Recently Ihor Dlaboha (Editor, ID Access) asked me “…in your conversations with distributors, do you get the feeling that they’re in a roll up your sleeves and we can lick this recession mentality?”
Wow. Interesting question, Ihor. My reflections are the subject of this post.
My career spans nearly 40 years now, the majority in foodservice. I have seen my share of business recessions (early 70’s; mid 80’s, early 90’s; ’01, etc), but I don’t recall ever experiencing the economic “perfect storm” we are currently in. The combination of energy costs and logistics challenges, combined with steadily rising prices and scarcity of business financing, topped off by a general consumer purchasing slowdown and ratcheting unemployment. Its enough to make even the most optimistic of us cringe.
Foodservice distributors are a resilient lot. When I sold directly into the channel, the landscape was a little different, with a mix of large and small distributors, corporate players, and group co-ops. But look at the ID Top 50 today and you see the result of two decades of an expanding channel, with the resultant consolidation and business failures during the aforementioned slowdowns. Some of the innovative solutions devised by distributors to bridge the gap during a slow economy just aren’t happening anymore. Much of distribution today is comprised of public companies, focused on EPS and market share. In and of itself public ownership is not a bad thing; but the result too often is a constriction of innovation and a narrowing of choices for their customers and suppliers.
My current online training business does not give me the same interface with distributors that I once had, so it’s difficult to answer Ihor with feedback directly from the distribution community. However, I do have what might be an interesting perspective on the industry, since I regularly interact with two other links in the supply chain: foodservice brokerage companies and foodservice manufacturers, as well as hold a financial stake in my family's tavern business here in Atlanta.
The foodservice brokerage business has never been an easy path to success. Their role as liaison between the manufacturer and his direct and indirect customers places them in a challenging (and often untenable) position. But lately, I have been hearing from my broker clients that concurrent pressures from both their principals (the manufacturer), and their customers (distributors and key operators) have increased significantly. Their manufacturing partners are aggressively demanding higher and higher sales volumes, while at the same time chipping away at brokerage percentages and support fees. In a few cases, brokerage payments have slowed, placing the brokerage firm in a cash crunch that cannot be solved under today’s tight credit requirements. Finally, agency consolidations and regionalization have brought new criteria that independent brokers find alarming, forcing some to create alliances or sell their firm to a competitor. The result is fewer options for all but the largest manufacturers seeking representation.
Distributor pressures on brokers include demands for “extra services” like directed selling, and “surge” projects requiring them to dedicate hundreds of man-hours to a single distributor initiative. In addition, of course, the ongoing pressures for lower pricing, better programs, longer terms, and deeper deals seem never-ending.
So what’s different about today vs. the supply chain we all have dealt with for decades? In the brokers mind, it is the VOLUME of price and service pressures in comparison with previous years. Everyone is looking for a deal --- and gratis man-hours --- all the time.
As a restaurant operator myself, I have seen a rise in stock-outs, substitutions, and pressure on our credit line from some of my suppliers, and certainly from our bank. Both sales and customer counts at the restaurant are down from last year, although not as much as some of our friends. We are surviving, but have to be more and more innovative to keep our regulars coming in. For example, we recently polled our customers and asked them if they would prefer that we reduce the portion size in order to hold our menu prices, or raise menu prices and not change portions or preparation. Overwhelmingly our customers preferred a price increase on the menu rather than a change in our product or service (cloth napkins, glassware and china, free drink refills, etc.) Chains could learn from our example…
The foodservice channel is in the midst of a major sea change. Food costs, logistics costs, and financing costs will all structurally and emotionally change the business forever. Marginal chains will disappear (or be purchased) and the strong (and resourceful) will survive (or be purchased).
The same holds true for foodservice distributors. My fear, however, is that the independent distributor will be the hardest hit and will disappear, leaving the corporate distributors to absorb even a larger share of the market. Specialty products will disappear, as corporate distributors become unwilling to stock product that does not reach an ever-increasing hurdle rate. Independent operations such as our tavern that pride themselves on their food and service, will be reduced to the lowest common denominator of national brands and processed food products stocked by their supplier. New sources of supply will be slow to react and fill that niche.
The industry will be changed even more substantially should this crisis and the resulting recession drag on too long. The trends were already there…these latest issues will only exacerbate them.
Alas, it’s all part of the evolution of any business. As one of my first bosses used to say, “This business ain’t gonna go away. People always gotta eat.” I guess they do: it’s our challenge to make sure they eat OUR food…
Yes, our customers are going to be under stress, but that's simply another way of saying 'open to change.'" --- Jonathan Schwartz, CEO of Sun Microsystems