Are dealers selling themselves short?

A sense of optimism has returned to the catering equipment sector this year, operators are putting their hands in their pockets again and the government has kindly put a £175m dollop of school kitchen work on the industry’s plate.

So why, when conditions have supposedly improved, are distributors still selling themselves short when it comes to commercial kitchen schemes?

Picture the scenario: Foodservice client X issues a tender for a catering scheme. Several dealers, including Dealer A, submit their price. Client X comes back saying the cost needs reducing. Dealer A evaluates different specifications and materials, and resubmits a revised price. Dealer A really can’t afford to lower the cost any further, but is confident its bid won’t be beaten. But dealer B comes in with a price 10% to 20% cheaper than Dealer A, without massively changing the specification, and walks away with the business.

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Many distributors will be able to identify with this sort of situation following a tough few years in the market and it can only mean one thing: some parties are seriously sacrificing margin to secure business.

Sure, dealers are known to try and pass some of the cost back up the supply chain to manufacturers, but in the main most have shown they are prepared to work for margins far lower than would ordinarily be the case.

But that was when the market was going through a difficult period, corporate catering spend was on hold and the economic picture was gloomy. We’re told now that the foodservice sector is expanding at a strong single-digit rate, more projects are getting the go-ahead and everyone from the main catering equipment buying groups to the larger suppliers speak of growth of at least 15% this year, if not more.

So why then, if things are on the up, is the market rife with tales of distributors still working on silly margins? Marios Poumpouris, managing director of Chiller Box, feels that distributors which continue to sell themselves short in the current environment are cutting their nose off to spite their face. He brands it a “ridiculous” situation.

“We are not talking four years ago, when the recession was biting and everyone was scrapping around trying to get what they could. It doesn’t need to be like that anymore. The sort of companies we are talking about all have to carry a heavy overhead cost; they have got designers, projects managers and sales reps. You have got to make a sensible margin just to cover those costs, let alone make a couple of quid on top for the business as well.

“Obviously you don’t know other people’s buying price, but we know that we buy relatively well, so when you see people working on what appears to be 10%-12% on cost I can’t understand why they are doing it.”

Mike Mellor, boss of Space Catering Equipment, is in no doubt that certain dealers are selling at margins which can only be described as unsustainable.

“This is borne out by Plimsoll reports and some of the profitability levels that some companies are achieving,” he says. “Professional distributors offer a comprehensive range of services that are ‘included’ as part of what we do. If we are to do our job well, we need highly paid and skilful project managers, skilled CAD technicians, accurate and efficient administrators and estimators, and all the equipment and software to enable these people to do their jobs well in a fast-moving and demanding market.

“Businesses that have these in-house skills need to generate sensible gross margins to cover their costs and leave themselves some residual margin to generate net profit to invest in their businesses,” adds Mellor.

One distributor said the single-digit margin “should be history by now”, adding: “I don’t think things are as bad as 5% or 6% anymore but those thinking that 10% to 15% is adequate could be achieving more. 20%-plus shouldn’t be difficult to achieve. No distributor should be going in with a 20% margin and being way over the top.”

It it is no coincidence that some of the more notable distributors to have exited the market in recent years were heavily dependent on the construction sector, where main contractors, in particular, stand accused of applying significant cost pressure.

One of the companies to have navigated through the choppy waters of the construction sector with its financials intact is Notts-based Garners Foodservice Equipment. Marketing head, Peter Walker, acknowledges that it has been difficult watching main contractors bidding at next-to-nothing margins and then looking to gain profit from their supply chain.

“We have had our most successful year since formation in terms of delivering projects; actual turnover is up against the previous three years but still not as high as 2011, so that’s a clear indication as to how pressed we are in terms of margins,” he says.

“If a distributor is really struggling for work, one can imagine they would be more inclined to under-price themselves. Sadly though, this is very short-term and full of inherent risk and has certainly caused some distributors to not survive.”

Jonathan Skinner, director at Marshall Catering Equipment, believes distributors shouldn’t accept that slashing prices is their only option.

“At the end of the day, we all have to pay bills and if you are a small company with three to four members of staff on £1.5m turnover at say 15% instead of 25% margin you would need to turn over another £1m to make your 25% —that’s a lot of work.

