Operators buy into new tactics for purchasing

Operators buy into new tactics for purchasing

When Aftan Romanczak buys shrimp from overseas for the Steak-Out [3] dinner delivery chain, the executive has the product shipped to its longtime beef supplier, which is capable of moving the shrimp to his 70 branches.

Such “piggybacking” helps Romanczak, who is Norcross, Ga.-based Steak-Out’s director of research, development and purchasing, keep food costs down, and it helps his meat packer keep its trucks full, maximizing that company’s ability to move product across the country efficiently.

Steak-Out pays the beef supplier a storage fee for receiving the shrimp, but the overall costs are less than what Romanczak would pay through a separate distributor.

Such tactics are not unusual, but at a time when restaurant chains are being squeezed at every turn by rising commodity and energy costs, purchasing directors say they need to get creative and find more such optimization opportunities.

Operators are weighing the pros and cons of both consolidating and breaking up deliveries, playing hard ball in negotiating long-term contracts, and rethinking the value of proprietary products.

For Romanczak, it’s a time when the concept of “partnerships” between buyers and vendors is being tested.

“When times are tough, you really find out who your partners are and who your friends are,” Romanczak said.

The piggybacking tactic works for Steak-Out because Romanczak buys all its beef products from the same source, a supplier that has worked hard to keep beef prices down over the past five years to maintain that relationship, despite spiking average meat prices.

Others, however, say the current climate is forcing them to become more demanding in their interactions with vendors that are raising prices.

Marilyn Biscotti, executive director of purchasing and product development for 238-unit Johnny Rockets [4], based in Lake Forest, Calif., said: “We’re asking them, ‘What are you doing for me?’ I know you’re going to say [higher prices are because of] fuel, corn [or] whatever, but I want to see that documented.”

Johnny Rockets is leveraging its size and growth expectations to seek more favorable terms in the face of steep hikes by some vendors, Biscotti said.

One supplier of a particular commodity informed her that its price would rise by 12 percent, “but I can’t take that hit,” she said. Reminding the vendor that Johnny Rockets has projected it will grow to 759 locations in the next four and a half years, Biscotti said she responded, “We’d hate to lose you as a vendor,” and countered that she’d accept a 6-percent increase this year and another 6-percent hike next year.

Though such hard-nosed counteroffers can surprise vendors who insist they have little wiggle room for inflation deferrals, some suppliers are making concessions to operators’ demands for greater price protection.

Unlike in the past, Biscotti said, some of her long-term buying contracts now contain provisions that let Johnny Rockets obtain a midterm price reduction if the vendor’s cost goes down. That would give the chain a downside break even as it guarantees an upside ceiling at a time when some commodities may be peaking and poised for price declines.

Through firm negotiations, revised sourcing and new purchasing deals for key products—like the contract Biscotti negotiated for the chain’s 15-percent-butterfat premium ice cream—she indicated that Johnny Rockets last year was able to keep food cost inflation in the range of 2 percent to 3 percent, compared with the national average 7.6-percent wholesale food spike for 2007.

Andy Howard, executive vice president of marketing, purchasing, research and development for the 360-unit Wingstop [5] chain, has been negotiating floor and ceiling limits on poultry contracts, in which prices remain within a certain range.

“It doesn’t lock you in, but it does tighten you up,” he said, which gives a better idea of what food costs will be. “You hear all these horror stories about where this market could go.”

Howard also has tried to use Richardson, Texas-based Wingstop’s volume-buying leverage to negotiate pricing on secondary items. Recently, he discovered that the vendor of the quick-service chain’s plastic-foam food containers also offers plastic cups. By shifting his cup purchases to that vendor, Wingstop was able to get a better rate on both items.

For widespread chains like Wingstop, however, consolidation isn’t always the best choice. One of its vendors based in the Southeast, for example, was delivering products to restaurants from Florida to Denver, Howard said.

“Once fuel prices went crazy, their costs for traveling so far became a major challenge,” he said.

So Howard switched to smaller, regional distributors that delivered within 100 to 150 miles around their home base. Those moves not only reduced fuel surcharges, but improved service because trucks were less likely to be delayed by breakdowns or weather factors.

For smaller operators, however, consolidation is the year’s buzzword, said procurement consultant Lee Plotkin of L.P. Enterprises, based in Richardson, Texas.

Plotkin tends to work for small to midsize chains that don’t have their own in-house purchasing staff. To get his clients better pricing, he works to consolidate their collective buying power in certain categories. While his mostly chef-driven client chains typically are unwilling to share one broadline supplier, they often are willing to combine their buying power for categories like meat or paper products, he explained.

“It’s about finding ways to add more items to the truck,” he said.

Smaller operators also may find ways to take advantage of volume buying done by a large supplier’s other restaurant clients.

Plotkin said many broadline suppliers have leverage-deal clients “that you might not know about unless you really push them for a better price,” he said. “If that supplier is already bringing in so many thousands of pounds of this product for someone else, [the smaller operator might be able to ask], ‘Can I switch to that product and get the same price?’”

When prices climb the way they have, the temptation is to lower standards on quality. However, Plotkin said most of his clients have refused to take that road.

“Restaurant customers are very perceptive,” he said, “and, if they’re regular customers, they’ll notice even a slight change in quality.”

However, operators can find ways to shift to lower-cost products without lowering standards. One client recently saw significant savings by switching from cups, straws and packaging with the brand’s logo to the same-quality products without logos. The company surveyed diners and found guests didn’t remember seeing the logo on those products.

Consolidating suppliers not only could reduce food costs, it also could reduce labor costs associated with receiving deliveries, said investment banker and strategic-planning consultant Stephen Horowitz of Horowitz & Associates in Beverly Hills, Calif.

“Individual restaurateurs that have eight to 10 suppliers, with each one charging a fuel surcharge, can have $80 in fuel surcharges in one day,” he said, “and the more suppliers they’re dealing with, the less time they’re spending running their business.”

Horowitz, who has worked for and with foodservice companies for more than 50 years, recommends that operators take a hard look at longer-term contracts at least five months before they expire.

“When they know the price of something is going out of sight, they have to think about what will happen when that contract is up,” he said. “They might want to change how they use that product, but it takes time to plan for that.”

For purchasing directors like Romanczak of Steak-Out, taking an early look can also aid price negotiations.

When corn prices shot up, for example, he went to his supplier six months before the contract was up to renegotiate. Rather than taking the huge price increase that was expected at the end of the contract, Romanczak agreed to a smaller price increase sooner.

“Contracts are living, breathing documents,” he said. “You have to make the contract that’s right for the relationship.