Consumers are angry about high prices, but few realize just how little profit many of the small and medium-sized food industry producers and independent restaurants who make and sell them their meals actually make.
Big food companies like Kraft Heinz and PepsiCo have posted increased profits recently. But the story is very different for smaller players in the sector. The average profit margin in the restaurant industry is just 3-9%. Independent restaurants are particularly squeezed thanks to the comparatively higher prices they pay to distributors compared to large chains with more negotiating power.
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Smaller-scale food producers are in a similar bind. They too are seeing their profits squeezed by distributors who themselves are also struggling to turn a profit thanks to pressure from large grocery chains and food companies, the Wall Street Journal recently reported.
Christine Quinn, owner of My Family Seasonings, told the paper that over the past two years distributors “paid her almost 40% less than she billed” for her seasonings. She was forced to raise the cost of a bag of seasoning from $4.99 to $6.99.
Direct Sales: A Potential Solution For Smaller Food Businesses
While Quinn saw raising prices as the only solution to her financial difficulties. There is another option. Some small food industry producers like her—as well as the independent restaurants who buy from them—are attempting to cut out middlemen and do business with each other directly.
These efforts are enabled by new technology that helps food producers and their customers connect directly and streamline the selling process. In retail, platforms like Faire.com and Rgand.com allow brands to work directly with retailers, bypassing large distributors. These solutions have proven effective in reducing intermediaries and increasing transparency.
Now similar platforms are emerging in the food sector, enabling producers to sell directly to customers like restaurants, hotels, and caterers. These solutions automate ordering, provide demand analytics and help manage supply chains, all without a distributor taking a large cut of the sale.
The upsides of this more direct approach to sales within the food industry go beyond just higher margins for local restaurants and producers.
When producers hand over control of distribution and sales to third parties—distributors, wholesalers and retailers, they give up control over their brand. As a result, their products are often sold under retailers’ private labels or resold without any mention of the original manufacturer. Direct sales can help producers of all sizes strengthen their brands and gain control over their customer base.
The economy as a whole also benefits when the few, dominant distributors face increased competition. When restaurants spend less on food, they can reinvest those savings in new jobs or further growth. End consumers, too, could potentially see more stable food prices when costs from distributors add less to the final price of food items.
Hurdles To Direct Sales
The theoretical benefits of more direct sales between food and beverage producers and the restaurants they serve are large and broadly spread; however, in practice, many small and medium-sized companies face significant challenges when they attempt to cut out middlemen in a bid to improve profitability and gain more control. Having a great product is not enough to succeed. Food producers must make their products accessible, desirable, and convenient for customers to purchase.
Recent research I published in the journal Economics of Development, outlined key hurdles faced by producers including:
Visibility
Food producers often lack a visibility strategy that allows buyers to find their products. If buyers do not see the product, they cannot purchase it. Producers must ensure their product is available where buyers are looking—marketplaces, B2B catalogs, trade shows, and industry publications.
Recognition
Even if a product is visible, that does not mean it will sell. Buyers frequently need to have the opportunity to test it, through product samples, trial orders, and interactions with restaurants and retailers.
Logistics
In the food service industry, direct sales are impossible without efficient logistics. Restaurants cannot wait two or three weeks—they need fast restocking. To succeed with direct sales, producers must find a way to provide delivery within a day or two.
Capturing Feedback
One of the biggest downsides of working with distributors is that producers do not receive direct feedback about their products. Direct sales allow them to understand what product characteristics matter most to buyers, adjust packaging and supply formats and learn how to position their products more effectively. But to reap these benefits, they must put in place systems to solicit feedback and capture customer insights.
Sellability
Even if a product is high-quality, visible, and available for testing and quick delivery, other factors can be a barrier to sales. Products must be easy to purchase and have strong positioning.
Leveraging Technology To Compete
According to the National Restaurant Association, restaurant sales in the U.S. are set to top $1.5 trillion this year. Cutting waste by eliminating middlemen so that producers can sell directly to restaurants and other customers has the potential to put a bigger chunk of that massive sum into the pockets of struggling businesses, boosting the economy and benefiting consumers as well as smaller and medium-sized companies.
Realizing these efficiencies is not as simple as just removing intermediaries. To succeed at selling directly, producers must go through a sellability cycle. This means the product must be present in the market, tested by restaurants and trusted by buyers. This process involves significant investments in marketing, logistics, and warehousing infrastructure so that smaller producers can compete with behemoths like Coca-Cola that invest billions in their supply chains.
Fortunately, modern technologies and platforms are beginning to level the playing field and allow small manufacturers to go through this process at a much lower cost. The key to success for producers is knowing how to leverage available solutions to enter the market with minimal costs and operate at a level comparable to the largest brands.
