Purchasing Power Best Approaches to Collaborating with Your Suppliers – Revisited

Izzy Kharasch is president of Hospitality Works, a Chicago-based foodservice consulting company. And he thinks that purchasing from more than two broad-line distributors is too many. “Typically, an owner thinks ‘the more the better because I can check everybody’s prices.’ When they do that, they go back and forth and spend hours saving pennies,” he says.

Kharasch advises his clients to pick two of the broad-line distributors. You are likely familiar with the big-name players, including Ben E. Keith, Performance Food Group, Sysco, and US Foods. As Kharasch sees it, operators can compare pricing between their two primary suppliers to ensure they get the best deal.

Learning Objectives:

By the time you've finished reading this article, you should be able to:

• Explain why you should not work with more or less than two broad-line distributors at any time.

• Provide examples when “cherry-picking” supports your concept and story.

• Describe the benefits and caveats of purchasing from retail and wholesale distributors.

When they work with more than two suppliers, the cost to operators can exceed any benefits of comparative shopping. Time is money. There is the time spent checking the prices of multiple suppliers and the time spent placing orders with each of them. And there is the time spent receiving and inspecting the orders as they come in.

“When you have four distributors, you have the possibility of four deliveries in a single day and that takes labor away from your facility. Now you are calling someone four times a day to take in deliveries. With wages hitting $20 an hour on average that’s a big number for someone to put away groceries,” says Kharasch.

Kharasch will typically place bids with the top two distributors. “Eventually, we want to get to one broad-line distributor that sells 80 percent or more of its total products including food, soda, coffee, and grocery items.”

When choosing a distributor, many operators focus on the lowest price. While Kharasch believes that pricing is important, he believes operators should prioritize reliability. “I might be willing to pay a little more to guarantee products show up when I need them,” says Kharasch. “It doesn’t matter if you are going to save me two dollars a pound on steaks if the truck shows up two hours late or my steaks aren’t on the truck.”

You’re not on the property. You’re not watching the floor. You’re not taking care of problems. Yes, you’re saving $500, but you could be losing $100,000 in sales.” Kharash asks, “So, where are the savings?

Ordering items from multiple specialty vendors that we perceive as offering the best quality or prices might seem smart. “Cherry picking” can be false economics. Kharasch describes a successful operator who spent significant time at a wholesale cash-and-carry foodservice supplier to avoid paying a bit extra to the distributors who brought the supplier to his restaurant. “He spends six to seven hours a week there, saving maybe $500 a week,” says Kharasch.

While the operator was pleased with the savings, Kharasch feels the time might be better spent overseeing operations. Kharasch found the operator’s Yelp reviews suffered when he was shopping at the wholesaler. Specifically, the worst reviews (three stars or less) were posted by guests who visited between 7 and 11 a.m. when he was off-premises shopping.

“You’re not on the property. You’re not watching the floor. You’re not taking care of problems. Yes, you’re saving $500, but you could be losing $100,000 in sales.” Kharasch asks, “So, where are the savings?”

What Is Your Story?

You might use certain suppliers, such as a local farm for their produce. Or perhaps you source fresh-baked bread from a local artisan bakery. In that case, cherry-picking supports your concept and story.

Colin Smith, chef-owner of Smith and River in Reno, estimates that he works with 25 suppliers, including many who add a local touch. “My preference is to stay with local suppliers if possible and feasible,” Smith says.

Smith says he works with three purveyors for seafood, beef, and produce purchases. He says having relationships with multiple suppliers helps him balance quality and price. Limiting the number to three suppliers helps him save time checking prices. That is not to say he is not vigilant of his spending. “We also spot-check and bid on occasion,” he says, explaining, “For example, if I need 1,000 lbs. of tri-tip, I can contact my distributors who will provide back their best pricing.”

Smith puts a priority on quality and relationship-building when choosing new suppliers. He pays attention to the quality of the product and the service he and his team receive from the supplier. “A designated sales rep is valuable to me. I find value if that salesperson does a good job keeping me in the loop about new products and items that might be interesting,” Smith says.

