Food is one of the biggest expenses in a restaurant. A great way to rein in food costs is to negotiate a prime vendor agreement with your distributor. In exchange for your exclusive business, the distributor will give you a better deal. Here’s how to negotiate the best agreement possible.
Calculate Your Needs
It’s recommended that you deal with a single distributor for a large majority of your purchases (80-90%). When you promise your continued future business to a broadline distributor, they can offer you lower fixed margins on all your ingredients and supplies. Therefore a restaurant owner’s biggest bargaining chip is the amount of product he’s willing to buy. Before you approach a distributor, figure out the amount of food and other disposables your restaurant uses in a given year. The more product you need, the more sway you’ll have at the deal table.
Gather Information
Before you begin negotiations, you should do your research. Talk to other restaurant owners about which distributors they use. What are their prices like? How is their service? Let your sales rep know that you’re aware of their rates with other restaurants. This will help keep everyone honest.You should also read up on your local commodity market.
You cannot negotiate food prices without knowledge of what those prices should be. Don’t let yourself be taken advantage of.
Cast A Wide Net
Whether you’re picking a distributor for the first time or finding a new one, you should consider as many options as possible. And you should let your sales rep know that you’re considering the competition. For you to get the best price, he has to know you’re willing to walk away at any time.
Negotiate The Pricing Structure
There are two main ways distributors structure pricing. Cost-plus-fixed-price and cost-plus-percentage.
Cost plus fixed price – You pay the cost of the food plus a flat, static fee. For example, you negotiate to pay however much a case of asparagus costs plus a fee of $3.00 per case. When the asparagus is in season, the farms charge the distributors $50.00 per case and so you pay $53.00 (that’s a cost of $50.00 plus your flat $3.00 fee). During the off-season when the farms charge $80.00 a case, you pay $83.00—different cost, same fee. Prices do not increase in proportion to cost.
Cost plus percentage – You pay the cost of the food plus an additional percent. E.g., you negotiate a percentage of 5% for asparagus. During harvest time when farms charge $50.00 a case, you pay $52.50 (since 5% of fifty dollars is $2.50). During off-season when farms charge $80.00 a case, you pay $84.00 (since 5% of eighty is $4.00). Prices do increase in proportion to cost.
Generally, cost plus percentage should be avoided since the amount you pay the distributor will increase as food prices rise.
Food prices are always rising.
Specify Markup Percentage
Oftentimes smaller restaurants won’t be able to negotiate a cost-plus-fixed-price structure. That’s okay. There are ways to make the best out of cost plus percentage. One way is by specifying Markup Percentage over Margin Percentage.
Markup Percentage – Percentage is calculated from your perspective and based off the supplier’s price. A case of rice costs the distributor $100.00 and you add 20% to that. You pay $120.00.
Margin Percentage – Percentage is calculated from the distributor’s perspective and based off whatever price it takes to give the distributor a specific profit margin. In order to get a 20% profit margin on the $100.00 case of rice, the distributor would have to charge you $125. (20% of 125.00 is 100.00; charging you $120.00 would only give the distributor a 16.6% profit margin)
From the restaurateur’s perspective, markup percentage is always the better option.
Request A Market Basket Report
Distributors compete with each other to pay the least amount for a supplier’s products. Some distributors pay more than others. A low markup percentage is useless to you if your distributor pays more for its products than everyone else.
To adequately compare different distributors’ offers, you must request a market basket report from each candidate. A market basket report details twenty to thirty of your required products and offers theoretical prices. Using these reports, you can compare base prices across your options.
Allow Fewer Deliveries
Fewer shipments to your restaurant will save your distributor money. Instead of three shipments to your restaurant a week, store your ingredients more efficiently, pare the deliveries down to two, and haggle for a better rate.
Pay Frequently And On Time
Distributors get nervous when it comes to receiving payment. If you agree to shorter payment periods, you will alleviate their fears. This can help you negotiate a lower price.
Include A Termination Clause
It is recommended that every distributor contract have a no-fault termination clause that lasts for up to two months. This allows either party to back out of the deal for any reason within 60 days. This sort of clause allows you to renegotiate the terms of your contract after the two months are up. This usually leads to a better, renegotiated deal.
Bring Up Substitutions
The distributor prime agreement should address the substitution policy for out-of-stock products. Ask for notification prior to delivery and specify that you won’t accept lower-quality substitutions without a rebate or higher-cost products without a discount.
Get It In Writing
It’s critical that all the specifics of your deal are written out to ensure you’re on the same page. You’ll be glad you did this later on.
