Food distribution in the 1990s

Technology and Irtrlovation~j--~

Food Distribution in the 1990s Because the mechanics and finances of food distribution are obscure to many foodservice operators, some might think that cutting out brokers might be a good idea. In a business where big orders give big advantages, however, self-distribution may not be the tickeL

by Gregory X. Norkus and Elliot Merberg LATE IN 1993, a large, m u l t i u n i t food-service operation with $40 million in a n n u a l purchases was negotiating a new contract for food distribution. The issues of appropriate case prices, delivery charges, and m a r k u p s became complex enough t h a t we were asked to analyze the operation's food-distribution situation and examine distributors' offers for delivery contracts. We believe © 1994, Cornell University

t h a t this operation's desire to u n d e r s t a n d food distribution is not unique. In this article, we explain the state of food-service distribution for multiunit operators in the United States, examine current distribution practices, and present the criteria t h a t a multiunit operator should consider when examining a distributor's bid. In theory, an operator has four distribution alternatives for its food purchases: self-distribution, ordering from national or regional broadline distributors, developing a primary-vendor relationship with

a broad-line distributor, or contracting for delivery with a systems specialist. In reality, the choices are not always straightforward, because the i n d u s t r y is

Gregory X. Norkus, M.S., is a senior lecturer in food a n d beverage at the Cornell University School of Hotel Administration. Formerly the proprietor of a food distributorship, E l l i o t Merberg, a visiting lecturer at Cornell, is president of a division of Transmedia Network, a restaurant financial services a n d consulting company.

50

THE CORNELL H.R.A. QUARTERLY

big, the vendors many, and the cost structure on which most bids are based is not immediately apparent. Sales for food-service distributors totalled $110 billion in 1992, b u t those sales are spread among a great number of competitors. Although the industry has some major players, it is far from being an oligopoly. The top five companies, large as they are, accounted for less than 20 percent of total sales, and the largest, SYSCO Corporation, with sales of $8.9 billion, represents j u s t 8 percent of the market. The remainder JUNE 1994

of the top five are Kraft Foodservice, $3.5 billion; MartinBrower Company, $3.4 billion; P F S (PepsiCo Food Systems), $2.8 billion; and Rykoff-Sexton, $1.6 billion.1 Of particular interest is that among those five companies one can find each of the four typical distributor types: broad-line distributor, primary vendor, systems distributor, and self-distributor. A broad-line distributor, as its name suggests, sells m a n y 11993 Directory of Foodservice Distributors (New York: Chain Store Guide, 1993), p. viii.

51

different types of products. It is, in effect, a "supermarket" that stocks and delivers a considerable range of food-service products to many customers, on request. The operators that patronize a broadline distributor are termed "street accounts." Some broad-line vendors encourage food-service operators to develop a primary-vendor relationship, in which the operator agrees to purchase most of its products from that vendor in exchange for specified savings in price and delivery charges. Under the typical primary-vendor

EXHIBIT 1 The relation between street and chain business Percentage of 1993 total sales to street accounts, national accounts, and regional chains 1993 Gross Annual Sales Volume

¢=~'~"

~.0~~%~

¢=o~# ~'

~Oj#%'~

L~x

/

~,e.~o~O

Street Accounts Less than 46% 46-69% 70-89% 90-95% More than 95% Median

2.6% 10.3% 25.6% 28.2% 33.3% 90%

7.5% 7.5% 17.0% 39.6% 28.3% 90%

14.8% 13.0% 37.0% 16.7% 18.5% 80%

8.7% 21.7% 40.6% 17.4% 11.6% 80%

25.9% 20.4% 44.4% 5.6% 3.7% 70%

11.0% 16.0% 35.7% 19.3% 18.0% 80%

28.6% 14.3% 28.6% 14.3% 14.3% 10%

31.6% 15.8% 21.1% 15.8% 15.8% 10%

17.2% 17.2% 27.6% 10.3% 27.6% 10%

20.0% 10.0% 17.5% 25.0% 27.5% 15%

7.8% 19.6% 2.0% 31.4% 39.2% 20%

18.8% 17.1% 15.5% 21.5% 27.1% 10%

62.5% 8.3% 20.8% 8.3% 5.5%

37.1% 37.1% 14,3% 11.4% 10%

30.2% 32.6% 20.9% 16.3% 10%

26.3% 26.3% 31.6% 15.8% 10%

20.5% 20.5% 31.8% 27.3% 15%

31.0% 26.1% 26.1% 16.8% 10%

National Chains Less than 5% 5-9% 10% 11-25% More than 25% Median

Regional Chains Less than 10% 10-12% 13-25% More than 25% Median

Percentages based on responses of those distributors who contract with operators in each category.

Source: "State of the Street: 1994," Foodservice Distributor, January 1994, p. 48.

program, the food-service operator would purchase 70 to 80 percent of its products and supplies from the vendor for a specified period of time, typically a year (with a n n u a l renewal options). That relationship, known as a "program account," does not preclude the operator's use of other vendors, and most food-service operators with a primary-vendor relationship also purchase m a n y items from a diverse group of vendors. SYSCO, Kraft, and RykoffSexton are examples of broad-line distributors t h a t also have program accounts. SYSCO carries a total of 185,000 items systemwide, while Kraft handles 160,000 items, and Rykoff-Sexton stocks a total of 43,000. These companies' individual distribution centers, however, routinely

stock only 5,000 to 10,000 items. 2 Most of their sales are from socalled street business--independent restaurants, hotels, clubs, schools, hospitals, and so o n - - b u t they also have primary-vendor relationships with multiunit operators (see Exhibit 1). A systems distributor is unlike other food-service distributors in t h a t it does not do business with street accounts and maintains minimal inventory relative to the typical distribution facility. Servicing only large chain accounts, this type of company is essentially a delivery specialist t h a t contracts to accept deliveries from various vendors and manufacturers with whom the chain r e s t a u r a n t has negotiated price agreements, m a i n t a i n the appro2,,The Top 50 Profiles," ID, December 1993, pp. 86, 96, 104.

52

priate level of inventory to keep the chain supplied, and deliver items according to contract requirements. The clients agree to pay a per-case fee for these services. In addition to its street and program accounts, SYSCO also operates a systems-distribution business through its SYGMA Network subsidiary, which in 1992 accounted for about 8 percent of the company's sales2 The largest systems distributor in North America is the MartinBrower Company, which in 1992 was third in total sales. A self-distributor is a restaur a n t company t h a t accepts deliveries from vendors and manufacturers at its own warehouses. Small operators t h a t do not :~1992 S Y S C O A n n u a l Report, p. 2.

