The Manufacturer’s Key Strategic Issue: Whose Customer Is It?

Posted on August 3, 2017 by Paul Wietecha under Industry News

In the foodservice business, one of the great topics for debate between manufacturer and distributor is focused on the operator [or end user] and the simple yet complex question, “Whose customer is it?”

Over the years, many manufacturers have publicly answered diplomatically “Why, of course, we share that customer.” And privately responded aggressively, “Those operators are under contract with us!”.

Over the past few years, the emerging practice of distribution bids [whereby the distributor awards preferred category supplier status within regions or clusters of local houses] has challenged everyone to seriously re-visit that simple question. The bidding process has upped the ante and altered the debate. The new reality is that the stakes are bigger than ever before and the implications of winning and losing are substantial.

Like most of your peers, it’s likely you have recently found yourself hunched over a conference table, surrounded by your colleagues, engaging in a heated discussion over questions like these …

  • How much of the business on bids or contracts can we keep if we lose the bid and are “de-listed”?
  • How strong are our relationships with the operators … will they raise their hands or even notice if our product is no longer the product they receive?
  • If they do notice, will they do anything about it, or will they just accept the substitutes and replacements?

 

If the operator community accepts this power shift in the purchasing cycle, what began as a limited proof of concept will gain broad adoption as the standard approach for managing most categories. Emboldened by success, this practice may very well evolve into an all-the-time policy with the majority of the trade. Debating whether or not that day will ever arrive isn’t the challenge; the task at hand is to prepare now for that potential outcome in order to mitigate the risk of getting caught flat-footed if it does.

The urgency to begin now [actually, if you have not already begun, you are already late getting started] is underscored by the lead time to design, organize for, and begin executing a strategy that will position you for success in that environment.  You should make time to evaluate your relative competitive positioning and operator value proposition.

Defining the “push” [distributor-focused] and “pull” [operator-focused] strategies for your portfolio is easily one of the top 2 or 3 strategic challenges. For your long-term planning horizon of 3 to 5 years, there is a very good argument suggesting that it is the key strategic issue for most manufacturers.

doors - push and pull

Within the discussion of push vs. pull, many have opted to take the stance that they are going to aggressively support the needs of both the operators and distributors.  In other words, they simply elect to open the escape hatch and proclaim that they will straddle the fence.  One question to debate is whether or not you can afford to successfully execute both strategies.

Consider the following trends —
  • Into-stock pricing has reached dangerously high levels, partially due to artificial inflation to account for sheltered and earned income. Operators are under enormous pressure to control food costs in the face of traffic declines and are more aggressive than ever in auditing their inventory prices.
  • Operators have aggressively moved beyond mere deviated price and are now looking for guaranteed delivered price for each eligible distribution point to strip out costs due to supply chain and freight variability.
  • As a percentage of gross revenue, corporate shelter and earned income spending rates have reached unprecedented levels and the demands for more are increasing daily.
  • The practice of bidding out preferred supplier status is gaining popularity, yet bid winners are often disappointed when the volume falls short of their projected forecast or those wins are reversed as soon as a competitor offers even more dollars than the original winning bid.
  • Distributors are changing the rules of engagement on the settlement mechanism for their purchasing rebates, taking deductions for all deal offers. Eliminating the ability to settle via check or ACH also removes one of the more efficient mechanisms for recapturing the portion of those funds that was driven by rock-bottom bid and national account pricing where the net operating margin does not support both the operator discount and the distributor rebate rate. Essentially, with the majority of the settlement now conducted via deduction, the manufacturers have surrendered transactional leverage to reconcile ineligible volumes and erroneous claims.

 

…This leads to 2 of the key strategic questions of the era –
  1. Which of our categories should be supported as “push” businesses and which are more suited for a pull strategy?
  2. If our portfolio has at least one of each type, can we realistically execute two different strategies with a single face to the trade?

 

As you evaluate the strengths and weaknesses of your business to address those challenges, consider the various factors that will help determine the approach that gives you the best chance of success.

9 characteristics and capabilities that successful operator-focused [e.g., “pull”] organizations share:

 

