The increased volatility of the commodity markets is adding an increased level of complexity that most restaurant companies would rather not have to deal with. Today, both Darden and Sonic talked about floating some of their key commodity exposures.
Darden announced that given the environment, there is less opportunity to enter into long-term contracts with their food suppliers. Also, Sonic said that the cost of entering a long-term beef contract was prohibitive so they are now floating their beef exposure.
As it relates to Darden, the company will be buying futures contracts in the open market to hedge their exposure to certain commodities. While this is new to restaurants, companies like General Mills, Tyson and Kraft have long hedged their costs. From an accounting standpoint, Darden will be required to mark-to-market its futures contracts each quarter. The volatility of these future contracts will pass through the income statement and may overshadow the company's true underlying operating performance. The company would rather continue to lock in these costs though longer term contracts, but given the volatility of the commodity market, many of the suppliers to the restaurant industry don't want to take that risk. Naturally, this puts some of the risk back on the industry participants to manage the process and consequently, eliminates some of the certainty over commodity costs that many restaurant companies have enjoyed.
Darden announced that given the environment, there is less opportunity to enter into long-term contracts with their food suppliers. Also, Sonic said that the cost of entering a long-term beef contract was prohibitive so they are now floating their beef exposure.
As it relates to Darden, the company will be buying futures contracts in the open market to hedge their exposure to certain commodities. While this is new to restaurants, companies like General Mills, Tyson and Kraft have long hedged their costs. From an accounting standpoint, Darden will be required to mark-to-market its futures contracts each quarter. The volatility of these future contracts will pass through the income statement and may overshadow the company's true underlying operating performance. The company would rather continue to lock in these costs though longer term contracts, but given the volatility of the commodity market, many of the suppliers to the restaurant industry don't want to take that risk. Naturally, this puts some of the risk back on the industry participants to manage the process and consequently, eliminates some of the certainty over commodity costs that many restaurant companies have enjoyed.
