Selling E&S On Price Is A Losing Proposition

This year is shaping up to be a rough one for manufacturers of foodservice equipment and supplies. Despite cautious consumer spending, a decline in the number of independent restaurants and continuing pressure on operators’ profit margins, consolidation is yet to occur in the E&S manufacturing sector. To put it simply, what this means is that too many factories are chasing too few customers with too little money to spend on new or replacement kitchen equipment. And that creates a sales environment dominated by price and an inevitable race to the bottom.

In addition to weakening equipment makers’ bottom line performance, price-based competition also serves to turn factories’ products into commodities. In the currently over-supplied market, salespeople and distributors strive to keep transaction volume growing by moving equipment at whatever low prices operator-customers are willing to pay, even when that means unprofitable deals. This only encourages equipment customers to ignore features such as superior build quality, heightened efficiency and even measurable savings over products’ use-life in favor of whichever model is cheapest. Manufacturers investments in new technologies and marketing are devalued and future R&D advances are often postponed because, as the situation now stands, sales are being won by whichever supplier is willing to offer the lowest purchase price.

To a certain extent, this downward spiral can be mitigated by acquisitions of smaller competitors by the large equipment-manufacturing conglomerates that now sit atop the supply chain. The more types of products in their portfolios, the easier it becomes for the top-tier factories to absorb low-margin transactions in selected equipment categories. Even so, over the long term, this, too, is a losing strategy. With the number of restaurant and foodservice openings unlikely to climb back to pre-recession levels during the foreseeable future, the only way for kitchen equipment manufacturers to attain profitable growth is for the weakest players to exit the market.

This is certainly a harsh reality, especially given the growing number of European and Asian equipment makers seeking footholds in the U.S. The most viable strategy may well be cost reductions in basic equipment manufacturing processes and practices, a topic we’ll explore further in an upcoming editorial.