The marketing group and vendor executives expressed their bullishness about business next year and beyond, some even forecasting double-digit growth. However, they said, in a continuously challenging marketplace, where one restaurant closes for everyone that closes, distributorships must demonstrate their individuality in addressing operator needs.
Independent operators will continue to be confronted by chains but aggressive, smart and resourceful broadliners will prevail, they said. With expanding consolidation, some distributors will be facing positive opportunities but, on the other hand, less aggressive ones will be left out in the cold.
The industry experts that we contacted also indicated that foodservice vendors will favor partnering with distributors that can impact the market locally and, moreover, distributors will seek vendors that can support that effort.
Technology, not merely in the warehouse, but software that will spur the establishment of a true paperless supply chain, was given a thumbs up by the executives.
Finally, the supply chain is facing several unresolved regulatory issues that can potentially impact their bottom lines.
Following are assessments of the industry leaders that we contacted. Next week, we will present viewpoints from the industry's pinnacle in a Boardroom column by Mark Allen, president and ceo of the International Foodservice Distributors Association (IFDA), Falls Church, VA.
Steve Push, president, distributor development, Progressive Group Alliance, Richmond, VA:
2005 produced an unusual array of challenges for distributors. The normal issues such as protecting sales margin were joined by some factors that are even more difficult for the businesses to control Ã¢â‚¬â€œ namely rising interest costs, skyrocketing fuel costs, and the natural disasters that struck the Gulf Coast. Progressive Group Alliance seemed especially hard hit by these disasters, as we have 31 distributors that were in the path of either Katrina or Rita.
Despite the challenges that this year brings, Progressive Group Alliance distributors remain very upbeat about the New Year. Most distributors seem to be predicting sales growth of about 10% for their businesses. Certainly, some are a little less confident, and some are predicting more than 15%, but 10% seems to be a good consensus number.
Having said that, many factors are in play that can impact upon that number for independents, among them are:
Managing the high cost of fuel. A major concern to all independents. This doesn't look like it's going away, and many pundits say that the yearly average cost of fuel will, in fact, be higher in 2006 than 2005. Also of concern is the cost of energy in general. Natural gas is predicted to increase in price by 80% this winter, and in some areas, electricity is trending upward.
Managing health care costs. A continuing problem for the independents, though this problem has been with us for a while, and we seem to be getting a handle on it.
Maintaining sales margins. It remains difficult for the independents to increase margins in the current market environment. Margin shrink and the upward creep of operating costs are a tough challenge.
Hiring and retaining high quality staff. In many areas of the country, distributors are having great difficulty retaining high quality staff. While hiring high quality drivers remains a major problem in many markets, employing competent sales people and other skill sets are also issues.
Vendor support. Distributors remain concerned about vendors' support of local marketing programs. Vendors want to partner with distributors that can impact the market locally, and distributors want to work with vendors that can support that effort. In the future, an even more common alliance of objectives will be needed so that both parties win big in this regard.
Disaster concerns. The events of 9-11, hurricanes and other weather related events of the past couple of years have really heightened the concern for good disaster recovery planning. Distributors realize that you don't necessarily have to be near the coast to be impacted by natural disasters or their crippling effects. Obviously, they can't be prevented, but good planning can lead to a speedier recovery.
Independent distributors are a resilient bunch that is adept at finding ways in which to compete. The first half of this decade has been impacted by many major events:
The dot.com melt down.
The attacks of 2001, which crippled the airline industry, and put a major hit on the lodging industry for a while.
A stock market collapse coupled with a recession.
A major war.
Interest rates that have moved from generationally low levels to higher plateaus over the last two-plus years.
Major national disasters that damaged a region, including one of the most dynamic restaurant markets in the country, and disrupted many supply routes from coffee to sugar to almost everything made from petroleum. The relief effort to help those impacted most then removed hundreds, if not thousands of trucks from the foodservice supply lanes, further disrupting supply.
Skyrocketing energy costs
Despite all this, the foodservice industry has grown every year, and has seen robust growth the past couple of years. Along the way, the independent distributors have found ways to compete and grow, as well. The distributors are close to the operator-customer, have simple organizational structures, and are well positioned to respond to these changing market dynamics. The future remains bright for independent distributors who can continue to deliver a high level of customer satisfaction.
