Today’s regional and national restaurant and foodservice chains are confronted by a surplus of business and organizational challenges, but none as critical as the direct and indirect impact of purchasing and supply management.
With over 30% of revenues being spent on food supply, restaurant operators are increasing focus and resources on developing more operational and cost-effective ways of purchasing, procuring and managing supply. This trend is the logical outcome of increased managerial concern to meet specific supply objectives of quality, quantity, delivery, price, service, and competitive improvement.
What’s more, negotiations with distributors is receiving increasing emphasis as opposed to competitive bidding, and longer-term contracts or master distribution agreements are replacing short-term buying techniques, placing special emphasis on strategies that ensure short- and long-term value for funds spent.
In an interview with Barry Friends of Technomic, a research and consulting firm servicing the food and foodservice industry, Barry describes the challenges concerning restaurant and foodservice operators, while providing solutions for managing master distribution agreements. Barry spent 24 years in executive leadership roles with three of the top five U.S. foodservice distributors — Sysco, US Foods, and Reinhart — making him uniquely qualified to share his insight on the complex issues associated with distributors and distribution agreements.
Q: What are the biggest challenges facing regional and national restaurant and food service chains when it comes to supply distribution agreements?
Regional and national chains are flooded with distribution related problems. The nature of their problems and challenges vary wildly on their scale, maturity and business model. Most chains are growing, and their problems are growth related — resources — operations — capital. In most cases, growing chains don’t have supply chain resources, they don’t have a supply chain person (department), and if they do it’s cobbled together or it’s a shared role between purchasing and operations.
Consequently, there aren’t a lot of distributors to choose from that can do a great job for growing chains across a large geography. Depending on scale and density, most chains are stuck dealing with broadline distributors — a single window approach for sourcing all food and operating supplies.
However, the most critical issues that supply chains manage is disruption. Bottom line, in order to manage risk and avoid stoppage, the operator surrenders quality, quantity, delivery, price, and service to the distributor, subordinate to the broadliner’s capabilities, transparency, and responsiveness to fluctuating markets.
Moreover, Barry points out that the biggest challenge regarding the operator distributor relationship is that operators “don’t know what they don’t know.”
Barry explains that when “RFPing your business, you will get a number of offers, and you can choose the best one, but no matter how much you (the operator) know, the distributors know more; they have all the power, and they (the distributors) are excellent at making their customers feel like they have a great deal when that it not be the best they can have.”
Q: What factors influence distributor costs?
There are many factors that influence distributor rates, but in most cases operators are not prepared to nor do they have the resources to analyze these influences.
To be clear, distributors do not raise costs, manufactures do. In general terms, costs are driven by the markets. For example, produce costs change daily while meat costs change weekly. Most distributors spreadsheet your supply by category and contract a fixed percent markup on top of their cost.
There are things that can be built into a distribution agreement to help smooth out price volatility, but costs are mainly controlled by the market. Once an operator comes to terms with a distributor, the distributor’s primary focus becomes delivering the service end of the agreement.
Q: When does it become ideal for a chain to start thinking about doing a master distribution agreement?
In short, you should do a distributor agreement as soon as possible.Basically, the moment an account is big enough to command the attention of multiple distributors, is the ideal time to start negotiating a master distribution agreement.
The rule of thumb is if a restaurant or food service chain has a regional and/or national presence, it should be behaving like a chain with regional and/or national authority. The chain should be buying at the very least on an honorable cost plus percent markup agreement, and it should be negotiating special pricing on it’s most important value added items, for example french fries, hamburgers and butter.
As a unit of measure, most of large broadliners like Sysco consider a 5 unit chain and above a “chain account.”
Q: How does an operator analyze whether they are getting a good deal?
Unfortunately, operators really can’t.
Even after operators get their 2 to 3 proposals, at the end of the day, there’s still a margin, and a backend markup that the chains are not privy to. What is the base price? What are the attached backend service costs, and how do you (the operator) analyze and compare? Aside from asking distributors how they make money, the operator is ill prepared and ill equipped to answer these questions.
The best way to know whether you are getting a good deal or not is to leverage the expertise, technology and buying power of Consolidated Concepts — the leading
purchasing partner in the US for restaurants and food service organizations. They work with hundreds of chains which allows them to benchmark and compare one distribution agreement with another.
Q: What’s the difference between a fee per case and percent markup?
Either one is fine. Generally speaking, the distributor will like the percent markup better, and as the product inflates, the distributor’s profit increases. It prevents them from coming back to the operator and saying they need a rate increase because their percent markup will float in respect to inflation.
Commonly, the higher the price volatility, the riskier the security. For example, 15% markup on produce during a tomato shortage can raise the price per case from $25 to
$50. However, either option is still better than autonomous pricing from the DSR (Distributor Sales Representatives).
All in all, it comes down to what the distributor is willing to offer and what you are able to do to rationalize that offer.
Q: What factors should an operator consider when terminating a 3 to 5 year distribution agreement?
Even if the broadliner agreement is sound and the service level is excellent, a chain experiencing significant growth should be checking the validity and currency of their agreement with some regularity. MDA’s have something called an “exit clause,” or common language that says with 60 or 90 day notice, for no cause, the operator can terminate the agreement.
For instance, a 25 unit chain on a 5 year MDA has grown to 50 units in the last 2 to 3 years and has doubled their purchase volume or added a third purchasing volume under their broadliner. In this case, there is no clause that forbids the chain from shopping their current MDA; in fact, Consolidated Concepts highly recommends shopping for new pricing with an agreement currently in place.
Q: What common triggers cause an operator to renegotiate their distribution agreement? What sets them off?
There are many triggers that start the distribution agreement negotiation process. Usually this is triggered by something that causes the operator to lose trust in their incumbent distributor. It could be a matter of price or it could be how the distributor is administered.
Another factor that compels renegotiation is the chains own external state of affairs. Unfortunately, sometimes the problems associated with growing pains transfer to blame on current purchasing practices.
A great example is a 260 unit chain experiencing the pain associated with declining revenues, despite years of loyalty to their distributors, they were urged to turn to Consolidated Concepts for a more innovative solution to reducing purchase spend.
Q: What is compliance and why is it important?
Compliance is designed to add strength to the agreement by assuring that both distributors and customers are adhering to the agreement. For example, if a customer doesn’t pay on time, or is not purchasing at the frequency or volume described by the key performance indicators in the agreement, the distributor has the right to call that customer to the carpet.
In other cases, a red flag may be raised against a distributor who doesn’t call out a customer who is not in compliance with their key performance indicators. For instance, a distributor accepting 100 cases when 150 cases are in the agreement is an indicator that the distributor figured out how to profitize that business to their satisfaction without the 150 cases. This can be a sign that the operator is paying for something they may not be aware of and did not agree on. This is why compliance is important for both sides.
Q: What qualifies a chain to ask for additional incentives?
The number one thing that qualifies a chain to ask for incentives or an improved deal is when a chain starts consistently out performing or overachieving the parameters of their agreement.
An good example of a chain that deserves a better deal is a 10 unit chain (paying cost plus 2 dollars and 40 cents a case with a requirement of 80 cases minimum order and 4 million dollars worth of supply per year) that grows to 15 units (paying 7.5 million dollars a year and 124 cases per order during the term of their agreement. In this case, the operator should reach out to the distributor to negotiate better pricing.
At the end of the day, the distributor will be competitive in situations that make sense. It’s your job as the operator to get the distributor to think of you as a 15-unit chain with 7.5 million dollars in business. They won your business once; make them win it again.