Direct Sourcing: Distributors and National Chains Have Adapted. How Will Suppliers Respond?

All indications point to a healthier future for foodservice. Sales are trending in the right direction and top distributors are bullish, returning to full growth and acquisition mode. Yet the industry overall is emerging from this period of unprecedented challenges with some significant changes to how we approach business going forward.

One key example is purchasing. Over the past five years, a growing number of foodservice distributors (and major operators) have shifted to direct sourcing and it can be expected that this will become more prevalent as the leading players remain aggressive in their pursuit of lower cost of goods.

The Rationale for Direct Sourcing
Moving to direct sourcing makes sense from the distributor point of view. In recent years they have faced increasingly volatile commodity prices as well as added fuel and operating costs. Against the backdrop of a deepening industry slow-down in a deteriorating economy, price increases came in at a record pace in a time when it was nearly impossible to pass them on to the operator. The fact that more began looking at alternative suppliers and comparing costs against club stores/cash & carries further solidified the need for distributors to consider different strategies.

One solution was to move to more direct or single sourcing on key items. It became the norm to use the volume of total purchasing power as leverage against manufacturers, and as the number of RFPs and RFQs increased, the manufacturer community experienced large shifts of business in short periods of time. Other changes were also evident. Whereas the traditional strategic thinking was that there was value in having multiple suppliers in a category to ensure appropriate coverage, some moved away from keeping that” safety net” in place. In addition, regional buying offices decreased overall purchases as authority seemed to move to the corporate level. The result? Some manufacturers were left scrambling to maintain volume that was lost in that transition.

Today the move to direct sourcing seems to have shifted from local and domestic to global and international. Global sourcing now appears to be the next phase in the supply chain’s continued evolution. In many instances, manufacturers have had to move production outside of the U.S. to reduce costs; they now find themselves competing for manufacturing capacity with the distributors who are their top customers as well as large national chains that have also begun to source globally.

Manufacturer Imperatives
The impact of these sourcing shifts is still becoming understood but one certainty is that manufacturers face some interesting challenges as this method of purchasing becomes more widespread. To protect business, the following are just a few considerations with potential applications for manufacturers:

Make your brands (more) important to the operator (especially independents)—Independents tend to be brand loyal. Finding ways to solidify your position in that community and create that loyalty will be even more important going forward.

Provide clearly defined product tiers—Offering solutions at multiple levels of the value spectrum is an interesting approach to protect market share and several large suppliers have moved in this direction. Procter & Gamble provides a good example in both foodservice and retail, tiering its Bounty and Charmin brands with a budget-friendly extension called Basic in addition to their core paper goods lines.

Maintain a competitive spread for national brands versus private labels—As private label has become more prevalent and accepted, such products are a growing threat that has created more pricing pressure. Yet we have continued to see significant ranges in the spread between the two over the years – even among companies within the same category. One maintained a 20 percent differential, while another let it go to 40 percent. Guess which brand suffered a decrease in sales?

Pursue alternative channels—Club stores/cash & carries have benefited from their ability to move large volume and reach a great number of customers in a short period of time. They are also willing to price product aggressively to create volume, thus helping suppliers move product when they need it most while also providing value to their growing number of foodservice operator customers.

Monitor the direct sourcing model on an ongoing basis—This is especially important for manufacturers in categories that are already being direct sourced (or will be) as well as manufacturers on the fringe of these categories. The model can change. As an example, seafood can be procured, grown and/or processed in multiple countries; the same is true with certain crops.

Direct and global sourcing will continue to grow, especially in categories that are treated as commodities, but all foodservice manufacturers should remain vigilant on these shifts in purchasing. Another consequence of global sourcing is that it can heighten competition among domestic suppliers, who are already fighting over a small share of volume. Appropriate responses will of course vary by company. For example, sharing volume/capacity with large accounts and distributors is a potential solution for some, but deepening relationships with important end-users is sound advice for all.

Note: This article was originally published in the Technomic Viewpoint.

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Gary Kawahara

Gary Kawahara is a consulting principal at Technomic, Inc. and the firm's expert in the club store/cash-and-carry channel and in redistribution. He has over 25 years of diversified foodservice industry experience in general management, purchasing, sourcing, logistics, operations and B2B marketing, including roles as Vice President of Foodservice/Midwest region, Director of Purchasing, and Branch Manager at Restaurant Depot, the industry's largest dedicated foodservice cash-and-carry operator.

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