How to Source Your Foodservice Program

It’s never too early to contemplate how to source your foodservice program. In fact, it’s an activity that should take place simultaneously with menu development, equipment purchasing and in-store process mapping.

Menu development and supply sourcing should be done hand in hand, according to Convenience Store News’ How To Crew experts, to ensure the ingredients and products needed to make menu items are available and the prices are amenable.

“Because price points are so critical in this segment, you can’t really afford to design a recipe with ingredients that are costly to source,” said Mathew Mandeltort, corporate foodservice manager for distributor Eby-Brown Co. and a member of the CSNews How To Crew. “Additionally, product availability is a big issue. Out-of-stocks can be a pain.”

As part of the in-store process mapping, individual recipes of each menu item should be documented, as well as all the preparation processes. Then, detailed specifications for each product/ingredient for every menu item should be drafted so they can be shared with distributors. This way, retailers can confirm that “the current supply chain partner either has the specified products within their current supply chain; has [products] that are comparable to the operator’s specification; or the distributor can source and add the new products to their portfolio,” said Maurice Minno, principal of foodservice consultancy MPM Group and a fellow CSNews How To Crew member.

If some of the products the distributor carries are not exact matches to the retailer’s specifications but are close, retailers should request samples and conduct detailed product specification and cost comparison analyses to determine if the substitution is acceptable, Minno added. “If the products that are available through the current distributor’s supply chain are not acceptable, the retailer should ask if the new products can be sourced/added to the distributor’s supply chain.”

One of the biggest questions that vex retailers about foodservice sourcing is the best type of suppliers and distributors to partner with — convenience store distributors, foodservice distributors, specialty suppliers or broadline distributors. The ideal number of distributors and suppliers, as well as how to negotiate the best contract terms are a few other questions that are top of mind for retailers.

FOODSERVICE VS. C-STORE DISTRIBUTORS

Most of the CSNews How To Crew experts agree that foodservice distributors bring expertise to the category that convenience store distributors lack.

“Convenience store distributors don’t have the expertise to be food distributors any more than a food distributor has the expertise to be a c-store distributor,” one How To Crew retailer said.

Another How To Crew retailer noted that product variety is another big reason to select a foodservice distributor. “Convenience store distributors are starting to do a much better job, but they are still limited by the number of c-stores that sell food. Since only a few have extensive foodservice programs, it is hard to get everything you need easily,” this retailer said. “Even the major convenience store distributors struggle when it comes to foodservice from distribution center (DC) to distribution center. Some DCs that have a high concentration of convenience stores with food do well, but trying to carry that to the next DC can be tough.”

A third How To Crew retailer agreed, adding that foodservice distributors also carry restaurant-quality products. “[Convenience store distributors] might have one or two burgers to choose from, while Sysco or US Foods might have 10 to 20,” this retailer explained.

Most experts, however, concede that c-store operators just beginning in foodservice can be adequately serviced by c-store distributors. But as the foodservice program expands and volume grows, a more specialized foodservice supply chain will be required.

The majority of experts also agree that it is ideal to have one foodservice distributor so that a true partnership is created and both parties are working to grow the business. One retailer put it like this: “You are looking for a marriage, not dating many distributors.”

While multiple vendors allow c-stores to use several specialists, such as distributors for produce, meat or fish, etc., managing multiple vendors is painstaking.

“Having a single source will streamline the supply chain and administrative process, saving time and money,” said Mandeltort. “Having a single source can often get you better pricing by including a broad range of products as opposed to a series of small orders with multiple vendors.”

The other side of the same coin is that a single source can leave your entire program “at the mercy of a single delivery,” he acknowledged. “If they don’t show up, you’ve got nothing. Regardless of which direction retailers go, they should always have a secondary vendor just in case something goes wrong.”

The fewer the number of suppliers, the more efficient for the retailer, Minno concurred. “In a perfect world, this would be one supplier with consolidated cross-temperature distribution capability,” he said. “This supply chain would then equate to a very efficient, optimized, end-to-end distribution chain that is efficiently managed with consolidated deliveries.”

This supply chain would also be cost competitive, capable of meeting the retailer’s service and menu needs, and be in compliance with all food safety and employment standards such as the U.S. Department of Agriculture; Health, Safety, Security and Environment; and the Occupational Safety & Health Administration, to name a few, said Minno.

The biggest reason to go with one distributor, however, is to build a partnership, another How To Crew expert stressed. “Two distributors are too many unless you are looking at a dairy distributor or a produce vendor, but even that’s not necessary in my opinion,” he said. “One distributor is always best because you are trying to build a relationship and help each other. It’s about building trust and a partnership where you can grow together.”

CONTRACT NEGOTIATIONS

Once you have narrowed the field of distributors you are interested in partnering with, what are the most important terms to negotiate and include in the contract?

Of course, the obvious one is cost of product — and cost increases and decreases related to volume. Other important terms to consider include payment terms, delivery standards and schedule, performance rebates, electronic data reporting and interface, compliance standards at all facilities, new product additions and launch terms, promotional investment funds and other retailer support, according to Minno.

“Always have clear performance standards so you can easily correct issues,” one retailer recommended. “I also look for distribution costs to be very clear and have escalators so if your volume surpasses what was negotiated, you can reap a financial benefit retroactively.”

Another How To Crew member said the most important things to negotiate are markups and minimums. “Food usually has a very high markup compared to other items due to refrigeration and shorter shelf life,” he said. “The markup can vary as much as 20 percent, which can kill margins. Buy an item from a controlled distributor with a set agreement and your markup can be as low as 8 percent. Buy from a foodservice distributor with no agreement and it can be as high as 25 percent.”

High minimum orders from foodservice distributors can be very difficult for convenience store operators — especially small chains and independents — to meet, particularly on items that do not turn quickly and are difficult to get anywhere else. As a result, both independent c-stores and restaurants have little leverage with foodservice distributors due to their lower sales volume, Mandeltort noted.

He offered this illustrative example: “Average monthly c-store sales of prepared foods are around $19,000. If your food costs are 33 percent, we’re talking about purchasing $6,300 of food per month or $1,575 a week [from the foodservice distributor]. To put things into context, the average McDonald’s probably purchases between $12,000 and $15,000 a week.”

It will be hard to excite foodservice distributors with $1,500 in volume per week, Mandeltort said, adding that this is one reason c-store distributors can be a better option for c-store operators with smaller foodservice volume. This way, they “stand a better chance of leveraging purchases in other categories to get the best pricing and other terms,” he said.

The bottom line with any distributor that c-stores partner with is that price can’t be the only consideration. “The question really should be –– besides delivering what I want, when I want it and how I want it –– is how can you help me grow my business? To do so, a distributor has to have a strong understanding of both the c-store industry and the foodservice industry. There are not many distributors that can make that claim,” stated one How To Crew expert.

Finally, how often should retailers put their foodservice distributor/vendor contracts out to bid?

Most How To Crew members recommend every three to five years. Yet, as one retailer put it: “If you really have trust and transparency, it’s not necessary” to put contracts out to bid at all. “Certainly you have to have an open invoice audit agreement, but it still goes back to relationships and trust.”