1. Viewpoint The Technomic
Direct Sourcing: Distributors and National Chains
Have Adapted. How Will Suppliers Respond?
By Gary Kawahara
All indications point to a healthier future for foodservice. Sales are trending
in the right direction and top distributors are bullish, returning to full growth
and acquisition mode. Yet the industry overall is emerging from this period of
unprecedented challenges with some significant changes to how we approach
business going forward.
One key example is purchasing. Over the past five years, a growing number of
foodservice distributors (and major operators) have shifted to direct sourcing and
it can be expected that this will become more prevalent as the leading players
remain aggressive in their pursuit of lower cost of goods.
THE RATIONALE FOR DIRECT SOURCING
Moving to direct sourcing makes sense from the distributor point of view. In recent
years they have faced increasingly volatile commodity prices as well as added fuel
and operating costs. Against the backdrop of a deepening industry slow-down in a
deteriorating economy, price increases came in at a record pace in a time when it
was nearly impossible to pass them on to the operator. The fact that more began
looking at alternative suppliers and comparing costs against club stores/cash &
carries further solidified the need for distributors to consider different strategies.
One solution was to move to more direct or single sourcing on key items. It
became the norm to use the volume of total purchasing power as leverage against
manufacturers, and as the number of RFPs and RFQs increased, the manufacturer
community experienced large shifts of business in short periods of time. Other
changes were also evident. Whereas the traditional strategic thinking was that
there was value in having multiple suppliers in a category to ensure appropriate
coverage, some moved away from keeping that” safety net” in place. In addition,
regional buying offices decreased overall purchases as authority seemed to move
to the corporate level. The result? Some manufacturers were left scrambling to
maintain volume that was lost in that transition.
Today the move to direct sourcing seems to have shifted from local and domestic
to global and international. Global sourcing now appears to be the next phase in
the supply chain’s continued evolution. In many instances, manufacturers have had
to move production outside of the U.S. to reduce costs; they now find themselves
competing for manufacturing capacity with the distributors who are their top
customers as well as large national chains that have also begun to source globally.
P r o v i d i n g p e r i o d i c i n s i g h t s t o t h e f o o d i n d u s t r yMay 2012
© 2012 Technomic, Inc.
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“Global sourcing now
appears to be the next
phase in the supply chain’s
continued evolution.”
Continued on page 2

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Continued from previous page
MANUFACTURER IMPERATIVES
The impact of these sourcing shifts is still becoming understood but one
certainty is that manufacturers face some interesting challenges as this method of
purchasing becomes more widespread. To protect business, the following are just
a few considerations with potential applications for manufacturers:
 Make your brands (more) important to the operator (especially independents)—
Independents tend to be brand loyal. Finding ways to solidify your position
in that community and create that loyalty will be even more important
going forward.
 Provide clearly defined product tiers—Offering solutions at multiple levels of the
value spectrum is an interesting approach to protect market share and several
large suppliers have moved in this direction. Procter & Gamble provides a
good example in both foodservice and retail, tiering its Bounty and Charmin
brands with a budget-friendly extension called Basic in addition to their core
paper goods lines.
 Maintain a competitive spread for national brands versus private labels—As private
label has become more prevalent and accepted, such products are a growing
threat that has created more pricing pressure. Yet we have continued to see
significant ranges in the spread between the two over the years – even
among companies within the same category. One maintained a 20 percent
differential, while another let it go to 40 percent. Guess which brand
suffered a decrease in sales?
 Pursue alternative channels—Club stores/cash & carries have benefited
from their ability to move large volume and reach a great number of
customers in a short period of time. They are also willing to price product
aggressively to create volume, thus helping suppliers move product when
they need it most while also providing value to their growing number of
foodservice operator customers.
 Monitorthedirectsourcingmodelonanongoingbasis—This is especially important
for manufacturers in categories that are already being direct sourced (or
will be) as well as manufacturers on the fringe of these categories. The
model can change. As an example, seafood can be procured, grown and/or
processed in multiple countries; the same is true with certain crops.
Direct and global sourcing will continue to grow, especially in categories that
are treated as commodities, but all foodservice manufacturers should remain
vigilant on these shifts in purchasing. Another consequence of global sourcing
is that it can heighten competition among domestic suppliers, who are already
fighting over a small share of volume. Appropriate responses will of course vary
by company. For example, sharing volume/capacity with large accounts and
distributors is a potential solution for some, but deepening relationships with
important end-users is sound advice for all.
Gary Kawahara,
Consulting Principal
Gary Kawahara is a consulting principal
at Technomic, Inc. and the firm's
expert in the club store/cash-and-carry
channel and in redistribution. He has
over 25 years of diversified foodservice
industry experience in general
management, purchasing, sourcing,
logistics, operations and B2B marketing,
including roles as Vice President of
Foodservice/Midwest region, Director
of Purchasing, and Branch Manager
at Restaurant Depot, the industry's
largest dedicated foodservice cash-n-
carry operator.