Since local sourcing is a distinctive element in his business, Smith tries to work with suppliers that align with his concept and story whenever possible. “I want to make sure the suppliers we work with have garnered strong local support,” Smith says.

Smith echoes Karasch’s sentiments about avoiding false economics, explaining that he will not change suppliers because another vendor offers a slightly better deal. “I value service over price,” Smith says.

Likewise, Kharasch is not categorically against cherry-picking. He supports Smith’s practice of working with small specialty suppliers to create differentiation that appeals to guests. Being seen as a farm-to-table restaurant and ordering from local farms enhances the perceived value of the restaurant in ways guests can appreciate. Running all over town or spending hours cross-checking prices before placing an order does not create value for the guest.

That said, Kharasch cautions operators to manage their time. He says cherry-picking works best if the restaurant has a bookkeeper who happens to have extra time to manage the various accounts. “If the bookkeeper’s time is not filled with paying bills, it makes sense to have them get prices every week, put them in a spreadsheet, and look at them,” he says. Otherwise, he cautions, cherry-picking might not deliver added value.

Retail – and Wholesale – Therapy

Independent operators are also looking to consumer-facing warehouse stores, which include Costco and Sam’s Club, to control food costs. “The warehouse stores have great pricing on some of the items we use. We typically make a run approximately once a month,” Smith says. These stores may have cheaper pricing on restaurant staples like flour, sugar, or oil.

Kharasch acknowledges the ease of buying from Costco or Sam’s Club. Operators can set up a business account and receive a tax exemption. They can visit the warehouse store and shop in-person or order online for delivery, which is often same-day.

“Very often a Costco or Sam’s Club can be very competitive [in terms of both price and quality] with Sysco and US Foods, on certain products,” Kharasch says. A restaurant that wants the best quality might purchase choice beef at their local Costco or Sam’s Club.

Smith echoes Karasch’s sentiments about avoiding false economics, explaining that he will not change suppliers because another vendor offers a slightly better deal. “I value service over price,” Smith says.

Restaurant Depot describes its business as “supplying independent food businesses with quality products from large cash and carry warehouse stores since 1990.” Indeed, it is a key player in the restaurant supply chain. “It’s a great source as a fill-in,” says Kharasch, explaining that it is often easier and cheaper for an operator to run out to Restaurant Depot and grab an item left off the order than to arrange a special delivery.

“Where Restaurant Depot really does well is with the small independent operator who is too small to get a delivery or the delivery is hugely expensive,” Kharasch says. Moreover, not all restaurant operators can afford to work with the broadline distributors. Kharasch estimates that most independent restaurants are doing less than a million in business, which “doesn’t give them a lot of wiggle room for pricing. Delivery would be too costly,” he says. For those operators, Kharasch says, “Restaurant Depot carries a majority of what they need, and they can go there anytime from 7 a.m. to 6 p.m. and pick up their items.”

Bargaining Leverage

The best contract terms depend on variables like volume and economies of scale. In addition to Smith and River, Smith operates Roundabout Catering, a food truck and catering business that provides diversity and buying power.

Smith has a different account for every unit at each distributor. Distributors track overall spending by unit and by volume. His increased volume helps him negotiate price margins in ways that might be unavailable for smaller operators. “I have large buying power, so I look for my products to come in at six to eight percent over a salesperson’s cost,” he says.

Many operators might not have as much bargaining power as Smith, but they have more leverage than they might realize, says Kharasch, who recommends operators negotiate with distributors. A starting place is discussing the percentage of business you anticipate doing with a particular vendor. “A typical distributor wants you to buy 90 percent of your product from them,” he explains. “I tell my clients to start at 80 percent because maybe you need to buy your fish from somewhere else or buy your product from local farmers during the summer.”

A new operator might wonder how the distributor would know whether they were shopping within their agreed-upon percentage. Generally, it is a matter of trust, says Kharasch, but distributors track purchasing from each account. If order numbers go down from historical figures, distributors take note and investigate the reason.

