Understanding the Economics of French Toast
JACKI LYDEN, host:
At Lyon Bakery in Southwest Washington, D.C., inflation comes down to brioche bread, bread that's eventually destined to become that Sunday brunch staple you may have enjoyed this very morning: French toast.
Here at the bakery, they're mixing 300 pounds of dough in a vat, kneading an eggy concoction of wheat flour, honey, sea salt and dash of vanilla. And wheat flour is a commodity that costs so much now that the baker jokes it's almost like gold dust.
Allan Hikime(ph) is a co-owner of Lyon Bakery.
Mr. ALLAN HIKIME (Co-owner, Lyon Bakery): I just pulled up some numbers from a year ago and from 2007 same time, my wheat has gone up 190 percent, when I used to buy the flour at 18.50 for 100 pounds. Right now the last quarter(ph) I got from my supplier was at $54.00.
LYDEN: $18.50 to $54.00.
Mr. HIKIME: Yup. And I did my little math.
LYDEN: That's a huge jump.
Mr. HIKIME: Yup.
LYDEN: Let me ask you about another ingredient in your brioche…
Mr. HIKIME: Yes.
LYDEN: …here at Lyon Bakery. What about eggs? You must use a lot of eggs.
Mr. HIKIME: Absolutely. And egg prices, over the past year, that's gone from $1.00 a pound to $1.50.
LYDEN: So if I were to ask you, you know, for your calculations of a 600-pound batch, and you've been scribbling away here.
Mr. HIKIME: Yes.
LYDEN: Can you tell me?
Mr. HIKIME: If I were paying a year ago $55.00 for that batch of dough, now I'm paying $162.
LYDEN: Just in flour.
Mr. HIKIME: Yes. That's not even things(ph) anything else. Now, we're going to load up the van and put the bread in here. Ready to roll.
LYDEN: And where we're going now is across town to one of Allen Hikime's customers, Constantine Stavropoulis, the owner of a cafe called Open City. He's a Rossellini fan. This is where brioche bread is transformed into French toast.
Mr. CONSTANTINE STAVROPOULIS (Owner, Open City): First of all, we put a little bit of butter on the grill and dip the bread in the butter, lay it down there, right there on the flat-top.
LYDEN: In this busy kitchen, Stavropoulis takes turn with the spatula whipping the slabs of brioche bread dipped in an egg-milk butter as they turned golden brown.
Mr. STEVROPOLOUS: Now it's plated up. We put a little bit of powdered sugar, add a little bit of syrup, and it'll be good to go right for the customer.
LYDEN: This is a wonderful, active busy kitchen. Your restaurant is obviously drawing a lot of crowds, very popular, it's jam-packed here at lunchtime. It's great (unintelligible) you want a business to be.
Mr. STAVROPOULIS: Oh, thank you. Absolutely, yes.
LYDEN: But the fact that prices are going up for you. For example, looking at our piece of bread, does it cost you more to buy it from Lyon Bakery than it did a year ago?
Mr. STAVROPOULIS: Yes, yes. Our prices have gone up overall. The price we charge has not gone up proportionate to the cost that we incur. A lot of these costs actually have gone up. In the case of eggs and flour, I mean, some of them have doubled and tripled in price over the last year. And proportionally, we cannot double and triple what we charge our customers, otherwise we out price ourselves.
The task we have is basically to do what we're doing or better with less.
LYDEN: I wondered why both Constantine Stavropoulis of the Open City Cafe and Allan Hikime of Lyon Bakery had held off as long as they could in passing their costs along to their customers. Here's how Lori Leachman, an economic professor at Duke University explained it.
Professor LORI LEACHMAN (Economics, Duke University): One of the things they know is right now the economy is very uncertain, and we've already seen that consumers are starting to pull back on spending. And so to walk in to a restaurant and confront higher prices in the context of less wealth is a double whammy for the consumer.
LYDEN: We just heard from our baker, Mr. Allan Hikime, that the price he pays for wheat has gone up 190 percent over the last year, more than three times what he was paying only a year ago. Does that surprise you?
Prof. LEACHMAN: It surprises me a little bit because it hasn't gone up more, because the price of wheat and grain has gone up 350 percent, in fact, since last year. So that tells me all of the price increases haven't been passed on.
LYDEN: And why is it so high?
Prof. LEACHMAN: Number one, it has to do with the increase in demand for biofuels. Farmers are switching a lot of production and to input resources for the fuel industry. Number two, it has to do with rising income globally. That increases the demand for food products generally and in particular beef. And grain is a key input resource into the production of beef as well as into the production of dairy products.
LYDEN: I see. Now, our bakers at Lyon Bakery in Washington are also paying 50 percent more for eggs this year than they were last year. Is that also related to the increase in grain prices?
Prof. LEACHMAN: It is. You know, that's also a fee(ph) product for chickens.
LYDEN: And milk apparently has gone up too.
Prof. LEACHMAN: Everything has gone up. And the other piece of that has to do with transportation costs, right? Just getting those products to market to the retailers, to the baker, costs you a lot more because energy prices are higher.
LYDEN: So if the bakery is paying 190 percent more for wheat, and you say the price of wheat's gone up 350 percent…
Prof. LEECHMAN: Mm-hmm.
LYDEN: …who's absorbing the cost? Because the baker is, obviously, not being charged everything.
Prof. LEACHMAN: Well, we call that aspect the price pass-through does an increase in price get passed on to the next purchaser. The ability of a producer or supplier to pass on that price increase really depends upon how competitive the market is. And the more competitive the market the less he's going to have an ability to pass on the price increase because essentially it says that the purchaser can go somewhere else and find a substitute.
But if prices in general are rising for, you know, all of your suppliers then obviously, there's less place to go for a substitute.
LYDEN: Duke University economics Professor Lori Leachman. And if more of a cost of that brioche bread gets passed on to us, what might the substitute be? Well, I suppose as the French once suggested, we can always eat cake.
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