The Profit Trap And How To Escape It

With new restaurant openings finally accelerating but still nowhere near pre-recession levels, many equipment manufacturers continue to count on consultant specifications and dealer selections to gain market share. The design-build market sector is especially desirable because of the size of many projects, with multi-million-dollar equipment packages not uncommon in larger noncommercial foodservice and fine-dining jobs. Becoming the supplier of choice on just a handful of these opportunities can bring important new revenue and profit to reps, dealers and selected factories. The problem in this scenario, however, lies in the word “profit,” as in who earns it and why.

As part of their “objective” services, design consultants most often write specifications that can be filled by more than one manufacturer, in collaboration with qualified dealers. This creates pressure on equipment suppliers to bid a job at the lowest possible level and deliver quotes with razor-thin (or even negative) margins. As has been shown over time, dealers can survive this practice because they have the safety net of volume discounts and year-end rebates. For equipment makers, though, the situation is more complicated, as first-tier factories face the choice of winning profitless sales or losing orders to competitors whose costs of doing business are lower. Reps are also placed between a rock and a hard place, since they earn no commissions unless the manufacturers they work for are willing to be the lowest bidders on design projects.

As this description implies, there are few potential winners and many likely losers when design-build work is attained in this fashion. Specifying consultants, for example, can find that equipment with entirely different capacities, performance and features than the ones they intended are now part of the final kitchen package. The biggest losers, in many instances, are equipment end-users who not only can wind up with equipment ill-suited to presenting their menus and expressing their concepts, but also realize that their best interests have been sacrificed by suppliers whose economic decisions they are powerless to control.

It is clear that there is plenty of room for improvement in the way the foodservice equipment and supplies distribution channel is organized and functions. Established business practices are notoriously hard to alter in our industry and as long as somebody is making money from the status quo competitors are prone to follow suit. The key to long-term reform and profitability is for channel partners to focus consistently on the needs of operator-customers and to win their loyalty and repeat business by providing them with the products best suited to their programs. This requires operators to spend a little more for quality, but that’s a small price to pay for a kitchen capable of generating profits for many years to come.