How has the recession changed procurement practices? On the one hand, it would seem to create buying opportunities because of depressed commodity prices. On the other hand, suppliers might be leery of over committing to selling at low prices if they believe that prices will rebound as the overall economy picks up. This is playing out in the restaurant industry. (See Restaurants Shop on Spot Market, Wall Street Journal, Oct 7, 2009 – for some reason this is not posted on wsj.com but is available from Factiva.) Many restaurants had been purchasing much of their supplies under long-term contracts but that is changing. According to the article:
Darden, parent of Olive Garden, Red Lobster and other chains, has locked in prices for nearly 90% of its main ingredients through its current fiscal quarter, but beyond this year it has locked in only 30% of ingredients to take advantage of low spot prices.
Similarly, Morton’s Restaurant Group is going from buying 70% of its steaks under long-term deals to buying exclusively in the spot market.
The logic of longer deals was that it protected the buyers form big swings in input prices. Now, however, prices have bottomed out and they know they are in for increases in the future. So why no long-term deals? Suppliers just aren’t up for it. They believe that prices are low because demand is slack and locking in long-term deals will limit their gains when American’s start going to Applebee’s again. For what it’s worth, it seems that restaurants are willing to accept this reality.
Chain restaurants may be willing to expose themselves to [spot market price] volatility, especially as some expect prices will come up only with increased demand. For an industry starving for sales growth, such a prospect would outweigh any drawback from higher costs.