Keiter Stephens Advisors - KSA Foodservice Finance Report

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KSA Foodservice Distribution Update

July 2008

The Gross Profit Challenge

By Bill Beattie

Do you know who in your company is responsible for tracking your total gross profit?

Most owners/managers can identify who is responsible for managing and tracking revenue, operational expenses, inventory and so on. Very few, though, can identify the one single person who is responsible for the most important number on their income statement - total gross profit.

Accurate tracking of gross profit is a critical element for every foodservice distributor, especially in today’s economic environment. Keiter Stephens Advisors works with distributors to develop accurate gross profit tracking processes, because it strengthens their negotiation stance with vendors and with customers – improving profit margins on both sides. Moreover, when we advise distributors selling their business – we advise them that accurate gross profit tracking directly impacts their future company valuation. A key part of every buyer’s due diligence process is the analysis of gross profit and earned income streams.

Long ago, gross profit was a simple calculation in distribution:

Gross Profit = Selling Price – Landed Costs

Over the last several decades, the calculation has become increasingly complex, and, as we all know, gross profit dollars have become increasingly hard to earn. Distributors now need to calculate:

Gross Profit = (Selling Price – Landed Costs) + Earned Income
+ Deviated Cost Recoveries

Industry Consolidation

Foodservice distributors are caught in a vise, with increasing pressure from suppliers and customers squeezing already thin margins. To help distributors negotiate effectively with trading partners, KSA coaches them to develop thorough knowledge of every piece of the gross profit equation.

As the foodservice distribution industry has consolidated, national and large regional distributors have become more sophisticated about managing selling profit and earned income. The result has been a greater awareness among suppliers about distributor retention of earned income; many are cracking down on deductions and adjustments.

Vendor consolidation only intensifies the pressure. Just a few decades ago, Carnation, Nestlé, Stouffer’s, and Hot Pockets were separate companies. Today a distributor deals with the Nestlé food service division for all of these companies. This scenario has been repeated by all of the large packers as they try to leverage their scale and their reach. More concentration usually means more power in the negotiating of cost. Think back a few years when distributors could play McCain/Moore’s against Anchor.

Squeezing distributors from the other side of the vise are the customers. Both customer group purchasing organizations (GPOs) and multi-unit operators have gained market share, reaching out and grabbing more earned income, in the form of cost deviations, incentives, and other arrangements. This money often comes out of the distributor’s pocket through so-called “exceptions” to promotional allowance calculations.

The Income Tracking Challenge

Today, a successful distributor has to be aggressive at seeking every source of gross profit and earned income as well as tracking those sources. We see successful distributors building their own tracking systems or using programs like iTradeNetwork’s allowance tracking product, CARMA (which stands for contract and rebate management application) and Track Max to help them achieve their gross profit goals. Regardless of what system they use, distributors must:

Track vendor cost deviations, cash discounts, growth programs, buying group income and so on.
Report these items in a clean, verifiable manner to its vendors.
Be proactive to accomplish growth and other programs by planning ahead. Too often, we meet distributors who rely exclusively on manufacturers’ recap and reporting systems after the deal – you have to know your own status before the meeting.

In a few companies, we are starting to see the emergence of a Margin Manager position. Although the scope of the position varies by firm, some of the responsibilities for this position include documenting all special deals and arrangements with vendors, tracking and capturing all allowances and deviations, policing customer pricing contracts, auditing group allowances, and helping to maximize logistics income.

Utilizing an information-based approach to gross profit management helps distributors run their businesses better, and if they’re current or potential sellers, it makes their businesses more valuable to prospective buyers.

The Gross Profit Leadership Challenge

Developing gross profit accountability is a tough ramp-up in the first year, and it will take strong leadership to keep it moving forward during this period. Then it will become a normal part of your routine.

At the same time, you must be committed to aggressive negotiating with vendors to achieve the maximum earned income and the lowest cost-of-goods. Buyers have been trained over the years to negotiate for the best invoice cost. Distributor owners and executives now need to train buyers to expand the negotiating process to include: product cost, payment terms, promotional allowances, marketing support, flyer income, sampling programs and so on. Distributor principals would be well-served to become deeply involved in the process with your top ten or twenty vendors.

We strongly recommend that you take charge of this most important aspect of your business and empower your key people to act.

If I can be of assistance as you explore your options, please call me at 804-565-6018 or email me at bbeattie@ksadvisorsllc.com.

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