Doug Polk, president, Golbon, Boise, ID:
Foodservice sales in 2006 should continue to show single digit growth (5-7%) with part of that growth being inflation. Through the end of the calendar year 2005 we were finding about 4-5% growth among our members. That means some are strong at double digit and others are seeing a negative growth due to various industry issues.
Golbon continues to strive to provide opportunities for its distributors and suppliers in order to create a positive business environment for both parties. We are actively involved in assisting our members in planning, analyzing, and creating action plans to provide mutual growth with distributors and suppliers. As we constantly hear from our supplier partners and at various IFDA meetings, it is a major task to connect with second and third-tier distributors. Second-tier distributors, as defined by Technomics as being companies under $150 million, are extremely important in the supply chain. Golbon has created several marketing programs to connect the operator, distributor and supplier through the newly announced "Recipe for Success" program as a part of our current marketing package.
OPPORTUNITIES FOR THOSE WHO SEEK THEM Top line sales continue to be an emphasis with our distributors as they compete for their positions in the marketplace. We believe there will be continued consolidation within our industry, which will provide opportunities for those who wish to seek them out, but, for the less aggressive, it may mean the demise of selling opportunities.
Fuel increases continue to erode profits of distributors that have not answered the challenge in the way they market themselves to their customers. Providing educational opportunities for the independent distributor and the independent operator becomes more important for the group that wishes to have continued growth. It is the growth of this segment, within a shrinking base, that provides sales opportunities. Therefore, a lot of the sales increase that one experiences may come at the expense of another distributor.
For the intuitive distributor, it will be a challenging market, but one that provides a great up-side in opportunity. The group has the responsibility for providing the environment whereby the distributor has the greatest chance of success. That means the group must provide the tools necessary to allow the distributor to grow.
Foodservice is now approximately 50% of the market. The chains are growing at a faster rate than the independent operator. However, that does not mean there are no growth opportunities. But it does mean the independent distributor must be aggressive, smart, and properly apply his resources and understand his market.
The foodservice market is mature. Consequently, we must approach it as a mature market, not one that automatically produces double-digit growth. In order to generate profits in a mature market, a distributor must control expenses. Golbon is offering opportunities to the distributor to reduce expenses in the area of liability insurance, health insurance, and logistics. Financial benchmarking is also provided to allow the independent to measure himself against himself from prior periods as well as against his peers.
Golbon is excited about the future of the independent distributor and looks forward to being a partner with them in their growth in the market place.
Bob Sala, president, Distribution Market Advantage, Schaumburg, IL:
Transportation costs: We used to think of transportation costs being around 25-30% of the cost of service a few years ago. We now calculate transportation costs to be 50-60% of the cost of service. Fuel is only part of the equation here. While diesel prices have backed off in recent weeks, we are still around 50 cents (25%) higher than year ago. We remain concerned about the long term.
Most of our chain contracts have fuel surcharges and all new deals we write today have them. Other factors impacting the cost of transportation are DOT regulations impacting less time on the road, equipment requirements, higher driver compensation and workers comp costs, etc. To address these issues we are traveling fewer miles from the warehouse or are charging higher fees for routes that go out beyond 250 miles. This can be a challenge for chain operators who prefer that distributors service more chain units out of a single warehouse (more miles) because they gain better in bound costs. We can't continue to run the miles we have in the past without higher distribution fees.
Data visibility/transparency: Chain operators are requiring more data with which to mange their supply chain. The ability to track products for the manufacturer to the warehouse and on to the restaurant is a huge issue for most chain. The reasons driving this need are restaurant spec compliance, pricing accuracy, freight cost management and quality assurance. DMA has invested heavily to provide our customers with a web-based tool that aggregates spend, provides near-real time inventory levels at the warehouses, and validates pricing accuracy. Our On Line Report ManagerÃ‚Â® has been a real hit with our customers.
Pricing Accuracy: This is the biggest issue we have on our plate today. In the broadline world, pricing accuracy is tied to how well we execute pricing arrangements that chain operators strike with manufacturers. These "deviated billing" arrangements have grown dramatically in recent years and the data that we receive from chains and manufactures is often incomplete. Since the distributor is ultimately held responsible for pricing accuracy, we spend countless resources chasing info, issuing credits, etc.
