Surviving and flourishing during this downturn requires innovation, flexibility and a playbook that can convince consumers to spend even when they don’t have much spare cash.
Last week I posted some features on interesting ways that retailers are refocusing to foster growth during this period of contraction.
Far and away the most viewer email came in response to my featureon Texas Roadhouse ,- from Davis Skinner pointing out the painful puns (“Texas Roadhouse CEO "Spots" Strategy To Cut Cattle Costs”) to readers questioning the strategy of buying meat at spot market prices. That’s why I decided to dig in and post a number of your emails.
Just to rehash for a second, Texas Roadhouse decided in September to start buying 25% of its beef supply at spot market prices. The majority of the meat is purchased at long-term contract prices from vendors.
Mortons and Ruth’s Chris have similar strategies as well. Restaurant analyst John Gordon of Pacific Management Consulting Group points out that the benefits of this type of buying strategy are only short-term: “As a long time restaurant analyst, I'd say that while the Texas Roadhouse Strategy makes sense if there was a spread, in general, it is not the long term best practice. Chains and more importantly, consumers, need planning reaction time and price flexibility, if possible.”
Gordon is right. In fact, beef prices are projected to increase over the next few months. Why? In part because there is a supply glut of cattle on the market right now that will not be there in a few months. One trader told me that he thinks this short-term oversupply is due to the high cost of grains and corn.
The cost to farmers of feeding their cattle is so expensive right now that many are choosing to “liquidate” their herds rather than pay pricey feed costs to keep them alive. In a few months, this oversupply will thin out and the market will then bid beef prices back up. That potentially could mean that those long-term beef cattle contracts that lock-in prices with vendors could actually save restaurants money. That would reverse the current trend which makes spot prices more strategic for companies like TXRH.
Another price saving suggestion came from reader James Tripper. He wants the restaurant industry to pay more attention to other cost-saving strategies such as taking on consultant companies to turn around on-site operations and save bottom line costs while still driving in customers.
Thanks for the emails. One bit of housekeeping before I sign off. My apologies to Ben Parks, Thomas Kramer and others who were looking for my full video interview with Texas Roadhouse CEO GJ Hart. Unfortunately, an editing problem forced us to remove the clip.
I hope you all enjoyed the long-weekend.
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