THE CORNELL H.R.A. QUARTERLY

EXHIBIT 2 Income-statement percentages of total sales for food-service distributors UPPER

HIGH

MEDIAN

QUARTILE

PERFORMERS*

15.3

83.6 0.6 17.0

85.3 0.9 19.0

84.4 0.4 16.0

7.8 4.7 12.5 0.5 0.0 0.4 0.4

9.6 6.0 15.6 1.4 0.2 0.6 1.1

11.2 6.9 18.1 2.1 0.4 0.7 1.7

7.8 5.5 13.3 2.7 0.3 0.5 2.5

LOWER QUARTILE

Cost of goods sold 81.7 Cash discounts received, net allowed 0.0

Gross margin

Operating expenses Payroll expense Nonpayroll expense Total operating expenses Net operating profit Net nondistribution income Interest expense Net profit before taxes

The figures in Exhibit 2 are potentially confusing. Most of the performance indicators included in the study are reported on the basis of medians, which are not distorted by unusually high or low values in the sample. The companies reporting the figures are divided into quartiles, and each median presented is independently selected from its own array of figures. Therefore, the percentages do not add to 100, as one might expect, and the mathematical relationships normally found in an income statement do not exist. *Upper 25 percent of responding firms in terms of return on assets.

Source: 1993 Distributor Productivity and Financial Report (Falls Church, VA: NAWGA/IFDA, 1993), p. 47.

m a i n t a i n warehouses may, in fact, pick up their own food. In some cases, self distributors act somewhat like broad-line distributors by reselling their products to franchisees. PFS, which became part of PepsiCo with its acquisitions of Pizza H u t and KFC, is an example of a selfdistributor t h a t also sells to franchisees. Most self-distributors are much smaller t h a n PFS.

The Bottom Line The f u n d a m e n t a l business of food-service distribution involves purchase, stocking, sale, and delivery of food and other foodservice products. Competing distributors purchase and carry essentially identical items (Campbell's New England clam chowder in number-5 cans, for example), which they sell and deliver to food-service operators without changing them in any way. What varies are the services provided and item m a r k u p s and prices, which can vary from one JUNE 1994

distributor to another and even among the customers of a single distributor. The food distributor's price and profit margin are based on what the traffic will bear r a t h e r t h a n any calculation of cost recovery plus profit. Relative bargaining power and m a r k e t economics govern the margins t h a t distributors can maintain. Small customers' relatively small average orders involve higher margins t h a n those of large customers, whose large orders generally obtain lower margins. A similar rule works with individual items. Less expensive products (on a cost-per-case basis) have higher margin percentages t h a n more expensive products, which have lower margin percentages. However, the actual dollar amount of the per-case margin may, in fact, be the same for expensive and inexpensive items. That is the basis of a systems specialist's contract relationship. The distributor's overall margin 53

is produced from a blend of lowand high-profit customers and low- and high-profit items. Achieving a blend t h a t will cover the overhead and earn a profit is the distributor's challenge; it is also the operator's opportunity. F i x e d o v e r h e a d . Over a moderate range of business volume, the food-service distributor's overhead is relatively constant. Occupancy costs, payroll, and administrative costs do not change unless the distributor's volume expands considerably. In an urban setting, even delivery (trucking) costs can be fairly constant despite modest increases in business, assuming the trucks are not ordinarily filled to capacity, because deliveries often are made to several foodservice operators at each stop. A distributor t h a t is focused on increasing volume may keep its prices low by disregarding certain fixed expenses when quoting prices to a q u a n t i t y buyer. As a result, large buyers can purchase food at a m a r k u p t h a t may cover only variable costs and does not reflect the purchaser's share of the distributor's cost of doing business. T h e income statement. The outcome of t h a t pricing policy is the slenderest of margins, as demonstrated by SYSCO's 1992 income statement. Food-service operators might be shocked by the food-expense percentage. Imagine r u n n i n g a r e s t a u r a n t with an 82-percent food cost and operating expenses of 14 percent! Yet SYSCO's operating expense and profit margins appear to be typical of food-service distributors (and possibly better t h a n most; see Exhibit 2).

Orders: Bigger Is Better The delivered cost of a product to the r e s t a u r a n t depends on the efficiency of the distributor's

EXHIBIT 3 Comparison of three types of distributors, 1992 SYSCO

MARTIN-gROWER

(broad-line)

(systems)

Sales $8.89 billion Distribution facilities 160 Units serviced 245,000 Average sales per unit $36,297 Line items per distribution facility 8,000

$3.37 billion 28 11,5002 $293,043 450-3,6004

PFS (self)

$2.75 billion 25 ~ 14,0003 $194,643

1Including one each in Canadaand Mexico. 2Involving 16 accounts. 3Involving 3 accounts. 4The centers that service only McDonald's restaurants stock about 450 line items. The other centers service about eight chain accounts each and inventoryabout 3,600 items.

EXHIBIT 4 Average order size and line items per order

Distributor volume

STREET ACCOUNTS

PROGRAM ACCOUNTS

ORDER SIZE LINE ITEMS

ORDER SIZE LINE ITEMS

(median)

(mean)

(median)

(mean) $811 16.5

Under$3MM

$200 8.0

$307 9~4

$500 15.0

$3MM to $9,999,999

$250 10.0

$241 14.0

$450 19.0

$485 245

$10MM tO $19,999,999

$350 10.0

$388 13.4

$750 22.0

$1,191 37.1

$20MM to $49,999,999

$400 14.0

$447 14.5

$800 25.0

$1,035 28.2

$50MM or over

$586 18.0

$588 18.8

$1,216 47.0

$1,534 56.5

Distributor type

(median)

(mean)

(median)

Full or broad line

$405 15.0

$437 17.3

$897 30.0

$1,080 39.6

Meat or seafood specialist

$450 6.0

$522 6.6

$800 7.5

$1,635 9.3

Systems distributor

$425 11.0

$425 11 0

$t ,800 50.0

$2,786 74.4

E & S dealer

$200 6.0

$344 7.0

$500 10.0

$447 9.8

All respondents

$361 12.0

$406 14.8

$825 25.0

$1,076 35.6

(mean)

Top numbers show average order size for street accounts and program accounts; bottom numbers show average number of line items per street order and program order. Source: "State of the Street: 1994," FoodserviceDistributor, January 1994, p. 45.

