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FE&SEditorial Archives2004 — May — Point Counterpoint

Should Bid Houses Receive
The Same Prices As Full-Service Dealers?

Executives from two dealers, a leading bid specialist and an award-winning full-service firm, debate the enduring yet current issue of justifiable compensation relative to channel investment.

Marc Israel
By Marc Israel,
Great Lakes Hotel Supply Co.,
Jerry Hyman
By Jerry Hyman,
TriMark United East,
S. Attleboro, Mass.

When I received the editors' offer to present the "Pro" side of this issue, I was actually disappointed since I feel I can make a better argument as to why successful foodservice equipment bid dealers should get lower pricing than many "full-service" dealers. Several manufacturers, including one who is now involved in functional discount discussions, have indicated to me that the cost of doing business with successful foodservice equipment bid houses is actually less than that to support full-service dealers. Manufacturing scheduling, marketing materials and other costly overhead aren't required. Thus, the very premise and continuing discussion of manufacturers extending only equal pricing to bid dealers is inconceivable to me.

I see three "teams" that effectively comprise the channel for foodservice equipment projects and whose existence helps to explain why it is not manufacturers' responsibility to provide functional discounts to full-service equipment dealers.

Team 1 — Manufacturers/Manufacturers' Sales Reps:

Manufacturers are obligated to provide profitable returns to their shareholders and owners. Why then should it be manufacturers' responsibility to help ensure the profitability of full-service equipment dealers by offering them additional functional discounts beyond the cost advantages they already enjoy? i.e., truckload pricing and extended terms. In instances when a transaction with a full-service dealer proves to be less costly for a manufacturer, then those savings can be passed on as circumstances warrant. It is now widely accepted, even among the most "traditional" dealers, that manufacturers need to make and distribute their products in the most effective and cost-efficient manner. Many equipment manufacturers build equipment upon receipt of an order, while others schedule production in advance for inventory. Which of these policies to follow is an individual manufacturer's choice and will be determined by its market and its customers. Manufacturers' primary obligation is to ensure their profitability and moving product is typically their top objective. Having a strong dealer network helps create that profitability, but it's the dealers' responsibility to provide the services and the margins that their market will support.

Team 2 — Foodservice Equipment Consultants, End-Users, Architects and Construction Managers:

These professionals can be lumped together into a single designer/engineering/construction team that successful large foodservice bid dealers have learned to treat as a unit. Successful foodservice E&S bid houses have learned to provide consultants with the equipment they specify, without exception, in a cost-effective manner. The construction managers' job is to assure that this process takes place and that owner-operators receive full value for their money. This type of project-based distribution usually does not require many of the services that the traditional dealers provide. For example, a showroom, inventory (due to generally long lead times) and commissioned salespeople are not required. In addition, consultants take on the job of selecting the necessary equipment to support the operator's program. Those who propose preferred pricing for full-service equipment dealers want to charge construction managers, contractors and project owners for services that they do not require. What's more, full-service equipment dealers seem to expect manufacturers to guarantee their profitability. I fail to understand why this is the manufacturers' responsibility.

Team 3— Foodservice Equipment Dealers/Contractors/ Installers:

The most perplexing question to me is why foodservice equipment dealers don't take responsibility for the profitability of their own businesses. Why have full-service equipment dealers determined that making additional allowances for the superfluous services they offer in certain markets should be the manufacturers' problem? When will they learn that, maybe, they should not compete in these markets? Traditional equipment dealers need to understand that they can only provide their services at profitable margins in those markets that demand them. If they cannot compete profitably in a foodservice equipment-contracting world - then they shouldn't.

Project-based distribution usually does not require many of the services that the traditional dealers provide.

Large foodservice equipment bid houses have their own challenges that are unique to the construction industry, including retainage, bond costs and installation variables. Successful foodservice bid dealers, however, confront these conditions on each project and must learn to deal with them in a cost-efficient way.

My company has been asked to provide supplies on numerous projects. We have politely declined to offer those items, since we are not experts and have recommended full-service equipment dealers as appropriate sources. Many traditional equipment dealers, on the other hand, want to have their cake and eat it, too, when they participate in projects where they are not entitled to functional discounts or preferred pricing.

Many full-service equipment dealers also put middle managers in charge of their contract departments and try to execute projects without in-house engineering services. They also assign their DSRs to supervise construction projects in lieu of engineers and, as if assigning inappropriate personnel to a project was not enough, they also want to be compensated for their inefficiencies by equipment manufacturers. Quite frankly, if they cannot compete in this marketplace as the system is set up now, they shouldn't.

