Food service Distribution Economics

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The conflict between the distributors and the food service producers has been growing for many years now. The obvious recognition that both parties need for each other maintains the diplomacy in the partnership, although it is still a fact that these two entities have their occasional differences. Each side is contending with the other to be the first one to get more percentage points, and education is one way to help solve this issue. Being familiar with the economics of food service distribution is one method for both parties to reach an agreement.

The market would have a lot more than one food service distributor at a time, and these companies vary by size. The rate of acquisitions and mergers during the last decade has formed an empty space in between. Because of this, the leading regional distributor that has been earning anywhere from $50 to $100 million has experienced a lot of pressure. Since these local distributors are not fast enough to dominate the smaller players and lack the funds to compete against the major forms, a lot of these businesses have decided to let their brands be acquired.

The main objective of food service distribution is managing and generating gross profit. Since the decade of the 70’s, the distribution margins have been constantly shrinking. There was a time where a margin of 25% was the norm, and then that percentage eventually went down to the range of 16-18%. The expenses have piled up, forcing the distributors of the “middle market” to turn into takeover targets. A typical distributor would earn around 16-18% gross profit while operating with an estimated 14-16% operational cost.

For a food service distributor, operational costs are normally split into four classifications: delivery, warehousing, administration, and sales costs. Amazingly, these categories are more or less equal in terms of their entire contribution. Maintaining all the expenses without impacting the overall service is a challenge that gets more difficult for the firm.