operation, which in turn depends in part on order patterns. Efficiency and costs are determined by the distance traveled (the shorter, the better), the n u m b e r of different items in a delivery (the fewer, the better), and the average order size (the larger, the better). Exhibit 3 compares the highestvolume broad-line distributor, systems specialist, and selfdistributor. We can roughly estimate the typical order size for SYSCO, Martin-Brower, and PFS. Given the perishability of the food being delivered, we can assume that at least one weekly delivery is being made to each unit and divide the average sales per unit for 1992 by the number of weeks in a year. The estimated average order size for SYSCO is $698; for Martin-Brower, $5,635; and for PFS, $3,743. Although crude, those estimates are not far from what food-service distributors have actually reported (see Exhibit 4). SYSCO easily falls into the $50-million-and-over category in Exhibit 4, and the $698 estimate is within 20 percent of the mean dollar value ($588) reported by high-volume distributors for average street-account orders. Our estimate for Martin-Brower, while high compared to the mean order size for systems distributors' program accounts, reflects the much larger orders handled by systems distributors, compared to broad-line distributors. Those large orders generate operating efficiencies that are critical to systems distributors.

Where's the Profit? Primary-vendor agreements involve cost-plus programs that average in the 8- to 14-percent range. Such margins would translate into cost-of-goods percentages of 92 to 86. Yet 54

THE CORNELL H.R.A. QUARTERLY

EXHIBIT 5 SYSCO's customer mix PERCENTAGE OF SALES

Restaurants Hospitals and nursing homes Schools and colleges Hotels and motels Others

60 13 8 6 13

Source: SYSCO 1992 Annual Report, p. 43.

EXHIBIT 6 SYSCO's sales mix PERCENTAGE OF SALES

Canned and dry products Fresh and frozen meats Frozen fruits, vegetables, bakery, and other Dairy products Poultry Paper and disposables Seafoods Fresh produce Equipment and smallwares Beverage products Janitorial products

26 17

15 8 8 7 6 5 3 3 2 Source: SYSCO 1992 Annual Report, p. 43.

the data presented in Exhibit 2 show t h a t the cost of goods for both the average distributor and the top performer is about 84 percent (meaning a typical margin of 16 percent). How can a distributor quote a margin as low as 8 percent? There are several possible answers to t h a t question. T h e c u s t o m e r mix. Recall t h a t the broad-line distributor has a mix of customers: street customers representing virtually every segment of the food-service i n d u s t r y - - r e s t a u r a n t s , clubs, convenience stores, hospitals, schools, military installations, and so o n - - a n d primary-vendorprogram customers. Exhibit 5 shows SYSCO's mix of customers. Exhibit 1 showed the mix of street versus chain business (virtually all chain business exists in the form of primary-vendor

JUNE 1994

programs). Seventy-three percent of all the distributors responding to a 1992 survey by Foodservice Distributor indicated t h a t street business accounted for more t h a n 70 percent of their sales volume. Generally, small distributors (under $3 million) reported t h a t a larger percentage of their business came from street accounts t h a n did large distributors (over $50 million). One quarter of the large distributors reported t h a t less t h a n h a l f their business came from street accounts. Each customer type is associated with a different operating efficiency. In the Foodservice Distributor survey, the size of the mean program-account order was 165 percent greater t h a n t h a t of the m e a n street-account order. The 8-to-14-percent margin applies to program customers, because of the greater efficiencies associated with the program accounts' larger orders compared to those of street customers, who face higher margins due to their smaller average order, t T h e p r o d u c t mix. The distributor's aggregate margin is also affected by the product mix in customer orders. (As a point of information, SYSCO's sales mix is shown in Exhibit 6.) Lower margin percentages are applied to items t h a t have a high cost per case, such as steaks and seafood, t h a n to items with a low per-case cost (e.g., paper, canned goods, and produce). The mathematical outcome of the margin calculations is t h a t distributors' per-case "service charge" is about the same for both high-margin and lowmargin items (even though the m a r k u p varies considerably). That is a logical approach to the business, since it takes about the 4For further information, see: Donald Eames and Gregory Norkus, "Developing Your Procurement Strategy," The Cornell Hotel a n d R e s t a u r a n t A d m i n i s t r a t i o n Quarterly, Vol. 29, No. 1 (May 1988), p. 31.

55

THE MARKUP/MARGIN TRAP

In evaluating a proposal based on cost plus markup or cost plus margin, you should know that the two are not the same. Given a cost per case of $50, and a 14-percent markup, the price to the food-service operator is $57 ($50 multiplied by 1.14). Given the same cost per case and a 14 percent margin, the price to the food-service operator is $58.14 ($50 divided by 0.86). A buyer who does not understand the difference between markup and margin might choose a distributor who quotes cost plus a 14-percent margin over a distributor who quotes cost plus a 16percent markup. The smaller margin figure sounds better, but that buyer would end up paying 14 cents more for a case that costs the distributor $50 ($58.14 versus $58).--G.X.N.

same a m o u n t of labor to load a case of top sirloins as it does a case of fancy apples, and the two cases take up the same space on the truck. Here's an example of how t h a t works. The typical program margin for sirloin would be 4.5 percent and the margin for apples is usually about 17.5 percent. If a 50-pound case of sirloins costs the distributor $100 and the margin (not the markup) is 4.5 percent, the price is $104.71, and the dollar margin is $4.71. (See the box above for an example of the difference between margin and markup.) SIRLOIN AND APPLES

Item . . . . . . . . ~: ~1Distribut°r's price Operator's price Ma~

Sirloin [ Apples [

$100 $104.71 ]$4.71 $20.50 $24.85 I $4.35 Margin difference $0.36

If a case of apples costs the distributor $20.50 and the margin is 17.5 percent, the price is $24.85, and the dollar margin is $4.35. Thus, although the case price for the sirloins is nearly five times greater t h a n the case price for the apples, the dollar margins for the two differ by only 36 cents!

