Margins in Foodservice

Margins in Foodservice

By 

Rich Wolverton

Former VP of Category Management, FSA

Published 

January 21, 2022

Margins in Foodservice

Let me start with profit is good! The US was built on free enterprise.
The restaurant & hospitality business is a great place to work to make a living and maybe even build generational wealth. But everyone in the business knows there are no guarantees. According to The Real Deal, in a normal year, 50,000 restaurants close in the U.S.

As an operator, to make money, you set your menu prices at a profitable level & adjust it as needed to cover inflation. You have many costs: rent, wages for your great staff; utilities; equipment replacement; maintenance; marketing; food and supplies. You need to watch trends to see where you can improve your menu and improve operational efficiency. Oh, yea, keep an eye on your key metrics, too. There are a million things to do.

It’s important to know what goes into the price of a box you receive at the back door of your business.
When you receive your order from distributor, who else made money on that box of product? What are some of the profit triggers for your supply chain? You can find all kinds of financial details online for publicly held manufacturers, truckers, and distributors.  I’m not a financial expert, so we will just cover some top-level factors.

For many long-term food manufacturers, the relative value of their products are set in the market. You’ll see prices move up to cover increased costs or to meet new profit expectations. So, the big move for manufacturers is to keep costs down. Foodservice manufacturers can run RFP’s(Request for Proposal is a process to get competitive pricing from a number of potential suppliers. This allows the company running the RFP to validate costs and secure the best long-term deal for ingredients or services.) You can RFP pretty much anything where you can set up a competition between your suppliers. Also, many manufacturers have squeezed their brokers, right sized their sales teams, cut distributor programs to reduce costs & improve profits for shareholders.

Trucking/logistics is a challenging business. Let’s start with the assumption truckers are all meeting the legal requirements imposed by state and federal governments. To put off expenses, truckers can run equipment longer, rent equipment, etc. Labor is a challenge today in the trucking and warehouse world, so employee acquisition and retention costs are up. Trucker scan do quite well when there is a rapid drop in the cost of fuel or, if they were lucky enough to RFP fuel and buy low in a rising market. If the cost of fuel is high, most truckers will add a fuel surcharge to a bill. Truckers do get hit with added costs with winter weather delays or when a warehouse isn’t ready for them to pick up or drop off a shipment. LTL’s can be a time drain when a driver has to make several stops for smaller loads. Restrictions on how long a driver can be on the road has put an undue restriction on truckers. So, to make money AND have competitive rates, truckers must constantly push to improve efficiencies.

Your distributor has several ways to make money. Distribution done right provides a good value for the operator.

  1. Distributors often run RFPs on their private label products to drive the best value. Better cost of goods on private label products usually means better margins for the distributor and  SHOULD mean better COGs for the operator, too.
  2. Distributors often use their own trucks to backhaul product. This keeps a truck busy going out to customers and coming back with products the distributor purchased. Very green! The distributor will then make the margin on the inbound freight while NOT having an empty truck returning to the DC.
  3. Some distributors will take a risk on the market to buy low on a rising market. The price they charge will depend on the current market and not what they paid for the product.
  4. There are two margins that may be added before the operator gets the product.
    a. First, there may be an“ inside margin” which is a rebate paid by the manufacturer or an amount added to the cost of goods before the DSR sees the cost.

            b. The other is the sales margin, which is often determined by the DSR.

If you work through a GPO, they probably have distribution and manufacturer agreements that create margin for them & you get some of the benefit.

So, what can an operator do to ensure they get consistently competitive pricing? Consider doing what the manufacturers and distributors do and use a service to help run RFPs on our purchases.

So, what can an operator do to ensure they get consistently competitive pricing? Consider doing what the manufacturers and distributors do and use a service to help run RFPs on our purchases.
Reeco is the perfect solution. When you use the Reeco platform, you can instantly determine the best cost of goods on your order and have confidence you did your best for YOUR P&L.

 

Rebates are commonplace in Foodservice distribution. If it is a big enough chain, they probably get rebates from the product vendors. If you work with a GPO, then the GPO gets the rebate and probably shares some back with you. If your business is a large independent operation, you may get a rebate on a few items from the manufacturer.

Many businesses have rebates as a standard practice. When a car dealer says “we will sell you a new car at our cost and we will show you the invoice,” there is a rebate going to the dealer for selling the car.

Distributors, like the other players in the supply chain use rebates for marketing and also as a part of the bottom line. That’s ok. Our country is built on companies making profit and creating employment for many people. I was one of those people for many years.

 

As it should, optimism prevails! operators are salient lot and new ones open every month! A friend of mine, John Stidham, is the owner of The Original Breakfast House in Phoenix, AZ. We held many conversations about the foodservice business. John spent most of his life in the restaurant business. He’s probably done every job from the back to the front of the house, managed restaurants, and owned them. He’s been broke, he’s been retired, then bored and then took a chance on opening the OBH in a location where I thought it would be hard to attract customers. It’s not uncommon to have an hour wait if you go on Saturday or Sunday! John is an optimist and shares his

You have to ensure your staff is well trained and cross trained to keep the consumer pleased. I heard an analogy today that running a restaurant is a lot like flying an airplane. You have a flight plan, but all along the way, you need to make adjustments to stay in the air and land safely.

 

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