In the competitive market, a single company does not have the ability to decide a price. In order to own maximum profit, companies should find the best way to control their cost. Those who are bad at controlling cost will obtain nothing from market.
Many restaurants try to use diverse strategies to blunt the impact of higher price of raw material. Starbucks, for example, wants to team up with other companies to buy milk, sugar and other essential food items. Darden Restaurants Inc., owner of the Red Lobster and Olive Garden chains, is moving to a system where it buys only what they knows they needs.
The unfavorable fluctuation prices of grains, meat, sugar and other essential ingredients will be a block for businesses to earn a stable profit and will bring the restaurant industry a financial risk. Especially, in cases such as the recent period of a rising global demand for protein, unfriendly weather in key growing regions, and government mandates to turn corn into ethanol.
There is a very useful strategy called commodity-price hedging to guard against large swings up or down. However, this can only apply for large companies like Starbucks and McDonald's, which have the capital to hedge effectively.
Another strategy, supply-chain management, is much more important and applicable for most companies. For instance, Darden faces similar risks with its plan to automate its supply chain where it buys and ships only what it needs, when it's needed. It might buy and store only the amount of biscuit mix its Red Lobster restaurants are expected to use in a given month.
Moreover, if Darden combine the two strategies together, it will create a bigger benefit. In regards to the biscuit mix Darden purchases for its Red Lobster chain, the company breaks down the cost of each ingredient, such as flour and shortening, as well as the packaging cost, so it understands exactly how much it should pay for a product. The company then hedges the price of the wheat that goes into the flour to avoid price fluctuation and earn a nice profit.
I think that not only will these restaurant businesses avoid spending excess money on food that may not be consumed, but they avoid waste which is nowadays a crime. These businesses Corporate Social Responsibility has been questioned on many occasions, since many establishments dispose of large amounts of leftover foods instead of donating it.
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