Here's the Profit Assuming the distributor sells an equal volume of sirloin and apples, the average m a r gi n for those two products is 11 percent, comfortably within the m e a n range of 8 to 14 pe r cent for chain programs r ep o r te d by distributors in the Foodservice Distributor survey. There's no reason to t h i n k t h a t extending the example to include o th er items would substantially improve t h a t margin. Yet one distributor recently told ID magazine: "Any distributor... needs a 17-percent m ar gi n to realize any sort of a bottom line." The question is, how can broadline distributors quote cost-plus programs at seemingly unprofitable margins? S tr eet customers cannot mak e up the difference, according to t h a t same distributor: "The only conceivable way a distributor could execute costplus-seven chain programs and achieve this essential 17 percent would be to realize 27 percent with s tr eet customers, and we know this isn't the case. "5 S h e l t e r e d i n c o m e . Yet SYSCO, for one, is able to achieve an overall margin of 17.9 percent. Virtually the sole source of profit for broad-line vendors is manufacturers' incentives. Those incentive programs reduce distributors' costs, but the distributors n e i t h e r extend t h a t cost reduction to th eir i nvent or y nor account for it in t he i r margins. In s t ead distributors view manufacturers' programs as a source of income, known as sheltered income, and those funds have become indispensable. An article in ID magazine recently proclaimed: "If it weren't for the availability of shelter, the average distributor would, at best, b re a k even. Man y would sink." " S h e l t e r e d Income: The B a t t l e C o n t i n u e s , "

ID, Vol. 29, No. 4 (April 1993), p. 77.

One i n d e p e n d e n t distributor found t h a t sheltered income was equal to 3 to 6 percent of sales. The reductions a p p e a r "offinvoice" and often do not a p p e a r during the course of an audit by a pr ogr a m customer. Food-service operators a t t e m p t to negotiate cost-plus programs with t hei r p r i m a r y vendors, but sheltered income m akes t h a t negotiation difficult. In fact, one observer commented t h a t cost "has lost any m e a n i n g it might have had. ''~

To increase t hei r p e n e t r a t i o n of a m a r ket , m a n u f a c t u r e r s routinely offer incentives to food-service distributors. When bidding a volume client, food distributors often gamble t h a t low margins will be offset by high volume t h a t will g a r n e r considerable income from incentives. As an example, we will outline the incentives one m a n u f a c t u r e r offers its distributors. G r o w t h p r o g r a m s . This m a n u f a c t u r e r rew ards distributors for selling increasing a m o u n t s of its products. The m a n u f a c t u r e r sets dollar-volume t a r g e t levels, and when the distributor reaches a t a r g e t level, the cost per case is reduced for all s ubs equent purchases until the next t a r g e t level is reached. The m a n u f a c t u r e r continues to invoice the distributor at the "regular" price and sends the distributor a rebate, or refund check, at the end of the y e a r t h a t reflects the value of the cost reduction. Since the cost reduction does not a p p e a r on the distributor's invoice from the m a n u f a c t u r e r , it is called an off-invoice discount. For example, if a distributor's 1993 purchases of an item totalled $57,000, this m a n u f a c t u r e r would offer a four-level growth

program for 1994. If purchases grow in 1994, the m a n u f a c t u r e r would offer rebates as follows. For the first 10 to 20 percent in 1994, the rebate is 5 percent of the additional $5,700 to $11,400 (or, up to $570); if t h e y grow 20 to 30 percent, the rebat e is 10 percent of the added a m o u n t (up to a n o t h e r $570); if t h e y grow 30 to 40 percent, the rebate is 15 percent of the additional (as much as $855); and if t he y grow 40 to 50 percent, the reba te is 20 percent of the added amount, for a potential rebat e of $1,140. Consequently, if the distributor m a n a g e d a 50-percent sales increase (from $57,000 in 1993 to $85,500 in 1994), the manufact u r e r would rebat e $3,135 at the end of the year. S a l e s a l l o w a n c e s . On top of the growth program, this m a n u f a c t u r e r offers a sales and marketing allowance. At the end of a year, the m a n u f a c t u r e r rebates a percentage of the total dollar value of the purchases made by the distributor. The m a n u f a c t u r e r in our example rebates 3 percent of the total product value purchased by the distributor over the course of the year. On hypothetical item sales of $85,500, t h a t would a m o u n t to a n o t h e r offinvoice rebate of $2,565. B o n u s e s o n b o n u s e s . In addition to those incentives, m a n u f a c t u r e r s m ay also offer a "bonus on bonus" for achieving a specified growth target. In the example, the m a n u f a c t u r e r would pay a n o t h e r $1,000 for a distributor's reaching total a n n u a l sales of $79,800 in the growth-program example above. These t hr e e rebates t oget her a m o u n t to n e a rly 8 percent of the distributor's cost of goods sold, and the distributor still has additional sources of sheltered income.

" S h e l t e r e d Income: The B a t t l e C o n t i n u e s , " p. 76.

P i c k u p a l l o w a n c e s . A distributor t h a t uses its own deliv-

56

THE CORNELL H.R.A. Q U A R T E R L Y

A L o o k at I n c e n t i v e s

ery vehicles to pick up the m a n u f a c t u r e r ' s products at the conclusion of its delivery r u n (called backhaul) m a y be entitled to a r eb ated discount for purchasing a load smaller t h a n the volume t h a t would normally be sold at a given discount level. The m a n u f a c t u r e r would bill the distributor at the "full" price for a less-than-full t r ai l er load and t h e n g r an t an off-invoice rebate, commonly called a pickup allowance. Distributors m a y also assess themselves a "delivery charge" for the backhauled delivery to their own distribution center t h a t works its way into the cost on which various programpricing schemes are based and eventually into the food-service operator's price.

Prompt-payment discounts. M a n u f a c t u r e r s and other producers routinely offer discounts for prompt payment. A distributor t h a t receives a 2-percent discount for p a y m e n t within a period set by the m a n u f a c t u r e r does not generally reflect t h a t discount as a reduction to its product cost, b u t views it as a source of income. Some distributors have found a n o t h e r way to g a r n e r additional income when the m a n u f a c t u r e r doesn't offer a p r o m p t - p a y m e n t discount. Those firms assess a 2percent "upcharge" on products t h a t th ey purchase from manufacturers who do not offer a p r o m p t - p a y m e n t discount! Brokerage fees. To combat the enormous buying power of SYSCO, Kraft, and other big companies, i n d e p e n d e n t broadline distributors join together in wh at is essentially a buying cooperative, known as a marketing group. Examples include ComSource, Nugget, Pocohontas, and CODE. The m a r k e t i n g group acts as a b r o k e r in a r r a n g i n g the sale of a m a n u f a c t u r e r ' s product to the distributors in the group.

