MRM's "Ask the Expert” features advice from Consolidated Concepts Inc. Please send questions to Modern Restaurant Management (MRM) magazine Executive Editor Barbara Castiglia at email@example.com.
Q: I want to negotiate the best contract with my broadline distributor, what are some things I need to consider?
A: Most operators who have scaled to multiple locations have found the benefit of pursuing a Master Distribution Agreement, or MDA, with their main broadline or grocery distributor. This contract offers the operator an opportunity to lock in pricing terms on their order guide items, and avoid drastic swings in costs and terms from their primary distributors. However, these contracts often carry terms that may cause an operator to minimize the deal that they’ve negotiated. Here are several ways to avoid MDA pitfalls.
Freight Costs and Fuel Surcharges
Fuel surcharges became popular among broadliners during the 90's when fuel prices were more volatile. Today, however, with fuel costs much lower, there really isn't much of a need for these surcharges. Many contracts will include a chart of "strike points" that indicate if the price of diesel goes over a certain fee, the distributor can raise the price, either by total invoice or on a per-case basis. Operators and consultants should aim to remove fuel surcharges from the contract altogether or make the strike points so high that they would never actually be enacted over the life of the contract.
One of the highest-dollar impacts for operators when it comes to Master Distribution Agreements is renewal. Operators must be aware of when their contract ends in order to take advantage of the opportunity to re-negotiate their MDA and maximize their contracts for their next three-to-five years. Typically, MDA's will contain language that the distributor will automatically renew for a 12-month period. This is especially true if the operator does not notify the distributor within 180 days of contract termination. Never miss an opportunity to negotiate a new MDA and do the same thing with distributors whenever possible.
Drop Size Penalty
A drop size penalty relates to the minimum delivery size that an operator must hit in either dollars or cases. If the minimum drop size, for instance, is $1,000, the operator will pay a flat penalty if a single order falls below that minimum. Keep in mind, distributors think about their business primarily in terms of drop sizes, whereas operators tend to think in terms of margins. Therefore, the burden is on the operator to negotiate an appropriate drop size penalty and to then manage their order guides, storage space, forecasting, and order frequency in order to avoid ever having to pay that fee. Don’t spread your business among too many distributors, which is not ideal for efficiency, security or pricing.
Margin increases are a fairly straight-forward part of an MDA, but one that operators need to watch out for. Often, when contracts roll over, there may be automatic or cost-of-living increases that can wind up costing operators more money and provide extra margins to distributors. Because of this, operators should make sure there are no increases and that their margin schedule and fee structures remain stable over the life of the contract.
An MDA should always have language that allows for auditing on a regular basis, either by the operator or an outside party, in order to ensure that all pricing is correct. A distributor might add stipulations to their contract language that says that the operator can only conduct an audit once or twice a year or only after giving eight weeks’ notice. Establish a provision for electronic invoice auditing and hire a third party with the software capabilities to conduct those audits on an ongoing basis.