When restaurant operators sign soft drink contracts, they don’t realize that the contract has clauses in it that will keep them tethered to their supplier long after the contract is expired. The worst of these clauses is called “unbundling".
To be blunt, unbundling is the scourge of the foodservice industry brought on by soft drink companies. It is hook in the “free” equipment offer that makes you stay put instead of switching suppliers. It is anti-competitive. It stifles opportunity. And it scares operators into thinking they have no choices. Let’s look at how it does this and why.
If you look in your contract at the page that is nearly illegible because the print is so small, you will find a section labeled “standard terms and conditions”. I promise you nothing is standard about these standard terms and conditions. A large percentage of the contractual land mines are buried in this fine print.
a. Within the first or second section you will see that if you remove the equipment prior to its being fully depreciated, you will owe your supplier a lot of money. Fully depreciated means 8.33 years for Coke (or 100 months) and 10 years for Pepsi. And yes, as you may note, this clause will likely outlast the term of your contract. That means your contract will expire before your obligations do.
b. What will you owe? Typically, you will pay an inflated cost for removal, an arbitrary price to refurbish the equipment so they can use it in your competitor’s restaurant, and the book value of everything that does not have a serial number, meaning the original labor cost, racks, pumps, lines, and other ancillary equipment.
c. As you might guess, this adds up to a lot of money. It is typically thousands of dollars per location. Millions for a chain of any size.
d. Additionally, if you took advanced money and you have not purchased enough gallons to earn it, you will pay what is unearned plus 1% interest from the date it was paid. This also adds up to a lot of money.
e. How can you avoid this unpleasantness? There are ways. The best way is to own your own equipment. Equipment is not free. It never has been and never will be. If you have loaned equipment in your locations, you are simply taking cash in the form of over-priced equipment. Own it and be done with the silly penalties. Also, if you own the equipment, you will avoid charges for having Dr Pepper or other non-cola-company beverages on your fountain.
f. The second way is to negotiate a cap and limit the unbundling to within the term of the agreement. Unless you have significant leverage, this will be difficult. You will want help.
g. The third way is to sign a deal for the depreciation term, so that you end the contract when the depreciation ends. I don’t recommend this unless you get a lot of money and plenty of price protection to keep you whole in the out years.
Don’t step on the unbundling land mine. Point it out to your lawyer. Lawyers usually miss it. And make sure you address it during the negotiation phase. Further, join the growing ranks of foodservice executives calling for soft drink companies to end this practice.