The Benefits and Challenges of Consolidated Food Purchasing
By Robert Hood Corporate Food & Beverage Manager, Atlific Hotels | August 24, 2014
'Consolidated Purchasing Power' with food or any other medium suggestions efficiency, savings and economy of scale. If you are in the business of being a chain restaurant offering a standardized menu throughout your operations with consistent menus, and defined dish specifications then the recipe for success can be efficient, quickly successful and generate enormous savings. But what if you are a national hotel ownership / management company operating multiple hotel brands in different geographical regions with varying property sizes, and still looking to drive economy of scale, reduce unit prices and generate the maximum product rebate potential, while at the same time respecting property menu brand standards, regional culinary fashions and requirements, and ultimately stabilizing a consistent food cost margin for the property type?
Challenging but not impossible if approached with the right business partner who is willing to fit your business model and grow with your company. This is a situation facing many companies when beginning the process of food purchase consolidation. Initially all properties develop their own purchasing programs establishing relationships with local distribution, manufacturers and producers. Selection is based on personal, management or relationship preference, price, as well convenience for the operation. All of these qualities are to be commended but if they are not placed in the correct order the end result can be a mixture of over-purchased, mediocre food product without the guest impact or value perception that is needed. Food cost nationally is not consistent and becomes varied depending on the location. Urban center properties will typically drive lower food cost margins than rural properties, and provincially the cost of bringing in food product varied greatly due to transportation costs and trucking routes.
But how to drive consistency, provide product availability and at the same time control the cost within an organization that spans an entire country? The first order of business is to find core items used in all properties. Inventory review of every food operation will show a commonality of food purchased that can be drawn into two distinct categories. The first being volume core items that were purchased through a distributor, and the second being speciality and local items purchased seasonally with sporadic volume. The latter was either distributed locally or directly from the producer. Meeting with our culinarians often highlights the general dissatisfaction they face with inconsistent pricing that changes from week to week, product quality issues across all categories, delivery timing issues and minimum order requirements that are set in regions where for certain times of the year during a down business period that are found to be either challenging or impossible to meet which leads to local retail purchase with inflated menu item food costs and therefore reduced profit margins. Being individual purchasers also meant that operators do not have a voice to register quality complaint or delivery issues, and they have to constantly monitor prices and move menu prices to ensure that food costs remain in-line with their property profitability model. All of this makes any type of food cost forecasting haphazard and if food market pricing changes unexpectedly then the profitability of a menu as well as it was produced, presented or served would be in jeopardy.
The next and vital stage is to partner with a national distribution company to service the current business. A company who is willing to look at purchase volume and food product inventories and provide a stable distribution margin to allow the base cost for delivery into the properties to be stabilized. This is a challenging endeavor due to the fact that most distributors without a substantial historical volume are reluctant to commit to a standard cost-plus margin without consistent drop ships at the property level. Initial programs may establish a cost margin per region which while initially it may not mean the ability to establish a consistent food cost nationally it will mean on a regional basis the hotel properties will be able to form some stability in terms of distribution costs going into the property and allow for a minimum drop ship to be achieved, and allow some service leverage for the property managers in terms of service, product quality and consistency. The next step would be to work with the distributor and individual product manufacturers to establish contracts on core items such as orange juice to allow properties to purchase core items at a contract price with renegotiation on an annualized basis and establish the rebate programs for the company. Most hotel management / ownership companies allows each property to keep 100% of the manufacturer rebates earned from contract payments in other cases a percentage is split between the property and the management company. This allows for the properties to benefit directly from any food and beverage program and this is often represented directly on the monthly P&L statement.
With many companies who go through this process as the national volumes grow so do the amount of manufacturer contracts, rebates and the ability to negotiate pricing for the collective properties which mean that overall individual product costs begin or remain stable and often are reduced. Renegotiation of distribution agreements with increased volume will mean that any organization will be able to finally able to set a standard distribution mark-up for all properties nationally with their distributor, resulting in improved property service, product quality and enhanced property level menu cost control along increased profitability.
With the continued growth of any company and the increase in the number of properties, product velocities and purchase volume growth, the time required to manage rebates, pricing and logistics issues on behalf of the properties becomes increasingly challenging especially for a small corporate team with limited resources. After much deliberation it may be decided to look for an organization that would be able to become a purchase management solution partner. Extensive due diligence to select this partnership is necessary and it is very import to find a partner that is the right fit for your organization who were specialists in the food procurement business on a national level. Even though though the program that is being sought could be offered by a number of procurement organizations, the needs of the company searching for this solution are often unique and specialized. An initial need may be a company that would be able to provide the food commodities that offer properties individually require and not simply what they had exclusively within their own existing programs. Secondly they needed to have a distribution platform that allowed for a reduced distribution cost nationally, an ability to enhance the manufacturer agreements that are in process at the present time, allowing property master agreements to be transferred to procurement programs and at the same time manage the current agreements that are in process. Rebate programs and payments also need to be managed and administrated either directly to the property level or corporate office, and provide the level of reporting that is required.