When it comes to negotiating beverage contracts and beverage partnerships, equipment can often be an afterthought.
After focusing on the beverage company brands and how they fit with your consumer, the marketing ideas that bring the partnership to life, the account team that will be servicing your account, and the financial proposal that ties the package together, it can be easy to overlook the equipment element of the prospective partnership.
Ignoring or devaluing the equipment element, however, would be a large mistake.
The truth is that your beverage equipment can have a greater impact on beverage sales than even the beverage supplier with which you choose to partner.
Indeed, there’s much at stake in how you handle your beverage equipment.
Here are seven reasons you should develop a specific negotiation strategy for the equipment which will dispense and house the beverages you serve:
1. Equipment Quality = Beverage Quality
It might be obvious, but having properly functioning, calibrated, clean and sanitary beverage equipment is critical to the quality of your guest’s beverage. In the case of fountain units, where syrup, carbonation and filtered water are mixed at the point of the pour, the importance of ensuring all components of the setup (including the dispenser, lines, carbonator, chiller, etc.) are functioning properly is obvious.
No one wants the first experience that a customer has of your food to be the taste of a flat beverage. And, of course, there are health concerns around ensuring all products you serve are safe to consume.
Even in the case of non-fountain dispensing equipment (including cold vault coolers, grab-and-go containers, vending equipment, etc.), ensuring that equipment is functioning properly is essential. Beverage quality scores increase if they are served at the correct temperature, and no one wants to receive an overly fizzy drink that took a tumble in the vending machine.
2. Poor Equipment = Poor Sales
Not only is the actual quality of the beverage dependent on the quality of the equipment, a product’s perceived quality is vastly dependent on the condition of the equipment from which the product is served.
Consider the following images in your mind:
- a grungy cooler
- a dated vending machine
- unidentified “slime” on a fountain dispenser
- a touch-screen unit with smudge marks on the screen
- lukewarm or hot beverages
Do these images inspire you to purchase a beverage? Of course not.
And even when a guest does make a purchase from equipment that is perceived to be dirty, their experience of the product is diminished.
Research suggests that the guest has a significantly less favorable opinion of the exact same beverage when purchased from equipment seen as “dirty” than a product received from a clean, state-of-the art piece of equipment.
According to one study by the Journal of Foodservice Business Research, the dining room experience – including the cleanliness of the equipment and the temperature of the food – has a greater impact on a consumer’s perception of sanitization (and therefore, a consumer’s likelihood to transact) than everything else except for the cleanliness of the restroom. And this is just one study among many that suggest the same thing.
As with many things in life, the mental perception we have of the quality of our beverage dramatically impacts our actual experience of the product.
Beverage sales are critical drivers of overall revenue. Some reading this article wouldn’t be able to keep their doors open without selling beverages. For that reason, beverage equipment is a vitally important factor in the perceived overall satisfaction of a guest’s experience.
And unlike equipment that is used to make or store food products, guests and consumers interact with beverage equipment in a very personal, individualized way. The importance of having great beverage equipment is heightened over other equipment that resides in your kitchen, café, or service area.
The wrong equipment choice could easily have a much greater impact on beverage sales – positive or negative – than the actual beverage the equipment dispenses or stocks.
3. Free Equipment = More Expensive Products?
Everyone knows the oft-quoted phrase: “There’s no such thing as a free lunch.”
In the same vein, we tell our clients: “There’s no such thing as free equipment.”
Receiving equipment at no charge makes for a great slide on a proposal presentation, but common sense tells us that the equipment is actually paid for via other means. Major beverage companies are not operating non-profits, and beverage equipment is not free to produce.
When the finance team at a beverage company models the financial proposal of a prospective partnership, rest assured there is a comprehensive analysis of the equipment costs that will be required for the account should the beverage company win the business. This analysis will consider the cost of capital, the cost of non-serialized parts, depreciation rates, labor costs for installation, residual equipment value and more.
This cost is then included in the total profitability analysis, modeling both revenue as well as all cash outlays – including rebates, sponsorship funding, floor costs, delivery costs, labor costs, and, yes, equipment costs. Beverage companies prefer the financial model to yield a return which fits within certain pre-determined guardrails and parameters established by the company’s channel strategy or an investment which can be subsidized by various marketing budgets.
