At any given time, I’m usually working with several clients on projects related to pricing.
Some want to standardize their bracket structure across all of their businesses and sales channels. Others are looking into establishing a price model that is tied directly to commodity costs, for a particular set of customers. Still more are working to better understand their total cost-to-serve for various order sizes, in part to determine whether to change their price bracket structure.
At the same time, the role of pricing throughout the foodservice supply chain is receiving an unprecedented amount of press, both inside our industry and in the popular media. The increased interest in pricing is primarily driven by the recent upward pressure on raw materials fueled by spiraling grain and energy costs. Of specific interest is how to make sure pricing models capture the risks associated with grain and energy.
One article on the CNN Newswire proclaimed “Restaurants Spurn Food Contracts for Spot Market.”
The gist of the article is that:
- Food manufacturers are responding to a run-up in commodity costs by shortening the length of price contracts and/or aggressively raising prices
- Restaurant chains are responding by switching away from price contracts and instead are purchasing protein products on the spot market
- While the chains may be saving money in the short term, they are adding uncertainty to their future cost and profit levels
- And because Wall Street hates uncertainty, the stock price of the restaurant chains takes yet another hit
Without a doubt, each side gloms onto “commodity costs” when it suits their needs, and conveniently ignores commodity costs when it makes more sense to sweep them under the rug. But the level, trend, and volatility of costs in today’s world is forcing us all to lift the rug and re-examine our pricing and purchasing practices in the light of day.
I kicked this around with Brian Finn of The Shamrock Group, a fellow foodservice industry consultant. Brian has a strong background in negotiating protein prices with foodservice customers, and adds some interesting perspectives.
“Pricing to foodservice chains is often filled with little discipline and process. The bottom line is for years many manufacturers have offered fixed pricing, with the pricing not even on a formula or indexed to a commodity. Now with high grain and transportation, manufacturers are looking to index their pricing to these “out of control” costs.”
“Chains and distributors seek level (fixed) pricing because operators are not able to easily raise their menu prices. However, this method of pricing (fixed) does not allow for the severe commodity costs swings we are now seeing in grain and energy.”
“Many manufacturers do not properly educate and discuss the true cost drivers of their products with chains and distributors.”
“Too many price agreements are based more upon competitive pressure and consequently do not adequately allow for price relief when these true cost drivers get out of control.”
“If a manufacturer is able to negotiate a price agreement that indexes a cost, he must make sure the index is relevant to the real cost of the product and not some “published” number which is not reflected in his P&L.”
“What some chains want to do is situationally switch from one method to another based upon which ever method gives them the lowest price.”
“Risk management services can play a critical role in pricing agreements with chains and distributors.”
As the pricing hot potato gets tossed around among manufacturers, distributors, and operators, there are a few truths which we ALL should bear in mind:
- Each percent change in price has a greater impact on your bottom line than a percent change in costs, inventory levels, or any other lever.
- In times of cost and price pressure, “pile on the service – it’s free – to maximize repeat business.” (That one’s from Jim Sullivan of Sullivision).
- We’ve been here before, and it’s not permanent. As the old sea captain said, “when the sea is calm, I know it’s going to get rough. And when the sea is rough, I know it’s going to get calm.”
So here’s wishing you smooth sailing – if not today, then soon!
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