. When Boston Pizza decided to address the emerging healthy eating trend with its Smart Eats menu, the challenge was threefold. First, the food had to be up to the delicious standards held by the brand for 50 years. Second, the meals had to have evident health benefits. Third, despite the cost of providing healthy ingredients, the prices had to be congruent with family casual dining. The same three challenges existed to an even greater extent with BP’s GlutenWise line of products catering to the growing gluten-intolerant market. Although in this situation, a fourth challenge—developing a pizza dough that would adequately adhere to the “hand-kneaded” texture BP’s customers are accustomed to—introduced a direct and significant variable cost to the mix. Anyone on a gluten-free diet will tell you that any gluten-free baking with any quality of flavour and texture is going to cost more. While Boston Pizza offsets the costs of making gluten-free pizza by marginally increasing its price, that product line, along with Smart Eats—and the entire menu, for that matter—are exposed to the ups and downs of economic cycles as well. Since the nature of healthy eating is often defined by fresh versus processed food, the cost of goods sold is very difficult to predict, given that it’s more prone to fluctuations in global supply and demand and, in Canada’s case, often volatile swings in the exchange rate. As president and CEO Mark Pacinda says, “A lot of our vegetables come from California, so a) we’re dealing with the exchange rate, which creates an uptick in costs, and b) yes, there has been an increase in the price of vegetables over the years.” He adds, “We monitor our costs, so we tend to know what’s going up and we work with our suppliers and try to lock that [price] in.” The other silver lining for BP is that 50 percent of its business is either pizza or pasta, “so we’ve been able to hold pricing across our chain,” claims Pacinda. The cash-cow nature of BP’s biggest sellers also allows the brand to provide the healthier, costlier menu items at prices that are consistent with standard BP fare.

QUESTIONS

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

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

Answer 1

Question 1 answer

Boston Pizza inability to increase the prices of the Smart Eats and GlutenWise menu is based on these issues. One issue is economy cycle ups and downs. Economy ups and downs are caused by recession factor, decrease or increase in GDP and savings of customers, etc. The economy ups and downs cannot be controlled by the company. Therefore, the company is forced to maintain a low margin because it cannot take risk of charging a very high price that may compel customers to stop purchasing products from it. Another reason is maintaining a brand image by Boston Pizza. The company is inclined to provide the feeling of casual dining to its customers. Increasing prices of these products not only reduce the volume of sale, but the loyal customers may turn towards the competitors’ products. This risk ultimately leads to more loss than profit. Competition also causes Boston Pizza to stick with competitive pricing structure to attract the customers. If Boston Pizza increases the price of these products, it certainly will lose the market, its brand image and competitive position. Considering these problems, it can be said that these issues, brand image maintenance and long term goals of business force the company to fix a low profit margin over these products.

Question 2 answer

The pricing strategy of Boston Pizza reflects low profit margin earned by the company. Even the cash cow products such as pizza and pasta products’ prices are made affordable by the company. Analysis of company pricing structure reveals a competitive pricing strategy. This competitive strategy is practiced due to economies of scale benefit. The company provides costlier items of menu at an affordable price because high demands from customers and a high rate of consumption of these products reduces per unit cost of production of pizza and pasta. The company maintains to adopt a competitive based pricing structure. Reasons of competitive pricing strategy implementation are explained. This pricing strategy is practiced to beat competition and maintain the market share of the products. This pricing strategy is practiced to provide customers casual dining experience that is the objective of Boston Pizza Company. This pricing strategy is also practiced to achieve long term business goals.

Question 3 answer

The demand of pizza and pasta that are main source of revenue for Boston Pizza Company is very high. Demand for healthy food products by the customers affect the profit margin of the company. Healthy food requires fresh raw materials, and a high quality. This increases the cost of manufacturing healthy food products to the customers. Such demand therefore, reduces the profit margin for the company and the company requires increasing the prices of the products. Beneficial aspect of such demand for the Boston Pizza company is managing economies of scale in its business operation, as the demands for such products are huge from its customers, and per unit cost of product is lowered. It assists the company to set a low price for products or in other words to choose a competitive pricing strategy. Therefore, demand from customers partially helps the company to fix the prices competitively.