As a business owner or purchaser you need to know how to negotiate. The best operators are obsessed with saving money wherever possible. With food costs rising with no sign of stopping any time soon, you need to hone your negotiation skills.
If you’re a smaller operator you may think that you don’t have much leverage when it comes to food purchases. After all, the business is dominated by the top 100 chains (46.5% of foodservice sales overall) and three big distributors that take and fill 31% of total foodservice sales. Don’t worry – the right information will give you an edge that can translate into dollars saved and spent better elsewhere.
There is information out there that even large operations, those that write multi-million-dollar food orders each year, don’t have. Russ Cipolla, founder and managing partner of Team Four Foods, grew up in the restaurant business and held senior executive positions in foodservice distribution with the biggest companies for more than two decades. Overall, he has been in the business for over 30 years, and he now negotiates contracts and agreements for companies with $1.3 billion in purchases. That’s a ton of experience working on the side of those with whom you’ll be negotiating, and he shared some fantastic tips during his 2017 Nightclub & Bar Show presentation.
Leverage is everything.
Size matters to distributors, so leverage whatever volume you have in order to get the best cost possible. Don’t be intimidated just because you aren’t operating a national or regional chain. Bars and taverns, according to data from Technomic, account for 24.6% of foodservice purchases, whereas national chains make up just 10 percent. Your operation is important to food distributors’ bottom lines.
You become important by leveraging volume and becoming important. Commit a significant volume of foodservice purchases to your primary distributor and you’ll find that they’re more willing to negotiate, offer favorable pricing, and offer you incentives such as price breaks for volume orders, consistent average order sizes, prompt payments, and ordering distributor brands. They will also begin offering manufacturer incentives like rebates, menu incentives, and incentives from product associations such as Certified Angus Beef or Creekstone Farms. But how do you decide on a primary distributor in the first place? You shop.
If you’re not shopping distributors, you’re not helping yourself.
Let that sink in. Don’t just work with the first food distributor that walks through your doors. Ask yourself the following questions when considering any food distributor:
- Can they service your needs?
- What is their product quality?
- How deep is their product line?
- Do they offer competitive pricing?
- Are they known for reliable delivery service?
- Do they offer clear, written distribution agreements?
Consider the answers to those questions your “greens fees.” These are the bare bones of what a distributor needs to do for you.
Your concept is under your control.
Your distributor should allow you to maintain full control of your order guide and menu. Put another way, any foodservice distributor you’re thinking about working with should service you. You should never be pressured to fit your menu around their product line. As I’ve said before, nobody knows your concept better than you. Don’t let anyone else take control of its direction. If a distributor can’t deliver on your needs Cipolla says you shouldn't even be talking to them.
Understand your distributor rep.
So, who’s your rep. Cipolla explains that he or she is a commission-based salesperson. That means you’re working with someone who makes more commission if they sell products for higher prices since they get paid a percentage of the gross profit. Sales reps work off sales cost, and unfortunately some of them sometimes pull a bit of a bait and switch on promotional products.
There are some sales reps who recover profit – thereby increasing their commission – by manipulating the price of unwatched items. This could be the tune to as much as double the actual price on some parts of your order. As Cipolla explains it, you may be shown a great price on the items the rep knows you're watching, but they'll recoup that "sale” through the items you're not keeping an eye on.
Notice that I said “some” sales reps. Be cautious, be aware, but don’t assume that every distribution rep is out to take advantage of you. Mistrust doesn’t exactly incubate a healthy work relationship.
Know your distributor types.
You will likely be ordering from broadline, non-food, and specialty foodservice distributors. Cipolla suggests you purchase groceries and seafood case items from broadline distributors. Simply put, broadline operations are your one-stop shops, those distributors that offer a broad range of items.
When ordering processed meats, use a specialty distributor. To understand Cipolla’s advice, understand what processing means. Processed meats are cut, sliced, etc. The reason you shouldn’t order such items from a broadline is also simple: you’re most likely going to pay a markup for extra processing that the broadline distributor isn’t even doing. That’s two markups for one item, and specialty distributors tend to handle their items better than their broadline counterparts. For non-food items (cleaners, napkins, paper towels, etc.) utilize a non-food distributor that offers better pricing than a broadline. The same holds true for produce distributors in terms of how they handle their products and their prices.
Groceries and basic seafood items from broadlines, non-foods from non-foods, produce from produce, processed meats from specialties. Easy.
Level the playing the field.
Ah, the distribution agreement. This is a big topic, and it’s crucial to your ability to save money. It’s also a massive portion of the information Cipolla shares that not even multi-million-dollar order writers don’t know.
Everything is defined and outlined in the distribution agreement, and you want the definitions to work in your favor. In particular, you want to pay close attention to how your distributors define the term “cost.”