Every cent in the model that is allocated to equipment is one more cent not allocated towards rebate payments, price reductions, or marketing spend to grow your business.
While it’s a great benefit that your company will receive new or like-new equipment at no cash outlay to you, it means that there are other benefits you are certainly not receiving.
Many operators, if given the choice, would rather have a say in where the money is allocated.
4. Equipment terms can extend the length of your deal
When beverage company proposals include equipment provided at no charge, the beverage company retains title to the equipment and continues to depreciate the equipment on its books. In their financial models, they depreciate this equipment over the life of the term of your beverage contract.
If the deal is shorter, it likely means more money per year is being charged against your program. If the deal is longer, they can allocate less money per year to capital equipment costs, add more to the rebates or funding, and still yield the same margin (at least on paper). This is the process that yields the typical 5, 7, or 10-year deal terms that have become commonplace in the industry.
It’s possible to achieve a shorter beverage deal term without sacrificing your financial value, but it will require a deliberate equipment strategy.
5. You can unknowingly rack up massive equipment charges by the end of your term
Beyond routine depreciation schedules, however, lies a practice that is far more subtle and dubious: unbundling charges.
Unbundling charges are fees that can be inserted into your agreement – often in the fine print – that allows the beverage companies to collect a series of charges pertaining to the equipment they have placed at your units at the end of the beverage contract. They can collect these fees even if the deal has naturally come to term.
These fees can include a myriad of items, including the unamortized costs of the equipment (equipment that they own!), removal costs, refurbishment costs, the costs of non-serialized parts, and more.
Of course, this is all in addition to unexpected service repair costs, costs to move equipment for any remodeling, and hefty monthly charges for certain touch-screen dispensers.
It’s not uncommon for these unbundling charges to add up to hundreds of thousands – if not millions – of dollars.
In fact, we’ve seen instances of the beverage companies systematically replacing beverage equipment near the end of a beverage contract term, simply in order to increase the unamortized equipment book value balance. The result? The unbundling fees ratcheted up to to a level that was prohibitive to switching to a competitor.
The right equipment strategy will help you avoid this fate, but without giving it much attention you could be in for an unpleasant surprise at the end of your agreement.
6. You know your customers better than the beverage companies do
New beverage equipment is always being developed by the beverage companies. A visit to a beverage company booth on the show floor of the National Restaurant Association will quickly reveal that these companies are interested in new equipment options – equipment such as touch screen fountain dispensers, sparkling water dispensers, tea urns, juice bubblers, coffee dispensing platforms, and more.
The primary equipment decision is no longer simply how many valves you want at each unit. The beverage companies are very interested in providing you with a variety of equipment platforms (and tying you to it via the contract) in order to be your provider for more beverage categories.
With these solutions, however, can come buildout costs, additional unbundling charges and relatively high product costs.
Our advice? Explore all of the equipment options at your disposal and allow the beverage company to inspire you and challenge your thinking. They are the experts, after all, and we’ve seen some wonderful equipment rollouts over the years. Like with any new innovation, however, it’s always a good idea to test new equipment before committing to a large rollout to ensure you understand your consumer’s actual behavior.
7. Your beverage equipment can limit your flexibility
Finally, without having a pre-determined equipment strategy, you could find yourself in a position with very little flexibility during, and even after, the contract term.
If you own your equipment, you don’t need to worry about stretching the deal term out to match a beverage company’s depreciation schedule. Since switching providers wouldn’t require a massive project plan, an army of service technicians, and unwieldy unbundling charges, you maintain more leverage and can move in a different direction much faster if you aren’t satisfied with your supplier’s level of performance.
Creating a strategy that allows you to have maximum control of your equipment will put you in a good position in the years to come.
Begin developing your plan now
There are tremendous advantages to thinking strategically about your approach to the beverage equipment you serve. If done right, it can yield considerable financial results, provide you with maximum leverage in your negotiations, and give you flexibility to take risks and change course if the need arises.
Typically, these strategies aren’t completed overnight and require deliberate planning.
The good news is that with careful preparation, the strategies cost no money to employ.
Are you interested in exploring these strategies?
Set up a free consultation to discover all of your options.