As a member of the executive committee of one of the larger foodservice equipment buying groups, I find it interesting that much heavy equipment buying is driven through foodservice equipment bid dealers like myself. Why would the manufacturers want to change? I would think that, in order to ensure that they continue to increase their sales, factories need to concentrate on promoting their lines to large and capable foodservice equipment bid houses. As in all economic situations, the law of supply and demand prevails in the foodservice equipment industry. This old obsession with attaining preferential pricing for full-service dealers is a waste of time and energy and should be put away forever. Foodservice equipment dealers, whether they offer a full range of services or contracting only, need to use their expertise to safeguard their profitability and service their markets as they have in the past. Pricing should be commensurate with functions provided on a contracted project, and nothing more.

For the purposes of this article I would like to define bid dealers as follows:

  • Typically, this type of dealer does not have an engineering staff responsible for creating kitchen designs. They may, however, be able to produce submittals when required for a particular project that they have been awarded.
  • They do not specify products.
  • They do not stock merchandise other than what is ordered for a specific project and many times this equipment is stored in a contracted or public warehouse.
  • They do not field a trained sales force responsible for calling personally on end-users.
  • They more often than not subcontract the delivery and installation of the equipment they sell.
  • They typically do not have a customer service/warranty department.
  • A true "bid dealer" probably will not have a showroom.
Traditional dealers on the other hand, for the purposes of this article, perform all of those functions and then some.

The functional discounting debate has been around for at least as long as I have been in this industry (23 years). Additionally, I have heard the arguments that traditional dealers must learn how to unbundle their services and that end-users must pay for the additional services that full-service dealerships supply. I have also heard arguments that it is the demands of the marketplace that give rise to new channels of distribution; that manufacturers do not create these channels, but merely fulfill end-user-created demand.

If the services offered by a traditional dealership did not have value to E&S manufacturers they would switch to different channels of distribution.

I now hear, more frequently than in the past, that some manufacturers are beginning to change their focus from the currently dominant model of discounting based on volume alone. I believe that manufacturers, like all of us, make their decisions based on what is best for the overall profitability of their companies. I also believe that if the services offered by a traditional dealership did not have value to E&S manufacturers they would switch to different channels of distribution, most likely at the expense of full-service dealers. Traditional dealers exist, and their channel remains viable, because there is demonstrable value in the services they provide to both manufacturers and end-users. However, it is my belief that manufacturers must support this channel of distribution by giving additional discounts (better costs) to full-service dealers than they afford to dealers who do not offer the same services.

We have been successful in training some of our customers to pay for some of the services we offer but, I believe, we will never be successful in getting them to pay for all of them.

For example, imagine a customer walking into our showroom who wants to buy a new six-burner range. We could help this customer select the appropriate piece of equipment for his particular application. We could advise that customer as to what we have in stock, we could arrange for delivery and setup, and we could handle any necessary demos or warranty repairs once the piece of equipment was in place. By contrast, we could give the customer our catalog that displays various manufacturers' ranges, tell him to pick one and arrange for it to be drop-shipped to his location from the factory. We could then explain to the customer that we will sell the exact same range at a different price depending on how he wishes to purchase it. We could go down that route, but look what happens when we try.

For example, we have had the experience of being asked to match a "bid" price from a competitor that does not offer the services that we do for one of our customers. We explained to this customer that since we did not specify the piece of equipment in question, we could not attest to its suitability for his applications, and that the figure our competitor offered was a drop-ship price from the factory. Our customer then responded, "OK, I understand," and still made his purchase from us. However, we have then received a call from our customer because, when the truck arrived, he was unable to unload the piece of equipment. We next got another phone call from this same customer asking if we could send our installation crew by because he couldn't seem to get the backguard to fit properly on the back of the range. We have had customers make deductions on our invoice for a dent on the side of an equipment piece even though it was a factory-direct shipment. We certainly do get calls on Fridays to arrange for emergency warranty service and, finally, we are sometimes asked to take a piece back, just because "the chef doesn't like it." But yet, most times our cost of goods from factories is the same as that of the "bid houses" against which we must compete.

We have been successful at charging for our engineering services. But, for the most part, that has been the only service that we have been able to earn revenue from regularly. I have heard that, if we market ourselves effectively and explain to end-users the extra value that our services provide, we should be able to charge more for our products. Unfortunately, many times all that gets us is the opportunity to meet the lowest bid price.

I am fearful that if manufacturers continue to offer their best pricing only on volume, do not take into account the value of the other services that traditional dealers provide and are not willing to offer better pricing to those providing these services, then full-service dealerships may not survive. Manufacturers will be then left with bid houses, big-box wholesale clubs and catalog houses as their only channels of distribution. At that point, the very services for which manufacturers were unwilling or unable to offer a better price to traditional dealers will now become their own responsibility.

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