operator focused

  1. They define and deliver a relevant value proposition:  Operator-focused organizations strive to craft their marketing messages around the value they offer the operator. Over the past 5-10 years, the high value areas for the operators themselves have been labor-saving and ease-of-preparation. Responding to that, manufacturers have pursued packaging and processing solutions that allow their products to be handled more effectively, prepared more easily and rapidly, and coupled with complimentary items to deliver a finished menu item.  Within the industry, many folks refer to these tactics as moving their portfolio ‘up the ready to use curve’ [imagining a two-axis chart with a pure-play ingredient in the lower left portion of the grid and ready-to-eat in the upper right quadrant]. There is a general belief that operators are drawn to products that require less skill from their labor pool to deliver – this strategy has been successful for many companies.
  2. Their product development resources focus on operator needs:  Best in class organizations understand that their product development strategy must fit with the operator’s needs. Responding to that, their product development efforts often include focus groups with operators and/or the creation of ‘advisory councils’ populated with restaurant-personnel who have experience in the target market segments the manufacturer covets [e.g., healthcare and B&I]. These formal and informal groups can be invaluable in evaluating the current product and its packaging design, offering tangible and relevant guidance for how to modify and improve the overall package to better address the needs of the marketplace.
  3. Sales resources are deployed against those segments offering the best fit:  These organizations research, analyze and then determine which of the operator segments make the most sense for their product offering and then focus against them aggressively. A component of successful segmentation involves market trends and menu analysis, with periodic workshops conducted by firms like Technomic to educate the organization on consumer trends and eating behavior within the targeted segments.
  4. National Accounts are a strategic pursuit across functions, not just sales:  Within the targeted segments, these companies focus their best selling and marketing resources against the largest operators to drive adoption, secure distribution availability and increase share. There is quite often a ‘top to top’ relationship with these key accounts, with the General Manager and her staff building relationships with the customer to identify opportunities beyond the product to drive value [e.g., consumer marketing, supply chain efficiency, packaging design, R&D, etc.].
  5. They have expertise in Database Marketing:  Once the segment[s] have been identified and the sale responsibility has been assigned, these organizations track their activities against a named list of accounts, making sure they are reaching out and ‘touching’ the customer frequently to build relationships and relevance. Effective deployment of the sales resource is critical, given that the typical distributor sales rep will reach each operator much more frequently. Your sales resources will need to deliver a value proposition that resonates and solves relevant issues for the operator.
  6. They reward success through public recognition:  These organizations celebrate ‘wins’ and major promotional events with the operators they service. Generally, a majority of the significant recognition within the organization is reserved for operator-based accomplishment [rather than distributor-driven volume]. Over time, members of the organization aspire to become involved with National Account initiatives, which are perceived as the growth engine for the company.
  7. They reward with financial incentives:  The Sales Incentive Plan is at least equally weighted towards operator-based and distributor-driven goals, often focused on new operators sold, total new units secured and/or key on-menu promotional events commitments. These organizations are energized and believe that new operator business will drive future success for both the company and their own individual careers.  Inclusion of operator-based sales activities in the formal SIP plan is a true indication of focus and dedication – only those organizations who are true believers and aggressively committed have taken the necessary steps to make this component a reality.
  8. They invest in community and continuity:  Successful operator-focused organizations invest in building continuity with their operator customers via menu development and training [for both the front and back of the house] focused on delivering their component of the menu more efficiently and consistently. Typically, these activities are designed to help the operators understand how to put the products to use within the framework of their menu.
  9. They invest in internal training:  Beyond standard selling skills training, these companies invest in training their staff in the areas of kitchen preparation [through organizations like Johnson & Wales], restaurant operations [through organizations such as the National Restaurant Association and IFMA] and menu trends [through relationships with research firms such as Technomic]. Their resources are well-versed on how their targeted customers function operationally, what their current challenges are and how they market their menu to consumers.  The selling proposition often begins with positioning how their products offer revenue-generating opportunities.

Clearly, a successful operator-focused strategy goes well beyond relying upon the premium your brands command. The implications are far-reaching and ultimately impact each functional area of the organization. If your organization has primarily relied upon relationships with your distributors, you may find that there is just not enough time left to consider a shift in that focus. After considering all the pros and cons, you may decide that an aggressive commitment to a concentrated “push” strategy is your best bet for future success.

If you believe that is the course of action for your organization, here are 5 core fundamentals that are common to organizations who are best in class for this approach:

 

push - distributor

  1. The majority of funds are offered as pure sheltered income:  Rather than allocating funds across a wide range of tactics, the lion’s share of the trade budget is executed as pure sheltered income, with percentage-of-revenue rate structures offered via off-invoice and deduction. There is little consideration for the return on investment for these funds … this strategy acknowledges that the power in the channel resides with the distributor.
  2. Into-stock pricing is set at a slight premium to traditional EDLP:  Rather than managing a wide range of price points across geographic boundaries, these organizations reduce administration and streamline their processes by selling most customers at a slight premium that only considers covering the shelter rate.
  3. They rarely offer operator-based discounts and bid prices:  These practices are not consistent with the strategy as they unnecessarily increase administrative costs and operating expenses. The goal of the organizational design is to run “lean” in recognition of [a] low brand value, [b] negligible relevance for the product point of difference vs. peer competitors and [c] poor success rates building meaningful operator relationships to insulate the business.
  4. The size of the organization is adjusted accordingly:  These organizations typically leverage brokers with a handful of Region Managers spread across the country. There may be 2 or 3 “specialists” who deal with very large operator chains but they are the exception.  Overall, organizations with a pure push strategy have 30-40% fewer resources deployed in the field to support the business.
  5. Administration of trade funds is simple and managed with few resources:  With most the funding settled via off-invoice and deduction, there is little demand for administrative resources to audit and process more complex claims such as operator deviated pricing. These organizations value simplicity and are aggressive in maintaining a low-cost support model.

Defining the right model for your organization is more important than ever before.  As the industry evolves and distributors become more aggressive in bidding out the slots in their warehouse, the organizations who have defined their operating model will be in the best position to “win”.  Failure to successfully navigate the paradigm shift could be fatal.

For more strategic expertise, download the eBook, How to Create a Trade Fund Strategy.