The 8 Most Common Mistakes of Beverage Contracting
Beverage contracts and the related negotiations are complicated. Onerous contract language has cost restaurant operators millions of dollars that they didn’t have to spend (or millions they left on the negotiating table).
This is a list of eight issues that restaurant operators should be aware of when negotiating a beverage contract.
1. Volume-based Term
2. Unlimited Price Increases
3. Reliance on Your Beverage Company Relationship
4. Allowing Marketing to “Own” the Relationship
5. Relying on Coke/Pepsi to Drive Beverage Incidence
6. Fair Share Payments
7. The Myth of Free Equipment
8. Accepting More Service Than Needed
1) The Volume Based Term
The beverage companies want operators to sign contracts based on purchases of a certain amount of product (i.e., a “volume commitment”), instead of a certain length of time. This makes the contract very predictable for the soft drink companies. They can exactly predict the maximum amount they will spend on you. But it makes it very unpredictable for the restaurant operators because of price increases and declines in consumption.
I have seen many clients whose terms have pushed well beyond the expected time frame, simply because the expectations of volume purchases were wrong. Carbonated beverage volume has been in a steady decline since 2004. In fact, in 2004, more than 8 out of 10 non-alcoholic beverages sold in the U.S. were carbonated beverages. Today, that number is 5 out of 10, and the decline continues. So, basing your volume expectations on today’s run rate is likely to elongate the term of the contract.
Unless you are front-loading the financial benefits of a long-term agreement, you can and should avoid volume commitments. Stick to a time-based commitment to avoid an unpredictable outcome.
2. Reliance on Your Beverage Company Relationship
Relationships are import for many reasons. But they are not to be relied upon during a negotiation for exclusive pouring rights.
I can’t count how many times I have heard this: “I don’t need to negotiate my soft drink deal. I have a relationship with so and so (a highly placed beverage executive). I can just call him (or her) to get the best deal.” Most often, when I look at the deal being referenced, it falls well short of the latest benchmarks.
Your beverage company relationship may get you invited to the World Series or the Super Bowl. But it won’t get you the best soft drink pricing. In fact, it may get in the way of achieving that goal.
3. Unlimited Price Increases
Have you ever seen a manufacturer demand rapid price increases for product that is experiencing rapid decline in demand? If you have purchased fountain soft drinks, you have. Fountain soft drink syrup prices have increased at a rate more than 50% higher than inflation, and without regard to underlying commodity pricing.
Limiting soft drink companies’ increases can be a tough negotiation but getting a palatable level is possible if you approach it correctly.
4. Relying on Coke or Pepsi to Drive Beverage Incidence
It is true that a significant lever for producing operating profit is beverage incidence. For quick serve restaurant chains, the average incidence rate is somewhere around 60-70%. What that means is that for every ten entrees sold, a beverage is sold with it 6-7 out of 10 times.
Increasing that incidence rate by even a fractional amount can result in a dramatic increase in operating profit.
The problem is that the soft drink companies use that fact to convince you to pay more for their products. They each claim they are better at raising incidence, and that because they will raise incidence, you don’t really have to focus on the deal.
Operators who want to increase incidence should take charge of their beverage incidence effort by having marketing and operations people put some focus behind it. Enlist the soft drink companies to help pay for those efforts and support them, not lead them.
Unfortunately, often what happens is that the soft drink company will do the deal, leaving you with expectations that they will proactively manage the soft drink category, and then no one focuses on it until it’s time for you to negotiate again.
5. Fair Share Payments
Often Coca-Cola will charge you for having Dr. Pepper on your fountain.
Neither Coke nor Pepsi have a real, viable alternative to Dr. Pepper. And Dr. Pepper will pay as much, if not more, than both of them to be on your fountain. Make sure the Dr. Pepper negotiation is a separate exercise.
6. Allowing Marketing to “Own” the Relationship During Negotiations
Coke and Pepsi both sell the “soft dollar benefits” of their marketing expertise. That expertise aligns them closely with your marketing department. Often, the marketing department is the driver of the soft drink relationship. But the marketing department is not primarily concerned with food cost and driving efficiency. They are concerned with driving traffic, brand building and communications.
The soft drink companies want the marketing people to “own” the relationship. It benefits them. It makes the discussion less price-driven. But having a balance of interests will be best for you to get the best contract.
7. Accepting More Service Than Needed
Many operators see value in getting more free service calls than the usual three calls offered by Coke. Pepsi will often call service “unlimited”, and simply value it at three calls. That’s because the average for the number of service calls per outlet in one year is three. I have seen operators negotiate for as many as eight calls. But still they only use three. It’s important to have a process including analysis of actual usage of mechanical service before negotiating this item.
Ask for only what you need, and turn the rest into cash.
8. The Myth of Free Equipment
Nothing is free, including fountain equipment. There is a real value and a real cost associated with it. But the amount of money the soft drink companies assign to your deal for equipment may be different than the amount they are charging themselves on their books. And it is almost certainly less than the amount they tell you they are spending. It’s important to take a good look at the underlying financials and make decisions that will benefit you. A thorough analysis of the relative merits of ownership, including depreciation, versus having the soft drink company simply provide the equipment is always a good idea. Also, if you decide to switch suppliers, having equipment flexibility makes it much easier to do so.
Ask your soft drink representative to detail how much remanufactured equipment they are supplying you with. Remanufactured equipment costs a fraction of new equipment, and it can be more than half of the so-called “new” equipment they place in your locations.
Would you Like Help?
There are many more potential land-mines along the road to a great soft drink contract. These are a sample of common ones that you probably recognize. There are literally hundreds of factors that go into a top-notch contract and negotiation process.
If you would like help in reviewing your current beverage deal or if you would like an opportunity analysis based on our extensive database, contact Ben Kitay of BevTrust Associates at email@example.com or at (770)-265-4728.