JUNE 1994

M a n u f a c t u r e r s pay the broker a sales commission for its efforts in ar r angi ng the sale. After deducting the expenses associated with r u n n i n g the buying group, the balance of the brokerage fee is divided up among the participating m e m b e r distributors, contributing income equal to as much as 3 percent of sales.

Dropping the Shield The m a t t e r of det erm i ni ng cost has a t t r a c t e d sufficient attention from food-service operators t h a t some distributors are willing to bring the shielded income out into the open. SYSCO, for example, has recently engaged in a disclosure campaign for its customers t h a t are on cost-plus programs. Operators who are serious about participating in vendor programs probably recognize t h a t the rebates are effectively reducing the cost of the commodities t h a t t hey are purchasing but t h a t those cost reductions are not being factored into their unit prices. Realistically, it is nearly an impossibility for an operator to audit a cost-plus pricing arrangement. As a consequence, a new kind of e n t r e p r e n e u r will (for a fee) "broker" p r i m a r y vendor relationships t h a t build the distributor's volume in exchange for access to the distributor's computer reports t h a t detail accounting activities. One such organization is the J B L Group in Mission Viejo, California, which in addition to performing a var i e t y of audit functions (including price verification for an operator's purchases), will t rack an operator's product usage and file for rebates on t hei r client's behalf.

Distributors' Promotions Distributors generate income from m a n u f a c t u r e r s in ways not

57

Distributors view m a n u f a c t u r e r s ' rebate p r o g r a m s as " s h e l t e r e d " i n c o m e that is essential to the b o t t o m l i n e - - a n d not s h o w n on invoices.

There are valid strategic reasons for some organizations to be selfdistributors, but the industry's economics works against self-distribution.

related to invoices and ordering, including food shows and controlled publications. Many broadline distributors conduct a n n u a l food shows for customers. The shows combine educational seminars, product demonstrations, culinary contests, and booths from m a n u f a c t u r e r s or brokers who offer product samples, m e n u ideas, and so on. Commonly the m a n u f a c t u r e r s or brokers write orders with "special show pricing" t h a t the distributor later delivers. To cover the cost of renting an exhibition hall, the distributor charges each participating m a n u f a c t u r e r a booth fee. The fees frequently generate revenue exceeding the cost of r u n n i n g the show, providing another form of income for the distributor. M a g a z i n e s . Some distributors publish magazines and provide t h e m to their customers. SYSCO, for example, publishes SYSCO's Menus Today, which contains information useful to food-service operators and contains coupons and other forms of m a n u f a c t u r e r promotions. Manufacturers whose products are represented in the magazine pay the distributor for the space, producing another form of income.

Gimme Shelter In its 1993 examination of sheltered income, ID magazine concluded t h a t sheltered income is "an all but indispensable component of distributor margins. "7 For the operator negotiating a volume-buying program, t h a t sheltered income is a factor t h a t allows the distributor to offer a program margin t h a t is nominally well below the profit margin. The distributor hopes t h a t the sheltered income earned as a consequence of the additional volume will make up the differ7 - S h e l t e r e d Income: T h e B a t t l e C o n t i n u e s , " p. 76.

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ence and, indeed, provide the profit for the business. It would be difficult for a broad-line distributor to be profitable at an overall margin below about 14 percent. Offering cost-plus programs below t h a t level requires a balancing act of customer mix, product mix, and manufacturers' incentives. Broadline distributors get themselves into trouble when the balance shifts. It is entirely possible t h a t the balance will shift, because food distribution is a dynamic business and volume calculations can be affected as accounts come and go and individual item preferences change. The distributor might find unexpectedly fewer orders from certain accounts. Certain items t h a t once were popular m a y become unsalable. On the other hand, economies of scale dictate t h a t distributors continue growing. As growth occurs, the relationship of expenses to revenue changes. W h a t was fixed overhead against yesterday's volume becomes variable overhead on today's much larger volume. Program-pricing agreements tend to stay constant through all t h a t turmoil, even when a distributor's cost of doing business increases, because distributors fear the loss of volume. That works to the buyer's benefit.

Self-Distributors The foregoing discussion makes us question why a food-service company would become involved in self-distribution. Opportunities for sheltered income may not be available to all self-distributors. Manufacturers are pressured by their broad-line distributor "partners" to provide the distributor with an edge over self-distributors. Certainly the volume offered by SYSCO, Kraft, or Rykoff-Sexton is far greater t h a n

THE CORNELL H.R.A. QUARTERLY

t h a t offered by most self-distributors. SYSCO, for instance, can buy by the trainload, giving it purchasing leverage formerly enjoyed only by national superm a r k e t chains. On the other hand, a self-distributor m a y well preclude itself from the manufacturer-rebate pool made available only to food-service operators. The following analysis of selfdistribution primarily involves the economic aspects of the distribution business. There are valid strategic reasons for some organizations to be self-distributors. If the motivation is one of operating another profit center, and the returns associated with r u n n i n g a distribution company meet or exceed a firm's goals, selfdistribution might make sense. Self-distribution m a y also be part of an operator's effort to ensure t h a t service levels are better t h a n those of competitors, to enhance food and production controls, or to improve productivity at the unit level. In the final analysis, however, the chief motivation for selfdistribution m u s t involve cost control. In a 1993 edition, R e s t a u r a n t B u s i n e s s magazine highlighted the Phelps-Grace company, which operates a substantial self-distribution operation t h a t the magazine said handles about 50 percent of its product needs (about $3-million worth). One point of the article was the money t h a t Phelps-Grace was saving from self-distribution. By R e s t a u r a n t B u s i n e s s ' s calculations, self-distribution costs the company a total of $60,000 annually, but the company "trims $2.50 to $3 per case off the cost of its fresh beef...a savings of $85,000 on beef alone. "s There is no question t h a t today's world of food distribution 8,,Taking over t h e Helm," Restaurant Business, A u g u s t 1993, p. 68.

