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10 things you need to know about your distributor

It's the distributor's job to serve you. Your job is to place the orders, receive the perfect products when they arrive and keep the distributor honest by squeezing the best prices out of them that you can manage. After all, you've got your own customers—and profits—to worry about. Let them worry about theirs. Your job is to place the orders, receive the perfect products when they arrive and keep the distributor honest by squeezing the best prices out of them that you can manage.

No wonder the relationship can get tricky.

But the more you know about distributors up front, the better your odds of building a good partnership with yours. We've rooted around beneath the sales reps, the (sometimes) shiny trucks, the pricing strategies and the cost structures of foodservice distributors to see how things really work—and what it all means to you.

1. Special orders can be a real pain

You've got to be a huge chain with massive buying power to expect any one distributor to carry everything you need. If they do stock all your items, that probably means they've gone out of their way to slot product just for you—which is pretty much a fantasy for most small- to mid-size operators. That's because even the largest distributor has a finite number of warehouse slots, the physical shelf space occupied by individual items—and maximizing profits generated through each slot almost always comes down to volume. Most distributors work on razor-thin margins, most under 2 percent. Special-order items are neither efficient nor profitable for them to handle; the cost has to be passed on.

If you routinely require special items, make sure to know your distributor's capacity to bring them in, what the order minimums are and what the timing is likely to be (don't expect shipment with your next regular delivery, for instance). Have a back-up source and keep sufficient inventory on hand. And ask about the return policy on special-order items. While your distributor may be able to score those pickled kumquats your hotshot new chef insists on having, you might need to meet a 10-case minimum. If customers hate the dish and it gets yanked from the menu, you could be left holding the kumquats—and the invoice that came with them.

The same holds true for specialty products. "I use a broadline distributor for my basic stuff and a bunch of specialists in key product categories," says Christian "Goose" Sorensen, chef-owner at Denver's Solera Restaurant & Wine Bar. "Sometimes they're not local. I've never met their rep, and everything's done over the phone. You gotta know in these situations who you're supposed to deal with when problems arise." see how things really work—and what it all means to you.

2. Your rep works on commission

To the vast majority of foodservice distributor sales representatives (DSRs), the size of their paycheck is based on some combination of total sales collected and percent of gross margin on products sold. The more they sell, the more they earn. Many DSRs receive additional financial incentives if they achieve certain company goals: increasing average order sizes or sales of a particular product, maybe upping sales of private-label items.

There's nothing wrong with that, of course, unless the sales rep's efforts to satisfy his company's goals don't jibe with your interests. Most reps realize that they only win when you win. "I want to work with reps who give me good information, present products and then let me make my own decisions," says Sorensen. "I don't want to be 'sold.' They take care of me, and I always take care of them—both with my business and referrals."

Stuart Sherman operates Phoenix-based Sherman Associates, a management firm that coordinates purchasing programs for hotels. "In correspondence to our clients, I have a slogan that appears at the bottom of every page," he says. "It reads, 'Never act on advice from anyone who earns a commission at your expense.' Yes, reps work on commission and they want to sell products that net them the highest return. There are lots of ways they can do that without it being too obvious. They may be out of the normal spec'd product for a week or two and sub out a high-priced alternative, which, of course, kicks up their commission. That's why we build into our contracts the provision that if a distributor has to sub something, they must do so at cost. The rep can send a sub when necessary, but we've removed any financial incentive for them to do so."

3. Substitutions are gonna happen

Speaking of substitutions, many times they're unavoidable. Faced with delayed or damaged shipments from manufacturers, for example, distributors may have to send a sub just to make sure you have product. Their intentions are good. But sometimes, substitutions aren't so good: a higher-priced item is sold and a lower-priced, off-brand item is delivered—with no change made on your invoice.

Thanks to sophisticated purchasing, sales and warehouse technology, it's rare today that a DSR doesn't know right away if an item you've ordered needs to be substituted. You can then make the call on the spot. Better yet, you can specify acceptable substitutions for key products ahead of time. If you're doing your own online ordering, you should have the information at your fingertips.

