The Digital Disruption of the Foodservice Supply Chain

The North American foodservice supply chain remains surprisingly entrenched in a bygone era; one in which the absence of published prices, uniform product codes, and scanner data puts independent operators at a marked disadvantage to their wholesale-distributor suppliers.

While operators can combat the system’s complexity by joining a group purchasing organization (GPO) or shopping at Restaurant Depot, the daily challenges of running a restaurant, deli, cafeteria, or taco stand generally prevent buyers from pursuing beneficial alternatives. Furthermore, many are unaware of their options because their primary source of information, foodservice distributor sales representatives (DSRs), insulates them from the facts.

How can that be? It’s because the financial interests of the customer and the distributors who serve them are not correctly aligned. In fact, they’re quite diametrically opposed since 76% of DSRs are paid to maximize the profit of each shipment by carefully “massaging” prices.

Strangely, operators typically don’t know how much they’ll pay until an item has already been delivered, and even then, they often don’t check the price! Because they don’t know any better, they accept this opaque model as the norm and manage DSRs by pitting them against each other, conducting business with several, if not many, suppliers. Beyond adding complexity, it ‘s also ridiculously inefficient; especially considering the fixed costs of processing and delivering an order exceed $100.

The Retail Terrain

In contrast, the retail grocery supply chain is elegantly simple. First, supermarkets have labels on every shelf that tell shoppers, in advance, how much they will be charged for an item. Second, supermarkets are public spaces where anyone, including employees or agents of competing retailers, can see what’s being charged for every item. Lastly, everything sold via retail is accounted for through bar-code scanning and reportable to anybody who wants to know (and buy) the truth. Information flows upstream in such abundance that it often seems as if manufacturers sell directly to consumers by virtue of knowing who they are, what motivates them, and what they’re willing to pay for happiness.

This isn’t to say the foodservice industry is devoid of insights, data, or connectivity. Over half is nicely linked from farmer to consumer, but that’s the world of highly-organized restaurant chains, GPO’s, contract feeders, and institutions.

Meeting the Challenge

“Power buyers” learned long ago they could manage supply chain complexity by negotiating contracts at every level; agreements most distribution firms approach honorably. Consequently, the spread between prices paid for similar goods by chains and independents is nearly 20%, more than enough to offset chain royalties, management fees, advertising, and other costs associated with being part of a “system.”

The burden borne by independent foodservice operators is unsustainable in a world where the answer to any question is seconds away on one’s phone, tablet, or laptop computer. Share-hungry manufacturers schooled in the retail and club/cash & carry domains will eagerly support distributors who scrap the old model to offer simple, transparent value to buyers in a manner not unlike those to which they are accustomed in their personal lives.

Change Is Coming

When presented the opportunity to grow by supporting an un-cluttered approach, savvy manufacturers will likely open their checkbooks. Weary of traditional distributor’s old-school tactics, it is conceivable suppliers might offer rich incentives to support a disruptive model. It has happened in other verticals, so why would foodservice be any different?

Technomic has not studied this subject to ascertain whether the foodservice supply chain will experience radical change, but rather to assess how and when. Assuming operators are willing to shift even a small portion of their purchases online, as our research indicates they are; the potential disruptive impact on the foodservice supply chain could be massive.

Understanding how to participate in and profit from the looming transformation is critical to any firm wishing to thrive in what promises to be a remarkably different foodservice ecosystem going forward.

Note: This article was originally published in The Technomic Viewpoint. View original .PDF file.

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Aaron Jourden

Aaron Jourden is a Managing Editor at Technomic Inc. in Chicago. He is responsible for writing and editing content for the company's newsletters, which cover foodservice news and developments in the U.S., Canada, U.K. and other international markets. Aaron also develops editorial content for the company's Digital Resource Library, a searchable online database that includes vital segment and industry data on leading domestic and international restaurant chains.

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