This is how two of the biggest distributors define cost:
- “’Cost’ is defined as the cost of the Product on the invoice and if not a delivered price, Applicable Freight. The invoice used to determine cost will be supplier invoice, or invoice issued by an affiliated Specialty Company, or merchandise services department or affiliate of XYZ Corporation and its cooperatives, and ‘Delivered Price' is defined as the invoice price from a manufacturer or subsidiary or any other supplier including redistributors, consolidators and transaction service providers plus applicable freight.”
This is how Cipolla defines cost, and it’s the proper definition on which you should insist:
- “Invoice Cost is defined as the Supplier’s or Packer's FOB [free on board, or freight on board] unit price plus normal freight to the XYZ distribution center, less off-invoice allowances."
You also need to understand the difference between margin and markup, otherwise you’re going to pay higher costs. According to The Strategic CFO, markup “can best be defined as the increase on the original selling price,” whereas margin “is the percentage difference between the selling price and the profit.” Does your head hurt yet? Don’t worry, Cipolla has an example anyone can follow:
- A $25.00 item with a 10% markup has a sell price of $27.50
- A $25.00 item with a 10% margin has a sell price of $27.78
- A 10% margin is the equivalent of an 11.1% markup
As with just about any contract or agreement you enter into, you need to find the hidden costs and fees. When it comes to foodservice, there are a lot of them:
- Fuel cost surcharge
- Restocking fees
- Under-minimum delivery fees
- Sales rep and electronic ordering fees
- Adjustments for non-representation
- Issues affecting operational costs
- High-cost operating areas
- Special handling fees for special order items
- Split case fees
Another critical element of the agreement is the termination clause. In Cipolla’s vast experience, too many agreements are signed without a termination clause. And lest you think that this misstep is limited to small, inexperienced operators, Cipolla says that even companies with multi-million-dollar deals fail to include termination clauses in their agreements. Don’t make this mistake.
There are two types of termination clauses: with cause and without cause. An example of a customary termination clause with cause is “for material breach without remedy in 210 days.” An example of termination without cause would be the right for either party to terminate the agreement at any time without cause or penalty with 120 days’ notice.
I know this topic was a tad dry. And I know that some people begin to glaze over or get a migraine when math shows up to the party. But you need to know how to negotiate and protect your money, and Cipolla’s advice is some of the best we’ve come across for working with foodservice distributors. As a business owner you’re going to have to come to terms with doing math and learning to love numbers. You don’t get to add up profits without first calculating and controlling your costs.
The takeaways.
Want to share this information with your managers or other employees who have purchasing authority within your business? Here’s a handy list of the keys to negotiating foodservice purchases:
- Shop around for the distributors that suit your needs and will service you best, but don’t treat them like shopping programs once you’ve started working with them.
- Decide on your “greens fees,” the bare bones requirements distributors must deliver to work with you.
- Understand what motivates your distributor reps and how they make their money.
- Commit a significant volume of foodservice purchases to your primary distributor to gain access to favorable pricing.
- Keep your eyes on the costs of every item and be wary of special sales or promotions.
- Be aware of the different types of distributors – broadline, specialty, produce, non-food and local – and know what to purchase from each distributor.
- The least expensive item from each distributor becomes their highest price.
- Know the difference between markup (the increase on the original selling price) and margin (the percentage difference between the selling price and the profit) to avoid paying higher costs.
- Level the playing field by entering into smartly phrased distribution agreements. Insist on using Cipolla’s definition of cost (defined as the Supplier’s or Packer's FOB unit price plus normal freight to the XYZ distribution center, less off-invoice allowances), identify hidden costs and fees, and insist on signing an agreement only if there’s a termination clause.
- You can negotiate special handling fees for special order items.
- Fuel charges should be calculated against a national index so you can track the costs.
- Distributors often pass labor costs onto purchasers for split cases. It may be better to buy, for example, a case of dressing for the month rather than a gallon out of the case each week.
- Negotiate higher volume items directly with manufacturers or their brokers. Do not have your distributors negotiate on your behalf.
- Know that in the majority of instances, an off-invoice deviation is to your advantage. Consider the following:
- $25.00 cost with a $3.00 rebate works out to $25.00 times a 10% markup, which is $27.50 minus $3.00, or a cost after rebate of $24.50
- $25.00 cost with a $3.00 deviation works out to $25.00 minus the $3.00 deviation, which is $24.00 times a 10% markup, or a cost of $24.20
- Set product specifications and make sure your reps stick to them. Fall in love with those specifications and not brands!
- Look to source products that will differentiate you from your competition.
Consider working with a third-party purchasing organization like Team Four Foods to take advantage of cost-saving benefits such as their purchasing and brand knowledge, volume leverage, a negotiated distributor agreement that includes aggressive cost-plus markups, audit services to keep everyone honest, value added member services (office supplies and trash removal, for example), consulting services, and more. According to Cipolla, these organizations often result in cost of goods savings of 7 to 12 percent.