Restaurants To Bear the Brunt of Rising Distribution Costs
Piper Jaffray analysts Nicole Miller Regan and Josh Long’s recent conference call on foodservice distribution isn’t good news for restaurant chains looking for falling food commodity costs to offset rising labor expense. Rising fuel and labor costs, two main components of distributor operating expenses are quickly being passed on to restaurant operators in the form of fuel surcharges and more expensive supply contracts.
Regan and Long discussed the distribution industry and the challenges facing restaurant operators on September 19 with Pat Mulhern, CEO and President of Distribution Market Advantage. Here are some excerpts from Mulhern’s comments:
‘Rising foodservice distribution costs reflect broader freight cost pressures from truck driver shortages, which look likely to persist.”
“Distributor truck drivers often have more demanding hours, forcing distributors to raise wages and increase employee benefits such as health care and free chiropractor visits. The shortage is expected to last several years, raising industry-wide costs for distributors, and in turn for manufacturers.”
“Reduced distributor capacity leaves fewer options for national chain restaurants.”
“Established chains are increasingly receiving fewer responses to RFPs, experiencing price increases with incrementally less favorable terms, and (in certain instances) interrupted service when geographic shortages materialize.”
Recent quarterly conference calls from public foodservice distributors confirm the increase in operating costs:
Sysco CEO Thomas Bené:
“We do have challenges filling driver roles in certain markets where the labor market's just very tight. We see regularly drivers being offered significant upfront incentives to join a company. We're having to do some of that same type of thing.”
Performance Food Group CEO George Holm:
“EBITDA decreased 5.8%, a result of higher than expected operating expenses from higher labor costs and rising fuel prices, most notably in the month of June. We experienced cost increases associated with hiring in sales, delivery and warehouses associates.”
Performance Food Group CFO James Hope when asked about passing on costs to operators:
"Our two types of business…..contract customers…..independent customers and we’re paying close attention to what is the right price for both of those. And, we want to make sure we’re in market. And I guess, the answer to your question would be yes, it can be passed through as we pass through carefully and fairly.”
So what should restaurant chains do to keep distribution costs in check?
Experts say distribution companies may be less willing in the past to “buy the business.” Piper’s Regan and Long sees distribution moving away from strictly being a transactional exercise for chains. Instead they write, “we view companies that increasingly partner with distributors on menu innovation and unit growth plans as being in a stronger relative position.”
For now, restaurant operators getting hit with rising distribution costs should be proactive in an effort to keep down costs, according to industry consultant Larry Reinstein. He recommends working with professionals in the purchasing field.
“It’s advantageous for companies with ten or more units to utilize a group purchasing organization that can provide price checks and help negotiate a master distribution agreement,” said Reinstein.