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offers considerable opportunity to eliminate the distributor at almost any volume. For example, the operator of a single-unit r e s t a u r a n t who is willing to make the effort can obtain the restaurant's food supplies from one of the huge cash-and-carry wholesalers t h a t have popped up around the United States during the past ten years (e.g., Sam's, Price Club, Costco, Jetro). The difference in cost between food delivered to the door and food picked up at a cash-and-carry operation could be 10 to 15 percent. A r e s t a u r a n t t h a t spends $300,000 a year on food could theoretically save $30,000 to $45,000 a year. We say theoretically because operators who choose cash-andcarry wholesalers as a supply source usually do not take into consideration the value of their time, the cost of operating their own vehicles, and the possibility of unexpected costs. As R e s t a u r a n t B u s i n e s s explained it, Phelps-Grace "began sending its employees to Boston several times a week to pick up seafood from primary sources such as brokers on the Boston fish pier .... It soon discovered advantages in going direct with produce and some meats as well .... Since the truck is already at the restaurants on a regular basis, there is little or no added cost involved in tossing on another item. "~ Those extra stops appear to add no extra charge to the delivery, other t h a n a few extra moments for the driver. But federal laws covering truck drivers' duty cycles (number of hours driving in a day, required rest between drives) m a y add big charges. The regulations, for instance, cap drivers' total workdays at 15 hours, with no " T a k i n g over t h e H e l m , " p. 67.

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more t h a n 10 hours of driving. The driver is also limited to no more t h a n 60 hours of work in any seven days. We know of selfdistributors whose drivers hit the daily ceiling each day, and whose work weeks are therefore limited to four days out of seven. Moreover, if the vendor is out of stock, the driver will come away empty handed, increasing delivery costs. Labor is only part of the cost picture. Leasing a truck can also be expensive. For a large fleet (where the distributor has some negotiating clout), typical costs are as follows: a 28-foot truck would cost $800 a month, plus a penny a mile and 50 to 60 cents an hour to run the refrigerator unit. A single-axle tractor trailer could cost $1,400 per month, plus six cents a mile. A tandem-axle semi would add another $300400 to t h a t cost. The cost of fuel is additional to all those lease expenses. Even under the best of circumstances, delivery is the greatest single expense for a food distributor, accounting for 4-5 percent of sales, on average. The most efficient, highest-volume distributors can hold delivery expense to about 3.7 percent of sales. We should stress t h a t the distributor is not just in the delivery business. The distributor's most significant function is maintaining inventory at the appropriate level to keep operators supplied without tying up undue capital in unsold items. While broad-line distributors sometimes experience stock-outs, they are usually able to provide a reasonable substitute. Most distributors boast a 98-percent fill rate, the frequency with which a customer's order is delivered as ordered, including agreed-upon product substitutions. Another unspoken issue in selfdistribution is the opportunity

cost of spending time dealing with a cash-and-carry operation instead of m a n a g i n g the restaurant. It is possible t h a t the r e s t a u r a n t operator could earn more t h a n the theoretical savings of self-distribution by building the business. Given the relatively high fixed costs of the r e s t a u r a n t business, an increase in sales is likely to have a greater impact on the bottom line t h a n will a decrease in product costs (assuming self-distribution actually decreases product costs). The issue is to determine the activity t h a t deploys the company's assets more efficiently.

ROE Self-distributors also may not be considering the cost of capital. An unresolved issue is the r e t u r n on equity associated with distribution, as compared with the r e t u r n on the core business. The median food wholesaler has a r e t u r n on equity of 11 percent, a r e t u r n on capital of 8 percent, and a profit margin of 1 percent. The median values for r e s t a u r a n t chains, on the other hand, are a r e t u r n on equity of 13 percent, a r e t u r n on capital of 12 percent, and a profit margin of 4 percent. And in the hotel and gaming i n d u s t r y the median r e t u r n on equity is 17 percent, the r e t u r n on capital is 9 percent, and the profit margin is 6 percent. 1° The hospitality industry's core businesses appear to outperform the distribution industry. While there are reasons for operators to choose self-distribution there are probably as m a n y reasons not to. Bottom-line profit of food-service distributors, expressed as a percentage of sales, has declined continuously during the past 25 years. The shrinking margin continues to 10,,Annual R e p o r t on A m e r i c a n I n d u s t r y , " Forbes, J a n u a r y 3, 1994, pp. 150, 156.

plague the i n d u s t r y despite the efforts of distributors and manufacturers to develop shelteredincome programs. Indeed, margin pressure is the number-one challenge facing distributors in 1994.11 Although it is easier to choose self-distribution in a single-unit r e s t a u r a n t t h a n in a m u l t i u n i t operation, the same principles apply. The main difference is the leverage a m u l t i u n i t operator has when purchasing large quantities from a distributor--leverage t h a t makes self-distribution look less exciting. As the volume grows, the cost difference between picking it up yourself and having a food-service distributor deliver products to your door narrows markedly due to the programpricing approach taken by most broad-line distributors for their chain accounts. The key to success for a selfdistributor is to outcompete the already competitive broad-line vendors. For this strategy to make sense, the self-distributor m u s t be the low-cost distributor in the markets the national distributors service. That stance requires major investments in material-handling systems, multi-temperature delivery fleets, efficient facilities, computer systems, and state-of-the-art software--investments t h a t can be justified only if the volume is high.

Profiles of Four Self-Distributors Self-distributors seem to be analogous to bumblebees. On paper, they cannot fly, but in practice they are alive and well. A n u m b e r of giant, successful food-service companies are involved in self-distribution, including PepsiCo, Marriott, ~ " O u t l o o k '94," ID, J a n u a r y 1994, p. 46.

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Shoney's, and ARA. We conducted telephone interviews with representatives of those organizations to find out why they are involved in self-distribution.

PepsiCo Food Systems (PFS). PFS representative Nancy DelRegno said t h a t PFS's purpose is to save PepsiCo r e s t a u r a n t s money and provide better service to the units t h a n other distributors can. PFS evolved out of PepsiCo's acquisition of Taco Bell and Pizza Hut, which were involved in distribution. PFS does not supply r e s t a u r a n t s outside the PepsiCo system. The operation is run as a profit center, and a "reasonable return" is expected, although PepsiCo's a n n u a l report does not provide sufficient detail to verify t h a t the company receives such a return. PFS conducts "market-basket" cost analyses to demonstrate the cost savings of purchasing through the division. Not all of PepsiCo's restaurants purchase from PFS, however. PFS serviced 14,000 of PepsiCo's U.S. r e s t a u r a n t s (nearly 17,000 units in 199212). Most of the remaining outlets are franchise units t h a t purchase from other distributors as long as the product specs meet PepsiCo's requirements. DelRegno stated t h a t virtually all the companyowned stores do buy through PFS, although they are not required to do so.

Marriott Distribution Systems (MDS). Marriott's selfdistribution system grew out of Marriott's Fairfield F a r m s commissary operation, explained Robert Praas, executive vice president and general m a n a g e r of MDS. Under Praas's leadership the commissary operation was shut down and the operation ix R o n a l d P a u l , 1993 Technomic Top 100: The Largest U.S. Chain Restaurant Companies (Chicago: Technomic, Inc., 1993), p. 1-13.