“But the customers are always going to want to pay the least for the most and that governs us by how we charge for things. It’s all about the bottom line for the large part of customers.”

If distributors are still guilty of selling themselves short, it is difficult to see what has to happen for this practice to change. The onus is on companies to stand firmer in the face of pressure, but perhaps this is only realistic once market confidence is fully restored and the volume of projects reaches a level where it is no longer such a bun fight.

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Iain Munro, managing director of ScoMac, agrees that as an industry we now need to try to get the margins back up to a reasonable level, but admits it won’t be easy for some.

“There is a considerable amount of value a distributor can provide which we all need to get better at explaining and at times allow those who provide a lower level of service win the work so it can be demonstrated ‘cheap isn’t always best value’. The professional kitchen house has ended up trying to compete with the online box shifter and tried to continue to provide a good level of customer service, which the online provider is unable to do, not having field sales and project management support.

"By trying to continue to offer the same level of service for a lesser price, the only winner has been the client. The bona fide catering equipment distributors need to stand by their principles and clarify to the buyer what they provide. It’s not only about a ‘box arriving at the back door off the back of a lorry’.”

One distributor based in the north, who asked to remain anonymous, said it was time for distributors to fight for the added value they can give.

“You don’t get something for nothing, and we must always be prepared to argue to maintain our margins and not give in at the first twist of the arm up the back. I think if distributors as a whole stand against those end-users that dictate terms we will get a better deal for all of us, and maybe fewer distributors will go out of business.”

There is clearly a clamour for the services of catering equipment distributors to be better defined in the eyes of the end-user, so that they are not regarded as a commodity.

“Some of the large corporate end-users have been instrumental in pushing prices down and purchasing departments are targeted on making savings year after year,” remarks Space’s Mike Mellor. “However, these companies also demand extremely good service and are often expensive accounts to run so it is vital that the buyers recognise exactly what they get for the money and focus on value rather than price. We have seen large clients making false economies on equipment quality and general price suppression tactics that have cost them in the long run.”

The worst-case scenario, perhaps, is that the market hasn’t yet pulled safely clear of the recession, and therefore the incentive for companies to edge up margins at the risk of losing business is simply not attractive enough.

This is certainly something preying on Munro at ScoMac’s mind. He is wary that the impact of the Universal Infant Free School Meals programme in terms of driving market growth could have created a false picture overall.

“We have noted a slight increase in enquiry levels but I wouldn’t say we have seen enough activity to suggest we are clear of the recession. I believe there will be more school meal activity in 2015, which will help the industry, but I can only hope that everyone realises they don’t need to try to win it all at very low margins and then find they cannot get it manufactured in time. Plus, you get left with the additional costs for return visits which the client is not going to pay.”

Margins have always been a contentious issue, but if conditions do continue improving there should be no reason why the industry has to devalue itself and sabotage its ability to make the sort of money that serious players think it is justified in achieving.

‘Margin woes creating fearful Sales culture’

Competing for work has been a battle for many distributors in the post-recession period and the pressures this brings has manifested itself in many ways.

Marios Poumpouris, managing director of Chiller Box, is particularly concerned that it has bred a culture of fear among sales professionals.

“I think distributor sales reps at the front line are scared to try and sell on higher margin because they don’t think they can achieve it or they think they are going to lose the sale,” he says.

“We talk to people that come for interviews and things like that and some seem to be moulded by the last four or five years. They are scared of larger margin. Go out there and push for more because the market is capable of giving more. Somebody needs to get up on the rooftop and shout: ‘The recession is over. Get back to business as normal. We can make money in this industry again!’”

Lyndon Moorby, director of YCE Catering Equipment, says it’s little surprise that companies have not felt confident enough to be able to maintain acceptable prices. “Market forces in the past five years have allowed clients to shop around and have projects ‘price matched,”, he says. “Many distributors have bowed to this pressure to maintain turnover and keep the doors open.”

One distributor from the north-west said it ultimately comes down to having the self-assurance to properly price the services offered. “I think it’s a balance between nerves and having the confidence to say, ‘we know what we are good at and the value of what we do’.”

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