Foodservice Redistribution and Operator Deviated Pricing

Imagine the following scenario:

$20.00  Case price you would sell to a local distributor for a truckload order

$15.00  Bid price you are offering that same distributor for a piece of local operator business

$ 5.00   Case rate you expect to pay that distributor for each case they sell that operator

$18.00  Case price to an authorized redistributor for a truckload order [net of a $2.00 redi allowance passed through off invoice]

$24.00  Price that same redistributor charges the local distributor who is servicing the bid

$ 9.00   Case rate that distributor deducts for each case sold to that bid account   

The incremental $4.00 has no revenue offset, it is sourced purely from your operating income.  This is a simple scenario that is playing out across the foodservice industry with increasing frequency as the need for supply chain efficiency and order optimization drives the popularity of redistribution.  The magic question in this scenario is how to best control the variance.  If your organization is struggling to process deviated price deductions against redi volume, the following are some pragmatic suggestions for defining and controlling the financial exposure to your business. 

Traditionally, debate in the industry focused on excluding operator contracted business and deviated price transactions from customers who purchase from redistributors along with denying the redistribution allowance on those cases.  These are not solutions to this particular challenge.  The purpose of the redistribution arrangement is to provide a cost-effective mechanism for distributors to purchase efficient quantities of products, regardless of the product or ultimate destination.  Relative to that goal, redistribution has been a huge success across the industry.  Additionally, excluding specific products and/or transactions is not a realistic approach.  Customers can no longer be classified as “Direct” or “Indirect” – the majority of them use both approaches simultaneously to manage inventory levels efficiently.  It is also no longer true that “big distributors buy direct and small distributors buy through redi”.  The largest distribution companies in the industry are also the largest consumers of redistribution services.

At the core of the issue in the example above, your redistributor is able to command a premium for your product beyond your established direct price.  If this is true for your business, you should begin with examining whether or not direct shipments are a realistic option for your customers.  If redistribution does not represent the majority of your volume shipped, it is more likely that the financial risk of the scenario above is somewhat limited.  While there may be specific scenarios where the redistributor successfully sells your product over and above your direct truckload price, it is likely that these transactions are [a] rare and [b] not sustainable as there is a low probability that the purchasing customer will continue to accept the premium when a lower cost alternative exists [eg, buying direct]. 

However, if your business tends to function mostly on LTL orders and your own internal supply chain does not offer competitive services for direct orders, then, you have essentially created a monopoly environment for your redistribution partners.  Absent of a viable alternative to purchasing your product direct, controlling the market price [and competitive value] of your product is going to be difficult.  

In either case, the following are three courses of action to consider that can limit your financial exposure:

1. Strike an agreement with your redistribution partner to control the outbound price:  Many organizations have been successful with this approach and currently avoid the financial risk of inflated deviated price deductions.  However, the arrangement is not likely to be as simple as “asking for it” [but you can try that first].  In return for limiting their revenue potential, you may need to structure your direct shipment processes in a way that drives LTL business to your redistributor partner.  In this arrangement, you could continue to offer direct transactions for FOB and truckload orders while all LTL delivered orders would be routed to your redi partner.  In return, the redi partner would agree to re-sell your product either at your truckload price or at a manageable fixed premium.  In this arrangement, both partners “win”.  The redistributor will receive a greater share of the velocity on your business [at least, all of the LTL orders].  You can control your exposure on deviated price deductions and also more effectively manage your competitive price gaps.   
    
2. Convert small and mid-sized contracts to allowances rather than deviated prices:  If you are not able to strike an agreement on the market price, you should then consider converting a wide range of your small and mid-sized operator contracts to an allowance or rebate rather than a deviated price.  Depending upon the depth of the discount you offer vis-à-vis your market prices, the redi premium could very well be a greater value than your operator discount.  It is also highly likely that the majority of these operator discounts are not reaching the operator in a meaningful way [eg, the ultimate price the operator pays is not affected as the pass through value is diverted as sheltered income by the distributor].  In that sense, the perceived “risk” of converting those agreements and losing business is actually pretty low.  It is more likely that there is a greater financial risk by continuing to offer deviated pricing that never actually affects the operator price. 
    
3. Revisit the value proposition and competitive gaps on your prices:  In the absence of pursuing either of the first two options, you should revisit your pricing schedule and competitive price gaps.  After all, if the redistributor is able to successfully charge a higher price than you would have directly, perhaps your direct prices are too low and do not accurately reflect the value of your product in the market.  Ultimately, if purchasing direct is a viable option, and your direct offer is competitively priced, the long-term financial risk of deviated pricing is limited at best.

Still looking for guidance?  You should reach out to Dave DeWalt and his team at Franklin Foodservice.  Dave is one of the leading experts in the business on redistribution and has consulted with many of the leading organizations in the industry.  You can read some of Dave’s thoughts on this and related issues from his content archive by following this link:  http://www.franklin-foodservice.com/fsmi_archives.cfm?cat=6244.  You should also take a few moments to subscribe to Dave’s Foodservice Marketing Insights Newsletter, which you can do through this link:  http://www.franklin-foodservice.com.

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