James Lucien Stein

Before the internet came around the market favored the sell side of most transactions. Sellers almost always had an informational advantage over buyers and could get away with consistently charging above market prices for their goods. The Internet has evened the playing field by bringing real-time, price transparency to many markets. No longer do buyers have to do pain staking research to ensure they are getting charged a fair price. If you observe customers in any Best Buy nowadays, the first thing people do before buying that awesome 50" LCD screen is google it to see how much it is selling for on Amazon. Not great for Best Buy, really awesome for the consumer.

This new transparent dynamic has caused a tectonic shift in a salesman's role. It is reported that up to 70% of a buyers’ decision to purchase nowadays is made before they even speak with a salesman. The salesman's objective is no longer to try and squeeze a few extra bucks out of the customer. Rather, they now act as consultants, guiding the buyer through the purchasing decision and adding real value by helping the buyer choose the best good/service that provides the optimal solution for their needs. Trust and transparency is the name of the game.

The Food Service Distribution industry is a $240 BN market in the United States. The industry plays a crucial role in the food service supply chain acting as the middle man between producer/manufacturer and food service businesses (mostly restaurants). Broadline distributors, named as such because they carry a “broad line” of food service products, supply commercial food businesses (excluding grocery) with everything they need to operate, from fresh fish to kitchen ovens. In the United States 50% of the food dollar moves through this industries’ distribution centers.

About 50% of the market is comprised of buyers with deep pockets known as chain/contract accounts (think Panera Bread). Contract firms typically lock in long-term contractual relationships with one primary distributor (hence the term contract). At the expiration of said contracts, chain accounts will put their business out to bid. Broadliners compete fiercely to win these high volume accounts and are willing to make single digit gross margins in exchange for securing a reliable high volume income stream. The prices charged to the buyers in this portion of the market is agreed to in writing and price transparency is championed.

The other half of the market is made up of buyers with no buying power, largely comprising of independent restaurants. Think, your favorite family owned Italian restaurant that has been in business since Grandpa founded it in 1940.

Both contract and independent accounts are managed by Distributor Sales Reps (DSRS). DSRS have many responsibilities including customer acquisition, collecting monies owed, taking customer orders and up selling. However, the largest distinction in duties a DSR performs in managing either type of account is DSRs are tasked with setting price for independents on an order by order basis . The lack of published prices in the industry means i ndependent restaurants get charged different prices for the same items when purchasing from the same distributor. DSRS are paid on a commission only basis, motivating them to charge their independent customers as much as possible for every item they purchase and to do their best to ensure the customer is unaware of the price hikes.

Restaurants buy hundreds of different items from their suppliers every week. Also, food items, especially perishables, are commodities whose prices fluctuate constantly. The market for avocados for example, has sky rocketed in 2016, selling for as little as $25 a case at the beginning of the year and up to $80 today. This combination: large number of items purchased plus extremely volatile prices make it very challenging for restaurant operators to ensure they are getting charged a fair price for the products they buy.

Here is a practical example to explain this dynamic. If you are an Italian restaurant owner you buy thousands of pounds of mozzarella cheese for your pizzas. Thus, you probably know the price you pay for mozzarella better than you know your own kid’s names. Your DSR will likely never screw you on the price of mozzarella because if he does you'll come down on him harder than on a customer requesting Parmesan cheese on his seafood pasta. Fortunately for the DSR, mozzarella cheese is not the only item you are buying from him. If you are buying your key ingredient from that supplier, chances are you are buying many other items as well and when you ask your DSR to throw on that mop you buy once every three months, that is his opportunity to make margin. What you typically find is customers will get charged ridiculous premiums on items such as food service film, take out containers, cleaning solution and the like. I.e. items that make up a small percentage of their spend individually but meaningful amounts in aggregate.

In an age where the price of any product is a mere google search away this dynamic of massaging prices is not sustainable. I also think broadliners have found themselves in a difficult position as they have looked for growth through low margin contract accounts and made the requisite investments in high fixed cost infrastructure needed to service those accounts. Sysco, the industry leader with $50 Bn in revenue managed to achieve operating margins of just 3.6% in 2016. With margins like these it will require sweeping, fundamental changes in the large broadliners’ operations to do away with this opaque pricing environment and still operate profitably.

The internet has brought on an age of transparency, where everything is open and where authenticity, honesty and reputation are the hallmarks of what make great businesses and businessmen successful. Jeff Bezos disrupted (and continues to disrupt) consumer retail based off his philosophy of “Your margin is my opportunity”. Why should the Food Service Distribution industry be any different?

James Lucien Stein

Newton Lower Falls, Massachusetts, United States 2K followers 500+ connections

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About

Experience

Steidland Brands

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Education

Boston College - Wallace E. Carroll Graduate School of Management

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