Last month we talked about determining the real value of a business for those looking to buy or sell a restaurant. Value is established by a complex meeting of the minds, resulting in an agreement to buy / sell for a specific price and with terms acceptable to both parties. This is how a transaction is crafted. VALUE is a mutually agreed upon hallucination.
In most cases the value of something is based upon a comparative analysis within a given market situation. It’s easy to compare the price of a case of tomatoes, ground round or 50 lb. sack of bread flour between vendors but is there a “value add” offered in the transaction associated with doing business with one vendor or another? If you boil the transaction down to its lowest common denominator and focus exclusively on the single item you might be missing the larger picture. Commodities like produce, meat and dairy can be compared on an “apples to apples” basis but what’s it worth to you to get more than just the product you ordered? Is that an “apples to apple pie” comparison??
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Larger broad line suppliers are known to charge more than bare bones cash and carry discount purveyors. There are good reasons for the difference and considerable value to the foodservice operator if you take advantage of the benefits.
With larger broad line suppliers you may pay more, but if qualified, you can get 30 days credit and delivery right into your prep kitchen. You also save considerable amounts of time and get the convenience of a “one stop shop” as many of these vendors often carry equipment, small wares and other supplies which can be thrown onto a food order with your next delivery. This is a huge convenience for the busy restaurateur, but it may not be worth the 20% – 30% they save by going directly to the discounter and buying cash and carry.
Some discounters offer much lower prices than the major purveyors along with a broad product selection including hardware etc., but you must pay immediately. COD – hard cash money on the spot. You also eat the most valuable asset of all – TIME. You cannot replace what you have lost. Then there is the hard labor component as you lug your own supplies back to your restaurant in a truck that is also costing you money. Is it worth it to you?
Having owned and operated many restaurants, I have gone both routes. Each has their own merits and benefits, but there is always additional value that you should recognize before making any final judgments. On a recent visit with my friend Michael Endico, of Ace Endico, I noticed a slogan framed on his wall. It said – “Cheap can be expensive”.
Larger distributors often make shopping / ordering and delivery easy. They assign a Sales Rep to come to you to introduce new products or call you regularly so you don’t miss a delivery. Many offer an online ordering platform that guarantees accuracy in the orders and tells you what is out of stock in real time. Some platforms also integrate directly into your accounting and inventory systems, which tightens up your cost controls and bookkeeping expenses saving you valuable time and money.
As my column is about finance, I love to point out a major key benefit – these larger purveyors offer an even more valuable resource – CREDIT! This gives you working capital by freeing up your cash flow. Whether you realize it or not, credit terms from your vendor are like getting an indirect loan from a bank. Managed well, this cash float can be viewed like an interest free loan which you can incorporate directly into the cost of your menu pricing. It’s a natural exercise for most restaurateurs.
If you have a loan with a bank, I doubt your chef will calculate the costs of the loan interest or cash advances into the pricing on the menu! That’s just not happening. Those costs are often forgotten at the operating level of your restaurant and must be serviced by the gross revenues. Conversely, when incorporated into the food cost the chef will do a price adjustment if the Beef Tenderloin cost $10.99 a pound vs. $8.99 a pound – the difference being financing costs. Invisibly your menu will pay for the cost of your financing.
One of the most valuable lessons I have learned as a restaurant owner turned finance executive was the meaning of the “time value of money”. Without boring you with formulas etc., let’s talk about it in basic terms. Money in your hands today, is more valuable than money you will get later. You have it now and can use it immediately to gain some benefit, be it in making a discounted purchase for cash, earning interest income by holding it or just enjoying the flexibility and freedom afforded with liquidity.
If a vendor extends you credit, you get the benefit of not having to pay for your supplies BEFORE you sell the product. This is huge! You are gaining the time value of the cash fronted by the vendor. For the vendor to get competitive costs with his suppliers, he had to pay cash up front, and he is willing to wait 30 days for you to pay him – and you gain the benefits. He lost the value of that cash but you on the other hand get the benefit. That’s why I’m always amazed when I hear restaurant owners and chefs complain about paying a bit more when the vendor is effectively giving you free financing.
Using vendor credit can be an effective tool for those seeking to expand or buy a second new location. Typically startups must pay COD until they prove themselves credit worthy, which can put an enormous strain on a new business. If you have established good relations with your vendors and have a good payment history, not only will they extend credit terms to your new location, I have actually seen vendors give cash loans to their best customers. How can you beat that?
The lesson here is to look beyond the commodity pricing of basic products that you get from your purveyors. You should continue to scrutinize and fight for the best prices possible, but don’t unfairly compare costs between a vendor offering you credit terms and convenience to a bare bones discounter. Value is in the eye of the beholder and the benefits you are offered. It’s up to you to determine how much that matters to your operation.
Not sure of a strategy for your restaurant? You can email me at dsederholt@sfscapital.com to discuss your options.
