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KSA Foodservice Distribution Update

April 2008

Raising the Bar on Customer Profitability

By Bill Beattie

Foodservice distributors can be easily seduced into believing that all business is good business, and that every customer transaction will add to the bottom line. Our experience in helping dozens of distributors has taught us that many fail to properly analyze the actual costs of operation. We find that many transactions lead to losses, and that these losses are hidden behind the veil of the remaining business.

One goal of a healthy foodservice distributor is for each transaction to contribute dollars toward overhead and profit. In your heart you know all of this, but how do you measure customer profitability, and what can you do to make better sales decisions going forward?

In a recent consulting engagement, we were able to help a client develop the tools and the ability to begin realigning its customer base and improve its profitability as a result. We’ve developed an organized and relatively straightforward approach to pruning unprofitable accounts from your customer base. It allows you to maintain control over how much and how often you prune, and it permits you to counter balance the attrition rate with new more profitable customers.

Our client’s sales team refers to this assessment and pruning practice as its “400 - 80 Plan”. In short, they created a list of accounts whose orders regularly fell below their breakeven delivery amount (in this example, the $400 amount), or those whose deliveries produced fewer gross margin dollars than it took to deliver to them (in this case, the $80 amount). They developed the customer list by salesperson, and then gave each rep a specific period of time in which to raise their numbers. After this transition period, we recommended that they give the customers who could not adjust to the new minimums to their competitors.

Here are some typical near-term results from foodservice distributors who have implemented this approach:

29% increase in average drop size
27% improvement in gross profit dollars per drop
The bottom 7% of customers were eliminated – while overall sales increased
Total gross profit dollars improved 24%

Remember: with this approach, YOU have the flexibility of setting the bar at the outset as high or as low as you choose, then raise it over time. Here’s how the program works:

Determine the cost to deliver an order. Here's a fairly simple approach: arrive at a “fully loaded” cost by dividing the number of deliveries in a twelve-month period into the total operating expense for the same period. Be sure to use a true delivery count; using the number of invoices (rather than the actual number of deliveries) can inflate the delivery total. (For example: same customer, same day delivery but multiple invoices = 1 delivery.) This answer becomes the $400 part of the equation.
Figure the breakeven point on a delivery. Divide the cost per drop determined in the above step by your average gross margin percentage. This amount becomes the $80 part in the example used above.
Examine your customer base. For each customer, calculate the average revenue per delivery ($ Sales / # of Deliveries) and Gross Profit per Drop ($GP /y # of deliveries).
Compare each customer’s average delivery size and GP per drop to the breakeven points calculated in steps 1 and 2.
Create a list by sales representative for all of the customers that fall short of your break-even delivery size or your break-even GP per drop.
Distribute the list to sales representatives with a directive to improve the delivery size or GP per drop (over a specific time period). Have them start at the bottom of the list; it will make some of their decisions easier. Communicate, communicate, communicate. Sell your DSRs on the merits of this strategy so they can understand and explain the mission.
Once the time period has elapsed, recreate the analysis above for the targeted customers and consider resigning customers who have not met the calculated thresholds on delivery size of GP per drop.

Again, we believe the best relationship is where everyone wins – both foodservice distributors and operators – because healthy growth enhances long term relationships. Focusing on the relationships that have the greatest value for your company will keep your sales team focused, and drive margin improvement.

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

About Keiter Stephens Advisors
Keiter Stephens Advisors is the foodservice distribution finance and consulting subsidiary of Keiter, Stephens, Hurst, Gary & Shreaves. They have worked with over 50 privately-held distributors across the country: improving their bottom line performance, facilitating mergers and acquisitions, planning management succession, advising on incentive compensation plans, and coaching owners through their most difficult decisions. KSA finance and operations specialists have proven track records of creating value in the industry.

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