Solution

Restaurant Chain/QSR

A global restaurant chain worked with Stable to protect themselves against pork trim price volatility - a risk they had never before been able to manage effectively.

The Challenge

Pork trim is a key ingredient for many of the menu items sold by Stable’s quick service restaurant (QSR) client. But pork trim price volatility was 64% over the past year, making it difficult to forecast prices and complicated to set budgets and plan for the future.

Pork futures contracts lack the liquidity to make them useful, and Stable’s client found that existing futures were not highly correlated with their underlying exposures. This meant that even if they were able to find liquidity, they’d be exposed to basis risk through an inefficient hedge. (Basis risk is the risk that the value of a hedge will not move in line with its underlying exposure.)

Stable’s Solution

Stable’s Club technology platform gave the client the ability to stress test their budgets and forecasts for pork trim by giving them visibility into the relevant benchmark price - in this case a pork trim combo price published by the USDA - and by providing access to specialized, easy-to-use tools for scenario analysis. The Club's technology then calculated the premium required to manage the risk.

Because cash flow was a key concern for the client, they were able to use Smart Sync to fund their Club account on an automated 'per truck' basis, rather than having to pay the premium up-front.

At the end of the contract, the pork price had increased and the settlement amount was calculated and sent automatically to the client, without the need for a lengthy claims process.

The settlement amount however was smaller than the total premium paid into the Club account, so the balance of the premium was made available again to the client.  In summary, Stable’s solution gave the client an efficient buffer against volatility in the cost of pork trim and gave them peace of mind so they could focus on their business.

Key Takeaways

Stable’s Club helped the client manage exposure to pork trim price volatility with an innovative and targeted solution that zeroed in on their precise exposure.

Stable’s sophisticated data-science platform allowed the client to identify, track and assess their risks.

Stable’s protection contract was linked to a third party, independently published benchmark price selected by the client.

The client was able to choose protection levels which made sense for their business.

When pork trim prices rose, the client’s settlement was calculated automatically and paid quickly.  If the pork trim price had fallen, the client would have been able to keep all of the premium they paid into the Club, less Club fees.

Stable paid interest on the premiums in their Club account.

Premiums were held in a segregated account for peace of mind.

Club fees were 100% transparent, and the Club was fully aligned with the member’s success.