How Big a Bite Does the Annual Price Increase Take?
Our clients tell us that Coke and Pepsi and Dr Pepper are the only suppliers in their portfolio of suppliers that will take automatic, unnegotiated price increases every year. Every other supplier will call, talk it through, try to justify an increase, and come to a negotiated conclusion. The soft drink giants just send you a letter.
Consider the math. If you buy 1000 gallons of syrup annually per store, the bite is awfully big. 1000 gallons is an average fountain account. At $18.34 now, a 4% increase (and by the way, Coke took 6.75% in January) would be $0.73 per gallon. For a single restaurant, that’s $733 the first year out of your ebitda. For a chain of 50 stores, that’s $36,680 the first year out of your earnings.
For a chain of 200 stores that’s $147,000, and for a chain of 1000 stores its over $733,000.
Consider this, though…the increases are cumulative. The next year, that same increase added to the increase from this year will cost the one restaurant over $1500, and over the 5 year deal the increases will cost about $4000. For a chain of 50 stores, the cumulative total is nearly $200,000. For the 200 store chain the dent is almost $800,000. And for the 1000 store chain the bill comes to almost $4 million.
Mr. CFO, deduct that straight off your EBITDA. Vacation cancelled.
So the next time you get a price increase letter, I suggest you do the following…send a letter back, telling them you will not pay this increase until they justify it. Ask them to show you their cost increase on fountain production. Don’t just sit there and say ok.
And at next contract time, pay attention. Don’t let them take automatic increases. Limit their ability to take bigger bites of your profits.