There are few contracts that impact your bottom line more than your beverage deal. And beverage deal negotiations are like chess games (at least the beverage companies treat them that way). Following are 4 principles that will help you during your next negotiation.
Supply chain professionals around the world source an increasing number of products and services and have a huge impact on the bottom line of their organizations.
While information abounds on the latest commodity pricing and strategic sourcing plans, nearly no information is available generally about relative soft drink pricing in the foodservice industry. Why is that? Why the mystery? Is there really a mystery? Do you need outside expertise?
Principle #1: Successful Negotiation Is the only driver of net pricing
Soft drink pricing in the foodservice industry is the sum of several factors.In the United States, all fountain product invoice pricing is published.The only difference in net pricing between customers is the amount they get back in funding and other value after the sale.And that amount is driven by one and only one activity…the negotiation.
In the rest of the world, the invoice price is fluid and so is the funding, making international negotiations even more negotiation-dependent.
Perhaps you have tried to find benchmarks in the industry that would lead you to understand where your net price stacks up versus other chains. If you have tried, you understand that no such benchmarks exist. You have encountered the reality that drives the first principle of soft drink negotiating.
Principle #2: People Don’t Talk About Their Soft Drink Deals.
It’s difficult to uncover reliable information of any kind on past soft drink negotiations, let alone independent benchmarks derived from the careful analysis of existing deals.The deals vary widely from a very low percentage of the invoice to a very high percentage of the invoice.And very few people in the industry talk about their deals.Why? Perhaps because soft drink deals have enormous impact on the bottom line.Most restaurant chains can’t keep the doors open without the profit from the soft drinks they sell. Tere’s a lot of truth in what your current soft drink supplier says when they point out the tremendous leverage in increasing the top line of the beverage sales. That’s because most of the revenue turns into gross profit. Why share such important benchmarks with your competitors?
Perhaps people worry about sharing their soft drink deals because they are afraid to reveal what might be a shortfall versus others in the industry. Since your deal depends on how well you negotiated, it’s only natural that people have some pride and some trepidation when it comes to how well they did their job. The bottom line is that benchmarks are hard to come by and they constantly change, since the soft drink companies change their pricing at least annually.
Principle #3: It Doesn’t Matter How Big You Are…Negotiations Follow Predictable Moves
The negotiation drives the value of the soft drink deal, not the size of your company. Whether you have ten locations or 10,000 locations, the price you ultimately pay for fountain syrup will be driven by how well you negotiate the deal.
I have a six-restaurant client whom I helped to negotiate a deal with a lower net price than an 8,000-store chain’s net price. Why? Because once the negotiating “sequence” is set up, soft drink companies typically employ predictable moves. This is much the way a champion chess player will follow certain predictable moves that are based on the way the opening sequence is played. And they will usually follow these moves until the end game.
Experienced beverage company account managers are like world-class chess masters when it comes to beverage deal negotiations. If you know how to best arrange the opening sequence, you’ll have a very good sense of the next moves. Your chances of beating the odds become very good indeed.
But without the knowledge of “what move when,” you are playing chess with a world-class chess master without a guide and without the proper information. The likelihood is that you will be in for a quick checkmate.
If you don’t play this chess game properly, you will undoubtedly leave considerable money on the table and your company will forego that money for the length of your next soft drink deal, which is usually 5-7 years.(Or your term may be many more years than that if you are unfortunately convinced to sign a volume-driven contract.)
That means your organization just gave away millions of dollars to Coke or Pepsi shareholders.
To successfully negotiate in this arena, you should know how to set the opening sequence and be able to predict the moves that will follow. The soft drink companies do that.
Principle #4: No Matter Who You Are, You Need Expert Help
If you have a legal issue, you consult a lawyer. If you have a medical issue, you consult a doctor. If you need advice on the beef commodity market, you consult a beef commodity expert. So why do supply chain professionals think that soft drink negotiations are different?
There are many answers to that question. The most common answer is that they negotiated with Coke, Pepsi, or Dr. Pepper before and they didn’t think it was that hard. And, in fact, it wasn’t. The reason it wasn’t hard is because the negotiation did not push the envelope of what’s possible. The soft drink companies count on that. They count on your belief that you have a good deal, and that your colleagues won’t challenge your assertion by showing you that someone else got a better deal. Because only a handful of people in the industry really know if it’s good or bad.
The second most common answer is that the CEO/CFO/COO has a great relationship with Coke/Pepsi and doesn’t want anything to interfere with it. Yes, the World Series and Super Bowl and Master’s tickets are flowing. But does the Super Bowl invitation trump the millions you will save? Relationships are important, don’t get me wrong. They can pull your backside out of the fire when you are in trouble. But negotiations should be completely divorced from those relationships. Suspend them for the period in which you need to be a serious businessperson. The World Series/Super Bowl/Masters Tournament will still be available when you have a world class soft drink deal in hand. And your relationship with your soft drink supplier will be even better, not to mention your bottom line.
I have consulted for years for an organization that runs restaurants all over the world, and has a purchasing organization of over 300 people. The incredible talent and expertise in that company is equal to or better than any in the world. It has proven to be true that the most capable organizations are usually the ones who understand that they need to bring in expertise when it is important.
Here is why you need help:
1) You get valuable benchmarks and you will understand if your program is measuring up to industry competitors
2) You get to understand and predict the moves of the negotiation game
3) You get a comprehensive diagnosis of your entire soft drink program, including equipment strategy, contract terms, marketing requirements, and not just financials
4) You get case studies and experience that you would not have access to on your own
5) You get the assurance and peace of mind knowing you will not leave millions of dollars on the table
6) You’ll have someone beside you who has been there before and can coach you along the way when the negotiations face critical junctions
7) You will build your reputation. Soft drink deals last a long time. The results are part of a supply-chain executive’s legacy. Make yours a good legacy.
Ben Kitay is the Foodservice Practice leader at Enliven, LLC. To reach Ben for an assessment of your needs and opportunities with respect to your beverage business partner, contact us today.