In addition to lowering the percentage of goods ordered, Kharasch also recommends operators try to negotiate the distributors’ percentage. If a distributor wants to charge 14 percent over the cost of retail, an operator might try to get this down to 12 or 13 percent. This might not seem like a big savings off the top, but it adds up. “Some of my restaurants spend $1 million or more on distributors. Knocking off one percent doesn’t sound like a lot but that’s $10,000 and now you have $10,000 more than you had yesterday,” Kharasch says.

Twice a year, Kharasch will audit the supplier’s invoices to check that the percentages in the agreement are being honored. He will have someone go through and do the math on the distributor’s invoices versus what they paid.

Kharasch is noticing more supplier consolidation, which reduces independent operators’ bargaining power. As a remedy, Kharasch encourages clients to search locally for suppliers of specialty items that might be cheaper than the distributors.

For example, if a restaurant is not going to make desserts in-house, they will purchase frozen desserts through a distributor. “All these companies have the same desserts,” Kharasch says. Not only can it be cheaper for the restaurant to look for a local pastry company willing to deliver fresh-baked pies or cakes, but it also provides the guests with something they cannot get at other restaurants around town. It can be a win-win when the restaurant highlights these suppliers on their menu, drawing the connection to other local businesses among consumers who have adopted the “shop local” mindset.

Among Kharasch’s advice for independent operators who want to save money is not to spend money on things that do not accomplish your objectives or serve your business. He recently advised a client who wanted to buy compostable containers for to-go items. Compostable containers cost more than other containers.

“The difference could be almost $1 per unit,” he said. “When you’re talking about using 30,000 units per year that’s a lot of money.” They must be recycled in a specialized facility, which was unavailable in the operator’s community. This restaurant operator would spend a premium on containers that would end up in a landfill dump. Compostable containers sent to landfill dumps will eventually break down because they are biodegradable, unlike plastic, which never breaks down. However, a compostable container that breaks down in a landfill does not become compost. It does not fulfill its job of enriching the soil.

Kharasch praises his client’s environmental conscience but believes it was not the best practice. Instead, he recommended using recyclable to-go containers. Not only do these cost less than the compostable ones, but they are recyclable if properly cleaned and placed in recycling bins. Do your homework before committing to expenses.

Quality is Job #1

Despite your purveyor’s best efforts, orders can arrive at your door in less-than-optimal condition. All deliveries should be inspected for quality before being accepted. Employees should look over the order for accuracy and completeness. Is anything missing? Did everything arrive in the quantities that were ordered? Finally, is the quality what it should be? Are there any discrepancies or issues to note?

These questions may be answered by checking expiration dates and counting and weighing items to ensure a correct quantity. Smell fish and inspect produce to ensure freshness.

Standardize procedures so that deliveries are evaluated the same way regardless of who is scheduled to work that day. In addition, detailed record-keeping is essential. Employees can note what is received, describe any errors or omissions, and keep track of variables like quality or price. Keeping records provides an operator with evidence if disagreements arise.

As a chef, Smith has had to replace suppliers. For him, the decision usually comes down to the quality of service, which is his priority “If the client service is spotty, it makes it very challenging to work together. I’ve had to part ways because of this key factor,” Smith says.

Kharasch shares an example of a conflict with a distributor that he resolved. The client’s restaurant had high standards for meat and seafood. “After a few months, the quality of the meat was no longer meeting our standards,” he says.

While a one-time incident could be brushed off, more and more of the deliveries were not meeting the standard they agreed to in the contract. Kharasch did not think the sales representative assigned to them was keeping promises made when it came to quality. He set a meeting with the distributor, which happened to fall on their delivery day.

“We brought the delivery we received that day. We went through the meat and none met the specifications. We said all this meat is out of specification. You aren’t doing the job. We are giving you 60 days' notice because you aren’t delivering the product you promised,” Kharasch says.

The distributor got the message. Their sales rep was pulled from the account. The quality problem was resolved very quickly, and the new salesperson assigned to the account is a better fit.

Kharasch had signed a two-year contract with the distributor and he was prepared to break it over poor quality. “There is always an out to these contracts, one of the outs is quality control,” he says. “If they don’t meet it, it’s time to give them notice.”