In the past decade, a growing number of convenience-store chains have embraced hedging as a strategy to improve profits and pricing predictability at the fuel island.
But the pump isn’t the only place operators are hedging their bets. Some larger chains are recognizing the value of tracking the commodities market when it comes to contract negotiations with foodservice suppliers. And as foodservice becomes a bigger slice of c-stores’ total margin, the strategy is saving some chains big bucks on coffee, meat, soybeans and egg products.
“Before we got into the foodservice business, we paid attention to coffee prices a bit,” says Kevin Mahany, senior vice president of merchandising for Corpus Christi, Texas-based Susser Holdings Corp. “But now that our foodservice business is a large part of what we offer, we pay heavy attention to the food commodity markets.”
Mahany says Susser is constantly looking at the price of proteins, especially beef, chicken and pork, as well as other commodities that affect the price of these products (such as corn that is used in feed).
“We’ve seen a lot of increases in proteins over the years,” Mahany says. “Not really fluctuations, but prices remaining high, based on the price of feed, where the corn prices are being impacted by the ethanol mandate. That’s held corn prices up, and the drought has also held them up. There are some predictions that prices will continue declining due to drought relief and increased production of these commodities.”
While such considerations may not make sense for smaller retailers, for those with foodservice—from coffee to prepared meals—being a centerpiece of their services, understanding the markets can bring greater stability and, as with fuel, an opportunity to gain a few percentage points in margin.
Commodity Coups
According to Mahany, the coffee market has been a “big win for everyone” because prices currently are below historical buy rates following years of severe spikes in pricing.
An even bigger win for Susser has been its efforts to track the egg commodities market and negotiate yearlong contracts. Contracts for eggs are rare in the convenience business, but Susser stores use such a high volume in their foodservice operations that it pays to hatch a deal with a supplier and lock in a rate.
“It takes away the volatility of buying a product that fluctuates from week to week, and soars during certain times of year like Easter,” Mahany says. Now in its fourth year tracking egg prices, Susser also keeps a watchful eye on the soybean and soybean oil markets.
Rather than be commodity market players, some retailers have interest but take a more cautious approach.
Tony Kenney, president and CEO of Speedway, says the chain “does absolutely no hedging, nor do we have other programs in place to protect against commodity price risk.” However, he observes the markets constantly to understand the potential effect that changes in commodities, such as crude, RBOB, ULSD, corn, beans and coffee, may have on business.
According to Ann Berg, an independent consultant and senior advisor to the FAO-United Nations food and agricultural organization, paying close attention to the commodities market can add to a retailer’s negotiating power. “If prices go down for basic goods, they might find some lesser-known competitor who can provide the goods at a cheaper price,” she says.
But she cautions that playing the commodities game really works only for raw goods, not a finished or processed product.
“There is a very low price transition from the raw commodities to the finished goods,” Berg says. “Of a pound of wheat, only about 10 cents of it goes into a $4 loaf of bread. It’s the processing, baking, marketing, shipping, etc. that causes the markup. If the price of wheat goes down, it has little impact on the price of the loaf of bread.”
How’s the Weather?
When talking price fluctuations, a logical question relates to the effect of the weather on the commodities market. Of course, a drought or flooding can send prices soaring, says Mahany, but it doesn’t affect how a retailer negotiates for product.
“Weather really doesn’t change what we do because it only impacts us in the produce area on a short-term basis,” says Mahany. “We are stuck with whatever the market price is because suppliers are not willing to negotiate contracts for perishables unless dealing with a very large volume.”
What can have a positive influence on negotiations, however, is paying attention to the optimal buying times for various commodities during the year. For some proteins, the best time may be November, and for others it may be July or August.
“The key,” Mahany says, “is to go five years back to identify the trends: the highs, the lows and when different commodities peaked out.”
Members help make our journalism possible. Become a CSP member today and unlock exclusive benefits, including unlimited access to all of our content. Sign up here.