We believe that pricing accuracy on these contracts is a shared responsibility among each of the three trading partners. To address the issue, we have taken a leadership position with our customers that all deals be recorded on a specific format. We have also enlisted our technology partner (Amphire Solutions) to develop a web based tool that requires each trading partner to initiate and/or approve chain contracts. The tool, called ReconcileÃ‚Â®, also hosts a repository for the deals and runs compliance reports. We are currently piloting with a chain customer, 3 distributors and 4 manufactures.
Industry Outlook. We are very bullish on 2006 and beyond. We believe that the chain operator segment will grow organically and with new concepts. Our primary target segment, casual theme chains, is particularly well-positioned for long term growth. We also believe that DMA has hit its stride and has become a significant force in serving chains. By combining the best regional broad liners in the business with superior technology and a great staff, we plan to grow revenue by 20% in each of the next three years.
Deb Winter, vice president, Federated Foodservice, Exter, NH:
Based on a poll of our members, we see business continuing to grow because of cultural and favorable economic dynamics.
Our distributorships have addressed issues like fuel with our operator-customers which has helped to offset the added cost. They have looked to their operations divisions to become more efficient and have held their category managers and category directors more accountable for SKU rationalization and stronger promotional activity for our operator-customers.
Technology has helped distributorships become more effective and offers our sales teams more time to actually sell to our customers and assist them with their true needs. Distributor-members and DSRs have been able to offer solutions and differentiate themselves from their competitors due to the fact that operator-customers rely on their expertise and, consequently, are loyal to their suppliers.
Federated's distributor-members expecting double-digit growth and are continually looking at ways to become more efficient to help on our return on investment.
Wally Gordon, president and coo, Slade Gorton & Co., Inc.:
From the seafood perspective, we look for four major influences on our distribution businesses.
First of all, continued government encroachment in our business for programs such as COOL, trade restrictions, bioterrorism and tracing requirements will all make non-productive demands on our staffs.
Second, label programs for retail and foodservice operators will accelerate putting pressure on smaller producers around the world to go beyond packing in their own labels.
Third, management should concentrate on supply chain management improvements to reduce inventory costs, shrinkage, and improved order fulfillment.
Finally, with increases in interest rates, we expect to see a more challenging business environment leading to more customers filing for bankruptcy. Consolidations will accelerate at the importer/specialty distributor segment of our supply chain.
Rod Van Wyngarden, assistant vice president, foodservice, Cargill Value Added Meats:
Cargill Value Added Meats as well as other Cargill Business Units will have a very good 2006 because we have focused on driving costs out of the system to continue to be competitive. In 2006 I can see category management as an opportunity for a win-win for our distributor customers and Cargill.
Do we really need 27 cooked pot roast products placed into a distributorship? Does anyone win in that situation? Product training, new valued-added products, risk management, technology and supply chain management are great examples of areas we are focusing on. For Cargill, it is important to get close to our customers, understand where they want to go and then help them achieve their plan. It is the rifle approach vs. the shotgun approach.
Some great results have come out of really getting to know each other, trust each other and then execute. A shining example is Sunny Fresh Foods and its second Malcolm Baldrige Award (1999 and 2005). It has a company-wide, focused approach on customers that shows in day-to-day operations.
Over all, 2006 will be a challenging year for foodservice distibution. We are near a saturated point where for every new restaurant that opens, another one will be closed. All of us cannot ride the foodservice growth train that we have enjoyed for many years. Inefficient manufacturers and distributors have been able to make money during this huge growth period. That is not going to be the case going forward. We need to change and adapt to this new environment. The winners will and the losers won't.
The industry will continue to splinter and relationships through out will be pressed and stressed. Some manufactures will target more regional chains and key anchor customers to pull product through. For the distributors, this creates more SKUs, less efficiency, more complexity, less loyalty and lower profits for the distributor. Not a pretty picture for distributors.
Some distributors continue to go down the path of getting into or expanding manufacturing. This puts them in direct competition with their vendors (the reverse of the Kraft/Alliant and Sara Lee/PYA Monarch initiatives). Some distributors continue to RFP their categories each year, making it difficult for some manufactures to grow business year over year.
