What 68% higher diesel actually means for a grocer, a restaurant and a bakery that never buy a gallon of it

Most of what we have written about diesel this month is for the people who burn it: truckers, farmers, landscapers. This is for the other side of the delivery. Diesel averaged $6.32 a gallon on Tuesday, up from $3.76 on February 27, the day before the U.S. and Israel bombed Iran, CNBC reported, citing AAA. That is $2.56 more a gallon, or 68%, a bigger jump than gasoline's 47%.

If you run a grocery, a restaurant or a bakery, you probably have not bought a gallon of it. You are still paying for it, because the produce, dairy, flour and paper goods that reach your back door came on a truck.

The thing the order does not change

President Trump's executive order lets truckers use cheaper red-dyed diesel and asks the IRS for penalty relief through December 31. Energy Secretary Chris Wright told Fox Business relief could start as soon as Saturday, because Treasury has five days to find the specific authorizations. He also said he thinks diesel peaked a couple of weeks ago and is down 20 to 25 cents already.

Both can be true and your costs can still go up. CNBC quoted Moody's Mark Zandi saying the full effect of diesel on consumer prices takes six months to a year to filter through, and RBC's Michael Reid describing a drip, "ticking up, ticking up, ticking up." A tax change for a trucker is a small part of the fuel bill, as we worked out yesterday. Your supplier's surcharge is set by the fuel price on the invoice date, not by the order.

The numbers economists are using

• Zandi's rule of thumb: each $1 a gallon on diesel adds about 0.1 percentage point to overall inflation if it is sustained. At roughly $2.50 more, that is about 0.25 point on the PCE price index, which was running at 3.4% a year in August.
• Goldman Sachs Research, in a September 21 note cited by CNBC, estimated diesel is roughly 5% to 10% of input costs across crops and expects food prices to rise 0.2 to 0.4 points cumulatively.

A grocer: the surcharge line

Take a neighborhood grocery with $90,000 of monthly sales and $60,000 of monthly purchases from distributors. These are our assumptions; use your own invoices. If a distributor adds a 2% fuel surcharge, that is $1,200 a month, or $14,400 a year. It equals 1.3% of sales. If the store keeps 3% of sales as profit, $2,700 a month, that one line takes 44% of it. A grocer cannot pass it through on every item at once, because shoppers compare milk and eggs to the chain down the road. The practical move is to pass it through on the items where customers do not check, and to ask the distributor how the surcharge is calculated.

A restaurant: under a penny on the dollar

A restaurant buying $30,000 a month of food, with food at 30% of sales, has about $100,000 in monthly sales. A 3% surcharge on those purchases is $900 a month, or 0.9% of sales. On a $16 entrée that is about 14 cents. A one-time increase of a quarter on a handful of popular dishes covers it, which is easier than the 5% menu increase owners fear. The risk is waiting until three rounds of supplier increases stack up and the menu needs one big, visible jump.

A bakery with its own van

Bakeries and caterers that deliver themselves feel the pump directly. A van that uses 40 gallons of diesel a week costs $102 a week more than it did in February: 40 x $2.56. That is about $5,325 a year. A wholesale account that buys $400 of bread a week would need roughly a 25% delivery fee to cover it on that stop alone, which is why many bakers set a minimum order or a weekly delivery day instead of free daily drops.

There are about 605,380 independent restaurants and 35,649 independent bakeries in the CheckThisBiz directory, so this is a very common squeeze. Our restaurant playbook covers menu pricing and food-cost tracking.

What to actually do

1. Read the last three invoices from each delivering supplier and find the fuel line. Many owners have never looked.
2. Ask each supplier what index the surcharge follows, how often it resets, and whether it drops when diesel does. Wright's expectation of a gradual decline only helps you if the surcharge is tied to the price.
3. Reprice in small steps now. Quarter-sized increases on a few items cost less goodwill than one large jump in January.
4. If you deliver yourself, set a minimum order or fuel fee. Do not absorb $5,000 a year quietly.
5. Do not stock up on the strength of the order. Nothing in it lowers the commodity price of the fuel.

Live oil prices are on our markets page, and our earlier piece on what the G7 diesel release means covers the distributor's side.

Sources: CNBC; AAA (via CNBC); Fox Business; business counts from CheckThisBiz. Sales, purchases, surcharge rates and van usage are illustrative assumptions and the calculations are ours. This is general information, not financial advice.