The Orderly Blog

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The Ugly Truth About Supplier Pricing

Posted by The Orderly Team on Nov 27, 2017 9:53:43 AM


We’ve got a bit of bad news…

Turns out your supplier is both friend and foe.

Sure, they do a great job of delivering the vital supplies you need to serve your guests. And hopefully, you’ve built great relationships that foster excellent service.

BUT, there’s also a dark side to the supply chain.

And this makes the restaurant business hard…

As we analyzed 413,013 purchases from 4,137 food distributors last month, we found some ugly truths about supplier pricing and the supply chain.

It's stuff you should know about so you can get a better deal and run a more profitable restaurant.

Ugly Truth 1: Big company dominance isn’t good for pricing.

The supply chain is dominated by the big boys. And while they may provide great selection and service, it doesn’t always translate into great pricing.

Let’s face it, it’s a supply chain that has a near monopoly status. As you might remember, the FTC even blocked the merger of Sysco and US Foods in 2015. They said it would be 'no bueno' for the industry.

And 'no bueno' it is... In simple economic terms, monopoly and near monopoly industries allow the distributor to control prices. And what this means is great pricing doesn’t show up in these markets.

We definitely witnessed the ugly truth about big supplier pricing as we reviewed transactions from the major distributors. The biggest revelation was the price variance in the same market for the same ingredient at the same time period, on a non-perishable item. 

There is no reason for one restaurant to pay 201% more for a standard case of zip lock bags, considering it was made from the same distributor, in the same market, with a purchase date one day apart.  This is big company profiteering.  

Big companies squeeze profits wherever they can.  The dominance of big companies in the supply chain isn't helping your supplier pricing.  

Ugly Truth 2: There’s no standard pricing

The fact that suppliers don’t provide standard price charts is a mysterious but accepted oddity.

Sure your supplier will send you a weekly price sheet.  And they will also send a weekly price sheet to every other restaurant in town.  All with different rates.

I mean how ugly is that?!! A business with a different price sheet for evey customer.  In the age of Amazon, Priceline, and discount double price check, it's hard to believe this is standard operating procedure.   

And since there's no standard pricing, what that really means is all your prices are negotiable.

And that means you need to negotiate. That’s why it’s so important to regularly meet with your suppliers... to track and contain price increases on your most important items.

We’ve created a simple and effective way to conduct a quarterly business review. We recommend you follow this process. It will directly translate into thousands of dollars in savings and profits a month.

So pay attention to food costs, track your pricing, and be sure to negotiate when you see increases.

Successful restaurants manage food costs... compare supplier pricing and always get the best deal.

Ugly Truth 3: You’re grossly overpaying for some items.

One of the more interesting findings from our data was how much restaurants were overpaying.

Sure, there was bound to be some price fluctuation in local markets... but 86%?

Yup... restaurants regularly pay 86% more for the same ingredient... from the same supplier... in the same market... in the same week.

And we found that the price variance covered a wide range of ingredients from everyday staples to specialty items.

The ugly truth is you are overpaying... and grossly overpaying.

Be sure to track your top 20 items by spend monthly. Identify and react to price increases quickly. This has a direct and immediate impact on your profit.

And we recommend that every quarter you price check all your specialty ingredients against a second vendor.

Ugly Truth 4: Everybody Overpays

We expected to find some restaurants were overpaying.

We were not prepared to find out that this really meant almost EVERYONE is overpaying.

92% of restaurants are overpaying their suppliers for items they purchase on a weekly basis.

And it was interesting to look at the patterns. It’s not just one or two items… most restaurants are paying above market price for multiple ingredients.

In fact, the data shows it’s closer to 5 - 15 items. Ouch.

The ugly truth is that the supply chain hasn't made it easy to track pricing or know if you're getting a good deal. And means that everyone has paid too much for something. 

Ugly Truth 5: Most Restaurants Eyeball Their Pricing

In addition to analyzing the data, we talked to hundreds of restaurants specifically about food spend management. It was surprising to learn that most do not have a formal way to manage pricing on key ingredients.

Rather, they would “eyeball it”.

Food spend represents 1/3 of the budget of the typical restaurant. Managing this aspect of the business well often means you’ll have a financially healthy business.

The ugly truth is that eyeballing isn't a good plan.  And this is what most restaurants do.

Conclusion: A Way to Fight Back

So there you have it. The ugly truths about supplier pricing. We believe what this really illustrates is that the restaurant business is hard. And the supply chain is difficult.

BUT, there is a way to fight back against the ugly truths…

  1. Manage your overall food spend on a weekly basis
  2. Track prices on the top 20 items
  3. Have regular meeting with your suppliers and make sure you discuss pricing and service

And while we’re talking about suppliers… by no means do we wish to suggest that suppliers are bad or evil… or out to get you.

Rather like any relationship. The relationship needs to be managed.

And that’s maybe the real ugly truth. That supplier and food spend management are damn hard amidst all the moving parts and most restaurants don’t do this well.

Of course, we’ve developed a great tool to make this easier.

The Orderly app with price compare lets you get the best deal on all your purchases.

It manages all your food spend just by snapping invoices.

It provides a national & local view of price trends on over 100 of the most popular ingredients restaurants are buying.

And you’ll be able to see if you're overpaying for eggs, onions, ground beef and other items... and this will give you the hard data to negotiate better pricing with suppliers.

The Orderly app is the industry's first guide to prices restaurants are paying for their supplies.

The best part? It's free.

So, acknowledge that there are some ugly truths in restaurant supply chain and take steps to fight them from eating your profits.

Download the app, check your pricing, and make more money.

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Topics: Supplier Relations

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