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was refocused on distribution. A Restaurant Business article concluded: "Making money is the obvious motivator. 'We t h i n k we can make distribution a profit center; that's our longterm goal,' Praas says. ''3 However, Marriott's a n n u a l report does not provide enough detail to tell whether t h a t goal is being reached. "Since 1982, Marriott has opened six distribution centers... and plans on adding two more centers e v e r y y e a r .... The company's strategy is to open new centers in regions where there are enough Marriott hotels to guarantee a core business, and then aggressively target restaur a n t chains. T M Indeed, MDS was recently awarded a distribution contract for more t h a n 100 of the Franchise Associates r e s t a u r a n t s (Howard Johnson's franchisees). 1~ Praas states t h a t h a l f the current sales volume is generated by Marriott hotels. Some observers suggest the possibility t h a t external customers might be seen as more valuable in such an arrangement, since they bring in outside revenues. TM Extending t h a t argument, they say it is not uncommon for external customers to receive better levels of service t h a n internal customers. MDS guards against t h a t possibility. Praas said t h a t MDS routinely surveys all its customers, both internal and external, to ensure t h a t there is no perceived difference in the service received by the two groups. Moreover, MDS also asks Marriott properties not ':~"Marriott G e t s Serious a b o u t Food D i s t r i b u t i o n , " Restaurant Business, M a r c h 1, 1993, p. 41. 14" M a r r i o t t G e t s Serious a b o u t Food D i s t r i b u t i o n , " p. 37. l~,,Marriott W i n s H o J o D i s t r i b u t i o n C o n t r a c t , " Nation's Restaurant News, J a n u a r y 31, 1994, p. 40. ,6 H.L. Lee a n d C. Billington, " M a n a g i n g S u p p l y - C h a i n I n v e n t o r y : Pitfalls a n d O p p o r t u nities," Sloan Management Review, S p r i n g 1992, p. 68.

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served by MDS to evaluate their suppliers using the same survey instrument. The results of the surveys provide Praas with information on how MDS stacks up against SYSCO and other national broad-line distributors with which Marriott properties have primary-vendor programs. "Based on the prices those units are receiving, we know when it's cost-effective and not costeffective to pursue [self-] distribution in those regions," he said. In m a n y ways, MDS operates as a niche player so t h a t it is protected from changes in the customer mix and product mix. As Restaurant Business reported, "Marriott intends to be a specialty distributor for r e s t a u r a n t chains, not independent operators .... That's because its centers stock only about 3,000 items, not the 8,000 to 10,000 items usually handled by full-service distributors.'17 As MDS pursues additional chain business its inventory level will have to grow to meet the needs of new accounts. The way to expand the business without undue increase in the number of inventory items is for MDS to create partnerships with local broad-line distributors and institute "cross-dock" arrangements. Those agreements would allow MDS to fill its customers' orders by supplementing its limited inventory through merging the contents of the broad-line distributor's trailer parked adjacent to (cross-docked with) the MDS trailer being loaded at the distribution site. Such a relationship would allow MDS to continue serving its growing business without incurring the added expenses associated with carrying expanded inventories. The partner gains by boosting its volume 17" M a r r i o t t G e t s Serious a b o u t Food D i s t r i b u t i o n , " p. 41.

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without incurring a sales expense, achieving greater delivery efficiencies, and increasing its own inventory t u r n s - - a l l critical components of profitability.

Shoney's Commissary and Distribution Operations. Shoney's began self-distribution as a consequence of its acquisition of Shoney's Big Boy, which was operating its own food commissary to supply the restaurants, according to Dan Stout, president of the operation. As the Shoney's chain continued to grow, so too did the processing and distribution activities. From five distribution centers, Shoney's provides participating restaurants about 90 percent of the units' food and supplies. The r e s t a u r a n t s generally buy paper products and some dairy products from local vendors. Shoney's 1990 commissary and distribution revenues were $396 million. TM According to Stout, 60 percent of t h a t volume comes from company-operated units, and the balance comes from franchisees. Like PFS and MDS, Shoney's Commissary and Distribution Operations marks up the cost of its products to realize a profit. Again, it is not possible to verify t h a t it has achieved t h a t goal. Shoney's has been involved in distribution since 1969, and Stout has been involved in growing t h a t business for the past 23 years. Still, he would probably not advise a multiunit operator like Shoney's to try starting up a selfdistribution operation in today's market. Woodhaven Foods. ARA got into food-service distribution in the early 1960s, when it acquired the Slater Corporation, a contract operator involved in self-distribution. That distribution entity is ~SShoney~ 1990 Annual Report, p. 13.

now known as Woodhaven Foods, according to H e n r y Langknecht, chief executive officer. As ARA grew, particularly in the Northeast, Woodhaven Foods grew with it. ARA encourages its units to purchase from Woodhaven Foods but does not m a n d a t e t h a t they do so. Langknecht indicates t h a t Woodhaven Foods, like the other big self-distributors, is viewed as a profit center, although financial data are not available to determine the degree of profitability. According to Langknecht, Woodhaven Foods serviced only ARA accounts until 1979, when it began to pursue street business to increase the volume of material moving through the warehouse and the distribution system. Because delivery is the single greatest operating expense in food-service distribution, a company t h a t adds accounts and stretches its distribution radius m u s t increase volume to offset increased operating expenses and keep its prices competitive with those of other distributors. When ARA's operations expanded away from the major n o r t h e a s t e r n urban areas, delivery costs increased and Woodhaven Foods began to seek street business. By 1992, 25 percent of Woodhaven's sales came from street business.