Both of these examples are not a pretty picture for manufacturers. It seems that a lot of energy and resources are spent in areas that do not help everyone grow profitability. If we could start with a clean slate for foodservice, many would say we would not rebuild it the way it is. Today, instead of tearing down the foodservice model and building it to serve the current environment, we continue to add on to a structure that is not optimum and make the best of it.
It seems like some people are not as happy as they were five to 10 years ago. Where is the fun in foodservice? Life is too short not to have fun.
There are great opportunities to have a profitable and growing business in foodservice. I look forward to working with our customers and making 2006 a profitable and fun year for all. There is no other industry I would want to be in and look forward to what we can all accomplish over the next few years.
R. James Alexy, president and ceo, Network Services Co., Mount Prospect, IL:
Our national account business has grown at over 20% per year since 1993, and we expect it to grow by at least that much in 2006. We are forecasting substantial increases in business with existing customers, supplemented by growth from new accounts. During 2005, we experienced price increases for almost all of our major product categories, which drove revenues up substantially. Although we cannot expect similar increases in 2006, the carry-over pricing effect from 2005 will result in revenue increases in 2006 as well.
Fuel costs: We have fuel charges in place with many customers and are adding them to all new customer contracts. However, we are seeing increased resistance to fuel charges from customers. This will be an issue for distribution in 2006.
Operating expenses and other margin eroders: Operating costs have gone up, but these costs have been offset by substantial price increases. Overall margin dollars have improved, and since fixed costs have not risen at the rate of the increased price driven margins, overall profitability has improved modestly. We see continued pressure from customers to reduce their overall costs, since they themselves are being pressed. For example, the industrial segment is faced with offshore competition, competitive outsourcing and raw material cost increases. We have invested in capabilities that provide value-add services—such as electronic order processing and invoicing—in order to address specific customer needs. In most cases, these services have worked well for us. In some cases, where the customer remains very focused on item price, we have had to be selective with new account qualification and solicitation.
Supply chain management: For some items—such as plastic foodservice disposables—there have been shortages related to availability of resin and other oil-based raw material supplies. We do not expect to see these shortages in 2006. In fact, we see recovery with possible price deflation.
Category management: Jan-san and foodservice disposables remain key areas for Network. In addition, we view industrial packaging as a significant growth area in 2006. A major portion of the industrial packaging market is direct from the manufacturer, but we estimate that the distributor-to-customer market ranges from $25 billion to $30 billion. We will penetrate the industrial packaging segment through a combination of selective supplier partnering, and adding packaging members.
Technology: We are doing more and more business as a result of our technology capabilities. Network Services Co. currently processes 40% of its purchase orders electronically, with an expected rate of 70% in 2006. We continue to invest in IT to drive down costs with both customers and suppliers. Not only are more customers and suppliers transacting with us electronically, but we are increasing the number of transactions that we can handle electronically and are increasing the range of methods that customers and suppliers can use to do business with us. We believe this to be a competitive advantage.
Supplier return on investment: We believe that suppliers are actively refining their distribution/logistics capabilities. As a result, we assume they will maximize their logistics capabilities by aligning themselves with more efficient distribution partners, such as Network.
Globalization: We are beginning to see more requests from customers to respond to their needs on an international basis. As a result, during 2005 we forged two strategic alliances with European-based organizations similar to Network. During 2006 we intend to explore opportunities to jointly sell our value propositions to international customers and leverage our combined supplier base.
Environmental and hygiene considerations: During Network's 38 years of existence, we have never seen more focus on environmental and hygiene issues than in the present. In foodservice, it's HACCP. In healthcare, it's infections originating in hospitals and other healthcare facilities. But the biggest issue of all—which transcends market segments but has taken particular hold in the government, education and building service contractor markets—is "the Green movement." We believe this environmentally driven trend represents a significant opportunity in 2006—particularly as it relates to jan-san products.
Industry consolidation: There has been significant consolidation at the distributor level in the supply system market (jan-san, foodservice disposables and industrial packaging). This consolidation has worked to Network's advantage because distributors need to be part of an organization like Network to maintain their viability. Despite prior consolidation, we believe that the market remains fragmented, where the top seven competitors hold only 40% of the market. Therefore, we expect to see continued consolidation in 2006.