Page 11 - 2019 Pancake Supply Chain Co-op, Inc. Annual Report

Macro View

Commodity costs were generally flat through 2019, with steady/favorable energy and crude oil costs, and a strong U.S.
Dollar that enables us to import commodities at a relatively lower cost and makes U.S. produced goods higher cost to
export destinations. The Consumer Price Index for Food and Beverage was up 1.9%, while the Producer Price Index for
Finished Consumer Foods was up 1.8%

A significantly more protectionist U.S. trade policy upset markets but had little overall impact to our costs. We absorbed
some increases for Chinese produced products such as Crayons, Printer ribbons, and Breaded Shrimp, moved other
products away from China (Straws), and got benefit to our egg costs as U.S. exports of Soybean Meal to China dried up,
driving costs down for us. The second significant event was the spread of African Swine Fever into China, where half the
world’s supply of pigs are grown. By the end of 2019, it is estimated that China had lost 45-50% of its pigs, driving up
Chinese demand and costs. Fortunately, U.S. production and supply of pork has grown significantly in the last two years
and our costs were not adversely affected. We do see this being an issue that will affect pork and protein costs though,
likely through 2022.

Food
Eggs were the primary driver of lower cost in 2019. Liquid (and particularly Shell) Egg costs were down significantly
as Egg markets were down due to strong supplies of Eggs after what was a strong market in 2018. Beef costs were
down, even with the YOY increase on Burger costs due to quality improvements. Beverage category costs were down
– driven by an approximate $1,300 per restaurant improvement in cost on Orange Juice as we moved to a Concentrate
product. While IHOP validated this move through extensive consumer testing, this is an important move from a supply
chain standpoint as IHOP's prior “Not from Concentrate” product was sourced exclusively out of Florida, which continues
to decline as a producer. Use of a concentrate product opens our available supply considerably and allows us to protect
pricing through use of futures markets.

The Dairy category led our unfavorable impact in 2019. Most dairy components, except for butter, were up. While our
costs on cheeses were up between 6 – 9%, IHOP’s butter prices were up only 1%, putting the whole category up 5%.

Indirect Spend
An additional 560 restaurants converted to the Conservewell dipper well program in 2019. In addition to saving an
estimated 219,000,000 (that is 219 MILLION) gallons of water, those restaurants will save approximately $3.7 million per
year in water costs, including the cost of conversion.

We also coordinated the installation of over 1,700 multi-valve Juice dispensers to support the move to concentrate
orange and apple juices. The costs associated with that equipment (equipment, installation, and basic service) are
amortized into juice costs for 2 years – and still result in considerable juice savings versus prior.

Relationships

We continue to put resources into Restaurant Profitability Management, with the goal of delivering lower cost options to
our Members without negatively impacting their guests. We delivered results on 48 projects in 2019, contributing over
$15 million in annualized value to the IHOP system, and approximately $2,300 per restaurant in 2019 on your market
basket items, or .68%. These excellent results require effective working relationships between CSCS, Culinary, Quality
•
Assurance, Strategic Operations, Marketing, Consumer Insights, our supplier community, and you.

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