For
many years the contention between foodservice manufacturers and
distributors has grown. The clear recognition that each needs
the other keeps diplomacy in the relationship, but the fact remains
that these two channel partners are at cross-purposes from time
to time. Each side is in a battle with the other for the last
two to four percentage points. Part of the solution is education.
Understanding the economics is one way to comprehend each other.
There are thousands of distributors in the market; some are very
large and some quite the opposite. The pace of mergers and acquisitions
over the past 10 years has created a void in the middle. The dominant
local distributor in the $50 - $100 million range has come under
great pressure. Not nimble enough to fend off the small competitor
and lacking resources to take on the giants, many have chosen
to be acquired.
At its core, foodservice distribution is about creating and managing
gross profit. The margins in distribution have shrunk continuously
since the 70's. Where once 25% margins were commonplace, that
number has continued to come down to the 16-18% level. Costs have
increased and this is why the "middle market" distributors have
become takeover targets. Many distributors are earning 16-18%
gross profit and running a 14-16% cost of operation. Net profits
of 1-2% are routine. This is not an enormous return on investment
in view of the tremendous liabilities of trucking and the huge
credit risk that most distributors take. It's no wonder they are
battling it out with manufacturers for a few extra percentage
points.
The cost of operations is typically broken into four categories,
cost of sales, administration, warehousing and delivery. Remarkably
the four are fairly even in their overall contribution. Managing
costs without affecting service is an increasing challenge. One
way the distributor can gain efficiency is by reduction of duplicated
or substitute items. Fewer items to sell simplifies the sales
function, reduces the SKU's that need to be purchased and eases
accounting. It also keeps pressure off warehousing and slotting,
meaning less need for increasing warehouse sizes. Delivery and
picking errors are also reduced. This tactic for distributors
reduces costs but makes it harder for manufacturers to market
new items and build brands. The distributor will bend these requirements
in the face of aggressive marketing programs, once again, decreasing
the profitability of producers in order to solve the distributor's
problems.
Superior investments in technology can reduce a distributors cost
of operation. To gain profitability, they must sell more value-added
products with higher profit margins and find ways to create additional
income. Marketing programs have become the key drivers for this
additional income. This is the open wound between manufacturers
and distributors. Distributors see their very survival tied to
the ability to bring additional dollars to the bottom line by
tapping manufacturers for marketing and merchandising funds. Some
of these programs offer great benefits for the manufacturer; others
are simply naked grabs for money with little return.
Because manufacturers have been burned, they are wary of blanket
participation. This is ironically a key to the long-term survival
of both channel partners. Manufacturers simply cannot participate
in every distributor's marketing program; profits in a market
will not support it. They must choose their channel partners and
improve their backing while limiting distribution points. The
more widely distributed commodities a distributor sells, the more
vulnerable they become to margin squeeze. Manufacturers can assist
by creating superior value-added products and limiting distribution
so that distributors can maintain a healthy margin.
Consolidation among the foodservice buying/marketing groups is
a reflection of this "middle drain" as well. The groups continue
to merge and blur the private-label, control-label business. Fewer
groups offering multiple labels complicate inventory management
for producers. In addition, the growing purchasing power of these
groups is increasing the program demands on manufacturers. The
groups each have their own philosophy concerning the collection
and distribution of marketing dollars. At the end of the day,
distributors join groups because they believe they can gain profitability
and value-added service from these buying/marketing groups.
The marketing benefits of nationally advertised labels are also
important to the independent distributor competing against the
national corporate distributors. The advertising and marketing
benefit created by the group label outshines their ability to
create a label on their own. Distributor private label products
are decreasing. This is actually good for both manufacturers and
distributors. Manufactures cannot continue to support weak and
slow moving labels. Distributors are not getting the mileage out
of private label programs due to their lower margin.
What functions do foodservice distributors perform? Simplistically,
they buy in bulk, offer bulk break services, deliver a wide range
of goods in small quantities and extend credit to an industry
well known to be a high credit risk. For this, they receive an
ROI that is low but commensurate with the market. So why do distributors
operate? Many of these companies could liquidate their assets
and achieve better returns in lower risk investments. Distributors
distribute food products because they have a passion for the business.
But the reality is that distributors are under enormous pressure.
The bottom line is that the foodservice distributor is deeply
in need of the income generated from their internal marketing
methods and those of their buying/marketing group. Manufactures
must continue to take responsibility for marketing their products
through the channel. They must also bear the cost of the channel
through the distributor. Operators are reluctant to raise prices;
therefore, they put pressure on the distributor. The distributor
has nowhere else to turn but the manufacturer. This pattern has
created the issues. Manufactures who market higher benefits to
operators can increase their margin and offer superior marketing
programs; witness Grande Cheese. Distributors with superior service
and technology can outclass the competition and increase their
margin. The point is that both sides must stop aiming at each
other and focus on building value rather than fighting over two
percentage points.