"You can't be too picky about substitutions if you haven't done your homework and selected acceptable substitutions ahead of time," says Bob Phillips, president of California Tortilla Group, Inc., a budding 15-unit QSR chain based in Rockville, Maryland. "You also have to work with your distributor to determine appropriate inventory levels. And while technology can alert you earlier to outs and shortages, it can also indirectly cause shorts and outs that result in substitutions. Distributors are becoming more efficient with just-in-time ordering to maximize their inventory turns. The problem with that is that they don't have control of the whole process and sometimes get shorted themselves by manufacturers, leaving them out of stock. Our buyer works with their buyers to try to ensure that acceptable inventories will be maintained on key products."

At San Francisco Oven, a Columbus, Ohio-based casual-dining group with 13 units open and nine more scheduled to go online in the first half of 2006, specifying acceptable substitutions is part of the initial relationship-building strategy with distributors. "When we open a new store, we review our product list with the rep and make sure that our needs can be met," says Eddie Cerino, co-founder and executive chef. "In some cases, like our clam chowder, we let them know that if they're out, we're out. We haven't found an acceptable substitution, so we'd rather tell our own customers we're out than serve something different. There's real incentive for them not to short us on that particular product."

4. The rep isn't just a solo act 

For most independents and small restaurant groups, the DSR is the sole link to the distributor. Many reps like it that way, as they're protective of their territories and accounts. But letting that go too far can work against you. Should things go south, you may need to separate the DSR from the company—and from your business.

"I'm on my fifth rep with one of my distributors," Sorensen says. "The rep is the primary liaison with the company—as servers are with guests—and a lot of times people will just ditch the distributor when things go wrong just like they'll ditch the restaurant if they get a bad server. Sometimes, though, it's the individual rep and not the company that's the problem. If the DSR isn't working for you, ask for a new one who may be a better fit."

Sorensen suggests it's a good idea to get to know several layers of representation at the distributor. "Go out there, visit their place and introduce yourself to the accounting department, to the dock workers, to buyers, inside sales reps and managers. You need more personal connections than just the DSR."

5. Prices not watched can creep up 

When it comes to monitoring pricing there's no substitute for vigilance. Chains typically ink deals for contract pricing with very little wiggle room for the distributor, but operators at the other end of the food chain rarely have that luxury. If you don't keep an eye on what you're being charged for items you regularly buy, you may experience "price creep." Sometimes there's a valid reason for it, such as seasonality or pack-size issues, other times it's opportunistic.

"You have to regularly check prices on your invoices," Sorensen says. "If I see things creeping upwards, I'll highlight them and go back to the distributor for an explanation. A lot of small operators, myself included, have trouble finding time to do that—we don't have purchasing managers. But it's really important and can be eye-opening. If the salmon I agreed to buy at $4.99 a pound a month ago is now showing up on my invoice at $6 a pound, I've just upped my plate cost by 75 cents."

Sorensen adds that it's often in nonfood categories, such as paper goods and cleaning supplies, that prices creep the most. "Chefs are always trying to watch their food cost and do a better job of monitoring their costs on proteins and produce, for instance, but you can really get burned if you don't watch the nonfood stuff, as well."

Over the past 18 months, California Tortilla has gone from managing its own purchasing to a coop of operators representing $300 million in annual purchases. A third-party consultant now manages the group's buying programs. "We started franchising about two years ago, and shortly thereafter joined the coop," Phillips says. "We did it largely to take ourselves out of traditional cost-plus purchasing scenarios. We felt that we never really knew what the true 'cost' in that equation was. If the distributor didn't buy well, for example, we paid the price. If he got deals from the manufacturer, we didn't know if they were passed on to reflect the true costs of the products. There was too much uncertainty. Now, we control the landed costs to the distributor through direct relationships with manufacturers on key commodities. They add their margin onto that."

San Francisco Oven locks in prices for 30 days, and Sherman's hotel group allows for negotiated price increases when the distributor re-buys.

6. When they save money, you should too

Foodservice distributors are sharply focused on reducing operating and sales costs. If you can be flexible about how your account gets serviced, you may be able to negotiate reduced costs of your own. Can you take larger, more infrequent deliveries? Do you really need to meet with your DSR three times a week? Can you eliminate emergency hot-shot deliveries? Could you order online instead of having your rep submit orders for you? Can you take deliveries during off-peak times? By working with a distributor to reduce the costs associated with servicing your account, you can better control some of your own costs.