Deliverance Some m u l t i u n i t r e s t a u r a n t companies prefer to let systems distributors handle distribution for them. The systems distributor's business is to purchase food and related supplies according to agreements made by the operator and the manufacturer, m a i n t a i n inventories of those items, and deliver t h e m at predetermined time intervals. Both General Mills and Long J o h n Silver's chains, for example, considered self-distribution, but instead chose to contract with the Martin-

Brower Company, the largest systems distributor. Unlike a primary-vendor program, which varies from customer to customer and distributor to distributor, the relationship between General Mills and Martin-Brower, for example, is identical to the one between Long J o h n Silver's and Martin-Brower. J i m Dimos at Martin-Brower said t h a t its a r r a n g e m e n t s with all companies are basically structured the same way. The p a t t e r n used by J o h n Metsker, vice president of distribution at General Mills Restaurants, is typical. General Mills does the sourcing and negotiates prices directly with the manufacturers, growers, and producers. Martin-Brower purchases from the sources identified by General Mills, arranges for delivery, and takes possession of those items at its distribution centers. It delivers the products to the r e s t a u r a n t units at the prices negotiated by General Mills with the producer, billing the total delivery fee as a separate invoice line item t h a t can easily be verified (by multiplying the number of cases being delivered by the negotiated per-case fee). The fee is the same a m o u n t for each unit regardless of the value of the case being delivered. (One exception to the systems distribution is seafood for Red Lobster, which is controlled by General Mills.) The fee. The fee is a function of the characteristics of the particular r e s t a u r a n t concept and the resulting effect on the distributor's costs of the following factors: • n u m b e r of units in the system, • location of and distance between the units, • mix of commodity items (dry, refrigerated, frozen), • volume of commodity items, • operator's ability to accept pallet deliveries,

J' General Accounting Office, "DOD Food Inventory: Using Private Sector Practices Can reduce Costs and Eliminate Problems," GAO/ NSIAD-93-110, June 1993.

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frequency and time of delivery, p a y m e n t terms, and • means of order transmission. Given t h a t information, Martin-Brower can forecast the costs involved in servicing the business and estimate its potential profit. The r e s t a u r a n t company negotiates the fee with Martin-Brower, which "opens up its books" so t h a t the company can assess the reasonableness of the profit, taking into account the impact t h a t the business will have on the distributor's costs. F e e estimate. Although the fee charged by Martin-Brower is confidential, we can speculate what it might be. Based on the estimated savings per case t h a t the Phelps-Grace company experienced when it stopped using a distributor and a General Accounting Office report t h a t analyzed the Department of Defense's (DOD) food-procurement and inventory practices, a fair assumption is a fee of $2.50 per case. 19 We can t h e n estimate the margins at which systems distributors operate, using the sirloin-and-apples example. The distributor buys a case of top sirloin for $100, adds to it the $2.50 fee, and charges the company $102.50, resulting in a margin of 2.44 percent. A case of apples costs the distributor $20.50, to which it adds $2.50, charging the company $23; the margin is 10.87 percent. If h a l f the cases are sirloin and h a l f are apples, the overall margin would be equal to the mean of the two margins, or 6.65 percent. That margin is low, suggesting t h a t compared to other foodservice operators the DOD's product mix consists of a higher percentage of low-case-cost items. • •

It m a y also be t h a t the distributors who were interviewed were all playing the "volume game," hoping t h a t the increased volume generated from the DOD business would be offset by increases in sheltered income or t h a t the costs associated with servicing a multiunit company t h a t sources its own products would effect a significant cost reduction. The issue for the DOD and, indeed, any food-service operator, is what is an appropriate margin. General Accounting Office investigators answered this question as follows: "The distributors we spoke with said they would probably charge DOD $1.00 to $2.50 per case if DOD purchased items or a percentage mark-up of 8-14 percent if they purchased items for DOD. "2° That investigation raised another issue related to margin: who owns the inventory in a systems-distribution agreement? In the case of the Department of Defense, the GAO report did not make clear which firm owns the inventory. If the distributor owns the inventory, then it incurs costs associated with t u r n i n g t h a t inventory, not to mention the credit risk associated with t h a t capital outlay. On the other hand, if the DOD pays for the items purchased and arranges for their delivery to the distributor's facility, then the distributor is providing only warehousing and delivery, and the distributor is charging a fee, known as drayage, for those services.

Achieving Efficiencies The development of r e s t a u r a n t chains gave rise to the systems distributors, with their cost-plus agreements at low margins. They are able to provide distribution services at tiny margins by: 2o G e n e r a l A c c o u n t i n g Office, pp. 2 4 - 2 5 .

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• minimizing the number of line items in the distribution center; • achieving rapid turns on their inventory; • realizing high levels of warehouse productivity; • realizing increased productivity in purchasing (since chains source their own products); • eliminating the sales expense and credit risk of handling street accounts; • reducing the administrative costs of dealing with m a n y individual accounts (although Martin-Brower delivers to 11,500 units, it deals with only 16 accounts); • reducing the day's sales outstanding (accounts receivable) as a consequence of faster p a y m e n t by chain accounts, particularly those t h a t are company-operated; and • achieving delivery efficiencies through large average orders. Cost plus eight. Systems specialists are well suited to operating in the low-markup environment of food-service distribution. As ID magazine summed it up: "Today, cost plus eight is common and even cost-plus-seven deals abound. Such arrangements can be profitable to systems distributors whose total operations have been geared to... chains .... Low cost-plus arrangements make sense for them. For a typical broad-liner, they do not. "21 Even SYSCO, the i n d u s t r y leader with nearly $9 billion in sales does not mix systems distribution with its full-line business. Instead, it created its separate SYGMA division. It is not unrealistic for a systems distributor to operate on a fee-per-case basis in the range suggested in the GAO report, particularly if the chain sources its own products, as do General Mills and other multiunit restau21 " S h e l t e r e d I n c o m e : T h e B a t t l e C o n t i n u e s , " p. 76.

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r a n t companies. The rest depends on the volume and the efficiencies achieved.

Shrinking Margin While there are reasons for operators to choose the route of self-distribution, there are probably also an equal number of reasons not to do so. Chief among the negative factors is shrinking margins. The bottom-line incomes of food-service distributors (as a percentage of sales) have declined continuously over the past 25 years. The shrinking margin continues to plague the industry despite distributors' and manufacturers' efforts to develop sheltered-income programs. ID magazine identified margin pressure as the number-one challenge facing distributors in 1994. While sheltered income remains a mystery to m a n y operators, those opportunities may not be available to operators who choose self-distribution. The distribution business has become one of volume (throughput, in industry parlance). Many selfdistributors cannot give manufacturers the volume they desire in moving inventory items. Finally, the distribution business has traditionally been developed and managed by entrepreneurs. Distribution profitability is often determined by management's ability to identify and capture niche markets while modifying the customer mix and pricing practices to achieve the right blend of volume, margin, and shelter essential to survival. Self-distribution cultures generally do not lend themselves to those kinds of activities. Given the financial returns normally realized in the restaur a n t and hotel industry, assets tied up in distribution could be better deployed in the operator's core business. CO