FINANCIAL MANAGEMENT: Prime partner

 
May 19, 2005

In an industry where profit margins are pepperoni thin, it makes sense to find the best prices. But the constant phone calls, visits with multiple vendors and cross comparison required consume time that might be better spent on activities that grow the business and make money.

When restaurant industry consultant Jim Laube speaks at pizza operator gatherings, he asks the audience how many there have a prime vendor agreement (meaning the majority of their goods are purchased from one supplier). The hands raised never exceed 30 percent, he said, which

What's Important

It appears the majority of independent pizzeria operators don't have prime vendor agreements.

Operators who do use prime vendor agreements say the time and cost savings make a noticeable impact on their profits.

Even though prime vendor agreements can be godsends, they must be monitored carefully to ensure honesty.

tells him too many operators are focused on winning price battles rather than the net-profit war. While an operator might save a few pennies per pound on cheese by shopping around, nearly always his business suffers in lost productivity while he is on the phone rather than at the helm.

"I know people on prime vendor agreements who say they save eight to 10 hours a week because they're not on the phone all the time," said Laube, owner-operator of RestaurantOwner.com, in Sugar Land, Texas. "That's time that they spend building their business rather than saving 25 cents on a case of green beans."

A veteran operator himself, Laube said he understands why many don't saddle one horse with the bulk of their supplies needs. Specifically, many operators fear a prime vendor will take advantage of them if they're not always shopping for better prices. Handing a vendor 75 percent of their supplies needs is nearly akin to opening their wallets for a grab and dash.

But Laube believes the opposite situation is far more common.

"I have seen restaurants lower their food cost 5 to 10 percent overnight by going to a prime vendor agreement," he said. Those vendors, he added, can absorb a narrower margin "because they get more of your business and can make more gross profit on your account."

Quite simply, it's a give and get relationship, said SYSCO Corporation's Scott DuPuis. Operators give a greater share of their business to the vendor, and the vendor gives better prices to the operator. He experienced that relationship several years ago while operating a hotel and restaurant.

"When we took over, the chef had 27 vendors coming into the kitchen, and he spent 95 percent of his time comparing and price shopping products instead of developing new recipes," said DuPuis, senior manager of brand marketing and recognition programs for the Houston-based distributor. "But once I took over full control, I narrowed it down to five (vendors). ... I was bringing in my receiving clerk only twice a week then, because that's when we had deliveries coming in. That reduced my labor cost because I didn't have somebody standing at the receiving dock waiting for somebody to bring in four or five cases of this or that all week long."

The bidding process

Bidding out a prime vendor agreement is simpler than most might imagine, Laube said, though it takes a bit of homework and some preparation. Most markets have multiple distributors that could meet the lion's share of an operator's needs. That level of competition virtually ensures more predictable and affordable prices.

In the case of basic pizza operations (i.e., a limited menu carryout and delivery shop), Laube recommended operators provide vendors with about 20 of their most used and/or — in the case of cheese — most expensive items. That list should be sent to each potential vendor with a request to know what those items cost the vendor. The operator and vendor then negotiate an acceptable margin for the vendor that will remain constant as market prices rise or fall.

"What you want them to do is fix their margins, either in terms of a percentage of their costs, or a fixed-dollar amount per unit, such as 'cost plus $5 a case,'" said Laube.

Such a market-relative cost agreement is increasingly common in the case of cheese prices, said Ross Violi, managing director of Buonamici International, an independent distributor group in Richmond, Va. It makes sense, therefore, to consider it in the larger prime vendor sense.

"The last thing an operator should be doing is 'shopping' for cheese every week," he said. "It is vitally more important that the exact same cheese is coming in the door every week."

Extend that line of "quality first" thinking to include a broader range of products, said Laube, and the time committed to price watching starts to go down. "You have a lot less to think about if you know that, no matter what the markets do, the margin stays the same."

DuPuis' vendor-shopping strategy was a bit less scientific than Laube's, but equally effective. He'd take his invoices for the month, cut off the portion of the document that held the prices and tell a vendor to price out those items for him. Not only did it let him know whether his current

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prices were good, it also gave him quick insight into the character of both his current and prospective vendor. "If that vendor's prices were substantially less than the vendor I was buying from, I'd become concerned that: A. They were just giving me a special deal this month to get me in, or, B. whether my current vendor was really being honest."

Your cheatin' heart

Of the 70 percent of Laube's audiences who aren't in a prime vendor agreement, many of them say they won't do it because they don't trust their vendors. Others who had prime agreements said they didn't work out because they felt their vendors cheated them.

DuPuis said any long-term and equitable agreement also must be subject to reasonable checks and balances. In some cases, he's seen operators negotiate auditing privileges, where they can examine their vendors' invoices.

Sound tedious? It might not be if "you're buying enough supplies from them and you have some concerns," DuPuis said. When he checked his vendors' prices in the past, "nine out of 10 times, nobody could beat where I was buying from because of the amount I was saving from consolidating down to those five or six vendors. When I added in the time I spent before that ... it really made it worth it."

Lisa Rodriguez, director of merchandising with Denver-based Vistar Foodservice, said especially in the early going, operators need to watch the prime vendor's prices.

"It sometimes happens that a vendor could drop the costs to the floor for a while to open the door, and then they cycle them back up," she said. "We try to help our customers understand that pattern and to watch for it."

Violi said a prime vendor agreement needs at least a semi-annual review that provides a look into both parties' operations.

"The operator needs to understand the capabilities and limitations of the distributor, from a pricing and operational perspective, as much as the distributor needs to understand (the operator's) business," he said. "Once this understanding is established, both parties can feel better about getting back to the business they do best."

Every agreement, no matter how promising

start quoteI know people on prime vendor agreements who say they save eight to 10 hours a week because they're not on the phone all the time.end quote

-- Jim Laube,
Owner-operator of RestaurantOwner.com

on paper, Laube said, must be centered on each party's confidence in the other.

"If you can't see yourself trusting them, you shouldn't do a prime vendor with that client," Laube said. "The majority of these agreements I know of do work out, but it's not a panacea. People do have problems."

To protect themselves, Laube suggests operators make only non-contractual agreements with 30-day opt-out clauses, should something go wrong. Additionally, he suggests every agreement should detail service terms, such as ordering methods and frequency, delivery times and payment/credit terms.

Beyond supplies

Rodriguez said a truly great prime vendor will deliver much more than fair prices and great goods. By carrying such a large portion of an operator's business, that vendor gains keen insight into that business and should collect information that can help the customer prosper further. Violi agreed, saying that prime vendors that reach out to operators with value-added services work to deepen the customer relationship.

"Help in menu marketing, ideas and solutions should become a partnership between the two parties," he said. "If the distributor belongs to a marketing group these services may be readily available."

DuPuis said a prime vendor should be responsible for studying a customer's needs in order to: 1. find opportunities to sell them more goods; and 2. steer his business toward a brighter future. That means becoming an advisor as well as a friend, he said.

"If the customer isn't changing their menu every six months, updating it, changing prices, they're not really an effective restaurant owner," he said. "And if he's losing money, you will be too, at some point. A good company would be in there helping to advise on how to change that, how to add menu items and take others off. It's all about building that partnership."


Topics: Financial Management , Operations Management


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