"We may contract for two regular dry grocery deliveries and two hot-shots per week at a particular margin level," says Sherman. "If the operator exceeds that, we add half-point increments to the distributor's margin. By the same token, if they end up not using the contracted service level, we'll reduce the margin." Steps are also taken to head off deception opportunities. "We might agree to a $55 charge per special delivery. We ask for those things to be billed on a separate invoice so the chef can't bury it in food cost. If the GM finds an extra $200 charged for special deliveries in a month, he can trace the issue back to the chefs, who need to improve their inventory management to stay within the service guidelines. They can see immediately the bottom-line implications of demanding frequent special deliveries." Don't expect distributors to do something for nothing, Sherman adds. "They can't service people to death. They have to make an acceptable margin. If you're a high-maintenance account, you need to expect to pay for the extra level of service."

Since joining a purchasing coop, Phillips says California Tortilla has virtually eliminated the service equation and gained chain status with distributors. "If you deal with a good broadliner, you'll get great service; the DSR will come every week," he says. "But we no longer require that level of service. We do all of our ordering online and ask for much less sales support. The distributor gains efficiencies and some of those savings are passed onto us."

At San Francisco Oven, cost of service is a strategy-changing issue. The biggest mistake the chain made when embarking on its ambitious national expansion plans, Cerino says, was to open one-store markets. "When you're planning growth, you have to factor in distribution. We didn't, and if we had it to do over we'd go for regional vs. national growth. Single-store markets are distribution nightmares—for them and us. We're at their mercy, whereas in markets where we have two or three stores, we have leverage. It's largely because of the number of proprietary items we require. Single-store markets just don't have the volume on those items that the distributors need, and it doesn't matter if it's Sysco or the local independent."

7. Good customers get good service

In an effort to control their costs and maximize efficiency, many distributors use customer classification systems, a common one being A, B and C. Service packages and options are set accordingly, with "A" customers getting the best service. "C" customers are often the "cherry pickers." They show little loyalty, jump around to whoever has the lowest price and spread their business around to "keep their distributors honest." They can also be the most demanding in terms of emergency service, which is disruptive and unprofitable for distributors to handle.

If you expect the best pricing and service, give a distributor more of your business. There can be advantages to going from C-account status to B, or from B to A. If you can, find out what system your distributor uses to classify its customers, and what benefits could be yours by improving your status. Once you know the parameters—which likely include average order size, relative cost of service and gross profit margin—you may not want to make the required changes, but having the information can't hurt.

8. They want you to love house brands

Many distributors are working hard to boost private-label product sales because they make more money on those products. But what's good for them may not always be good for you—even if the price is right. Before buying into assurances that distributor-label tomato sauce is just as good as, if not better than, the national brand you've been buying, make sure you're comfortable with the quality, performance and yield. When in doubt, ask for samples and do product cuttings.

Also realize that many so-called house brands today are nicely marketed and packaged to have almost the same cache as national or regional brand products. Typically, they're available in "value" to "premium" quality levels, and the same national brand manufacturers with which you're familiar often pack them. They may be individual distributor-label items, or marketed under the private-label programs of a distributor's buying group. "We're not against distributor-label products," Phillips says. "We won't take them on blindly, but if there's a comparable item to our spec, we'll look at it. It can be good for us as well as for the distributor."

9. Specials aren't always so special 

In the interest of moving excess or aging inventory and opening up warehouse slots, distributors sometimes put products on special price promotion. While they can be great deals, sometimes they're too good to be true. Just be sure to dig deeper than the price tag to make sure that quality and shelf life are what you expect, particularly with perishable products. And before buying, ask what the return policy is so you're not stuck with products that don't meet your expectations.

10. Their deals can affect yours

Some distributors survive thanks in large part to "sheltered income," money manufacturers pay them to carry and promote their products. Manufacturers, who started the practice years ago, cry foul when distributors demand payment. Distributors say they need the money to bring the manufacturers' products to market. Many distributors use the money for its intended use. Others, manufacturers complain, funnel it to their bottom line. The primary implications for operators come down to product selection and price. Distributors with large shelter programs from particular manufacturers will focus their sales efforts heavily on those companies' products. Are those the products you want? Maybe, maybe not.

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