5 potential money siphons hiding in your QSR's MDA
Most operators who have scaled up to multiple locations have found the benefit of pursuing a Master Distribution Agreement, or MDA, with their main broadline or grocery distributor. This vital contract offers operators the opportunity to lock in pricing terms on their order guide items, and avoid drastic swings in costs and terms from their primary distributors.
But it essential to understand that these contracts can also often carry terms that may cause operators to minimize the deal they've negotiated. In fact, according to former Broadline Market President and MDA consultant, Randall Knopf, there are several pitfalls that may be hidden in an MDA.
Fortunately, he said the savvy operators knows just as many ways to avoid those pitfalls. He said MDAs are akin to home mortgages, in that many people sign them, but few actually read all the way through to find the clauses that can make the difference "between a great deal and one that is not necessarily so strong."
Here are five area Knopf recommends savvy QSR operators look at to avoid MDA pitfalls.
Freight costs, fuel surcharges
"Fuel surcharges became more popular among broadliners during the 90s when fuel prices were more volatile", he said. "Today, however, with fuel costs much lower, there really isn't much of a need for these surcharges."
Many contracts will include a chart of "strike points," indicating that when/if the price of diesel exceeds a certain fee, the distributor can raise the price by either total invoice or on a per-case basis. Operators and consultants who are skilled at negotiating MDA's will aim to remove fuel surcharges from the contract altogether or make the strike points so high that they would never actually be enacted over the life of the contract.
"You'll almost never see credit given back to the operator on the flip-side, if diesel prices drop. It's only one-way," Knopf said.
This is just one of the many ways in which distributors may try to increase their fees via an MDA.
One of the biggest overall dollar impacts for operators in MDAs revolves around renewals. Operators must know when their contracts end in order to take advantage of the opportunity to re-negotiate the agreements and maximize their contracts for the next three to five years.
Typically, MDAs will contain language that the distributor will automatically renew for a 12-month period. This is especially true if the operator does not notify the distributor within 180 days of contract termination. Knopf said operators should never miss an opportunity to negotiate a new MDA that is tailored to their most current needs.
"It's a lot like buying a car," Knopf said. "Most people don't just go to one auto dealer. They shop around to see what is available and try to have the dealers compete for their business. Operators should do the same thing with their distributors whenever they can, especially if your operation has grown its locations over the life of your previous contract."
Drop size penalty
A drop size penalty pertains to the minimum delivery size that operators must hit, expressed in either dollars or cases. If the minimum drop size, for instance, is $1,000, the operator will pay a flat penalty if a single order falls below that minimum.
Remember that distributors think about their business primarily in terms of drop sizes, though operators typically think in terms of margins. Therefore, the burden is on the operator to negotiate an appropriate drop size penalty and then manage their order guides, storage space, forecasting and order frequency to avoid paying that fee.
Operators who find themselves regularly paying that penalty could be spreading their business among too many distributors, according to Knopf. He said this works against operators when it comes to efficiency, security or pricing. Additionally, managing an accurate drop size helps keep clients on good terms with distributors and can be used to enhance future negotiations.
Margin increases are fairly straight-forward parts of MDAs, though this is still an area operators must keep an eye on. When contracts roll over, it often triggers automatic or cost-of-living increases that can wind up costing operators more money and provide extra margins to distributors. As a result, it's recommended that operators ensure their agreement contain no such increases and their margin schedule and fee structures remain stable over the life of the contract, Knopf said.
Knopf said MDAs should always contain language that allows for regular auditing by either the operator or outside parties to ensure that all pricing is correct. Distributors might add stipulations to their contracts specifying that only operators may conduct audit once or twice annually or only after providing eight weeks' notice.
Knopf recommends that operators establish provisions for electronic invoice auditing and hire third parties who have the software capabilities to conduct ongoing audits.
"We recommend that our clients never accept an MDA without an open audit clause," he said.
Knopf advises that a proper MDA negotiation is a four- to six-month process. He said that operators should consider the complexity of their specific situations in such negotiations.
When an MDA contract approaches expiration, operators need a full RFP to not only compare distributors fees, but also individual product costs across each distributor.
"We've seen many cases where the bid with the lowest fee-per-case is not necessarily the best bid," he said. "A distributor might have the lowest margin, but they actually have a higher cost."
He said if an operator has the internal structure and expertise to properly manage the RFP and negotiation processes themselves, it's worth trying to do so, but he said it's very likely that an outside professional will ultimately obtain a better overall deal if regional considerations, proprietary items, unique items or other individual factors exist.
Andy Rosenbloom is a foodservice professional who heads up the Marketing Teams at Dining Alliance, Consolidated Concepts, Buyers Edge and other GPO Platform Brands. Andy’s insights come from the cross-section of the Operators, Distributors, Manufacturers, Service Providers and Trend-Watchers.www