THE ORIGIN OF DISTRIBUTOR BUYING GROUPS

Distributor buying groups are an important part of the supply chain today, but their origin is not widely known. That is to say, its beginnings are clouded with the mists of time. Today, there are some half dozen of these groups, each with its own constituency.

It began with the formation of Network Associates in early l967. Tom Roche, a former Lily-Tulip Cup sales manager was then managing sales for Franklin & Perkins in Brockton, Massachusetts.  Tom agreed with Jean Perkins, president and owner of Franklin & Perkins, that the distributor group idea was worth pursuing. Tom saw it mainly as a means to advance sales to large regional accounts. Jean saw it mainly as a means to leverage collective purchasing power. In any event, Tom started recruiting members.

Gerry Baum, President of Eastern Bag & Paper in Connecticut, quickly signed on. The original founding group, in addition to Eastern Bag and Franklin & Perkins, were Central Paper Products (New Hampshire), Clark Paper & Supply (New Jersey), Ideal Paper (Massachusetts), Mansfield Paper (western Massachusetts) and Superior Paper (Maine). Three remain part of Network today: Eastern Bag (now called EBP Supply Solutions), Central Paper and Mansfield Paper.

On a snowy night in November 1968, each of the seven founding members brought a $1,000 check to a meeting at the Holiday Inn in Waltham, Mass., to seal commitment to the project. Jean Perkins came up with the name, Network Associates, and Gerry Baum was elected its first president. Within a short time, seven other Eastern distributors joined the founders: Bond Paper, Buff-Henley Paper, D.J. Mead & Sons, J.P. Mead, Monmouth Paper, Paper Enterprises and Peerless Paper Products. Tom Roche’s wife, Pat, becomes Network’s first employee, handling the bookkeeping from a desk in Jean Perkins’ office.

They met on a fairly regular basis and with the assistance of their lawyer, former Georgia Governor Ellis Arnall, head of the Atlanta law firm, Arnall, Goldin & Gregory, organized committees and approaches to the marketplace. Years went by. Little happened.

In late l973, on behalf of Network, Gerry Baum and Herb Sedler, President of Paper Enterprises, invited DMS Corporation, a New York consulting firm specializing in national foodservice chains (now called quick service restaurant chains) to help propel Network forward.

DMS understood that expanding Network’s membership coast to coast was essential in attracting both manufacturers and large quick service restaurant chains. It worked. Under the leadership of Herb Sedler, who took office as head of Network in mid-l974, Network became a true cooperative and a force in U.S. paper distribution. By mid 1975, Network had some 33 members, incuding two in the West, and a group of manufacturers who provided rebates back to Network. Soon, it acquired its first major account, Baskin Robbins, that was truly national in scope. It also awakened the foodservice industry to the values of having distributors join forces and operate as a group. Within the next few years, a host of new distributor groups were formed.

Network led the way in successfully linking independent paper distributors into a cooperatively managed venture that enabled them to 1) leverage their combined purchasing power to secure favorable response from suppliers; and 2) coordinate their individual sales efforts to secure accounts whose needs encompassed geographic territory beyond the reach of any one distributor. Although the various groups have different strengths and points of emphasis, the basic concept was pioneered more than 40 years ago, and the value of distributor buying groups in the supply chain remains important today.

The Outlook For Quick Service Restaurants is Poor

The outlook for quick service dining establishments ain’t good.

Nation’s Restaurant News, the bible of the segment, reports traffic has declined by 1.9% in fiscal 2014, the sixth consecutive year of decline.

Bank of America, Merrill Lynch and Wells Fargo, three of the most active sources of financing, report that in recent months 20 of the strongest chains have borrowed more than $2 billion from the three banks, mainly in senior secured credit facilities. That means, to qualify for the bank loans, the chains hocked what they own outright.

A look at some current and prospective operating conditions explains this. Most importantly, expenses are rising inexorably. A $2.00 per hour increase in the minimum wage would probably put some chains out of business. Let’s take a restaurant doing $1 million per year in business. This restaurant typically will have a non-management payroll of about $240,000. The higher payroll would cost this restaurant about $60,000. Assuming such a restaurant is making a 12% profit, with the non-management payroll rising to $300,000. A good restaurant would be able to absorb the increase. Do the math. A weak chain would have to go out of business.

It’s worth noting, at this point, that forecasting is at best an inexact science. The annual growth rate for the industry in 2013 was 2.1%. In years past, the forecasts have been 1.7% too high, or too low.

The restaurants at the low end of the spectrum, with average checks under $10.00 each, will be hardest hit. Higher end chains, such as Cracker Barrel, can survive a 1.9% decrease in traffic. They first need to have, as Cracker Barrel does, a 1.2% increase in same store sales. This combination reflects a 3.1% increase in the average check.  The low end chains, barring the Cracker Barrel experience, will have to raise prices.

The outlook, at least for the foreseeable future, is rather grim. The full year 2014 will see housing starts hit 1 million. That’s up for an average of 750,000 starts since the recession. However, another way of looking at these numbers is that this year there were about 3 houses built for every 1,000 Americans. This compares with 7.5 houses built per 1,000 Americans in the l960’s and 6.5 houses per 1,000 Americans built in the early years of this century.  

Unless quick service restaurants are able to reverse or otherwise offset this decline in customer traffic, they are going to be vulnerable, and the weaker players are going to have a difficult time surviving.