Dante led Snapchat’s global expansion, is an independent restaurateur, and founded Zitti to make the food supply chain work for everyone.
If you’re like many Americans, you go out to or order in from restaurants at least once a week. You also probably have a favorite neighborhood mom-and-pop eatery or local chain. Even if you know the menu like the back of your hand and the name of every server, you may not be aware that this restaurant likely operates on razor-thin margins, with an industry average of 3% to 5%.
Across the board, independent restaurants overpay for the same food products that large chains get for far less. Food costs are restaurants’ single largest cost besides labor, usually running between 28% and 35% of total costs. Overpayment to distributors makes a huge impact on restaurants’ ability to be profitable, much less withstand an unexpected event.
It’s past time for independent restaurants to get fair prices on food products. With the right technology, they can.
Why are independent restaurants overpaying for food products?
Unlike large chains, independent restaurants typically buy their food products from distributors who act as middlemen between restaurants and end suppliers. This space is dominated by a small number of companies; the top 10 food distributors control 60% to 70% of the sector’s national sales, of which the top five alone control 50%.
Thanks to both this monopoly and the historically analog nature of the food service industry as a whole, each food distributor operates in a black box, setting its own prices based on factors that include target profit margins for each of its independent restaurant buyers. By contrast, large chain restaurants use large teams of supply chain professionals to negotiate lower prices with end suppliers directly. It’s no wonder the latter fared far better during the pandemic.
Independent restaurants have no way to know how much they are overpaying for the products their business depends on, and they have no easy means of shopping around for better pricing. Owners and operators will instead continue buying from the same small number of distributors to keep things simple—or else spend precious time manually tabulating price comparisons themselves with the little information they can access. As a result, they are systematically taken advantage of.
How can independent restaurants prepare to transition to modern price comparison technology?
First and foremost, independent restaurants need to be willing to make changes that benefit their own economic self-interest. While this sounds obvious, small restaurants are often deeply protective of their back-of-house processes, which they feel are their “secret sauce.”
Many independent restaurants also have long-standing personal relationships with their distributors, who give them “sweetheart,” or national-tier, pricing on certain items while overcharging them on other items to make up the difference.
Amid persistent food inflation, it’s more important than ever for independent restaurants to be honest about what these purchasing patterns are costing. This also means being open to tech.
Many restaurateurs generally mistrust tech companies, which they see as aggressively pushing useless and expensive products. Well-designed technology, however, could offer massive and even business-saving benefits. Independent restaurateurs should deal with technology offerings on a case-by-case basis instead of dismissing them all out of hand.
How can the tech industry help independent restaurants make this transition?
• Adopt a consultative mindset instead of a didactic one. Restaurateurs’ negative perceptions of tech didn’t form in a vacuum. Unfortunately, some tech companies tout themselves as solutions to customer incompetence. Offering a restaurant the opportunity to grow their business is far more effective in building trust than telling them they don’t know how to do their jobs.
• Offer solutions to real problems, not manufactured ones. There’s a reason tech companies are disproportionately addressing front-of-house or customer-facing problems: These problems are easier to tackle, which means they are often less urgent. Tech companies seeking to enter the restaurant space should ask themselves if they are really providing meaningful operational improvements. Are QR codes on receipts or another undifferentiated POS solution offering genuine solutions or just new layers of superfluous technology?
• Educate and increase awareness. Tech companies have the unique ability to aggregate and analyze massive amounts of pricing data. They should, therefore, deploy this data to show restaurants just how much they are being overcharged. Tech companies must also terminate their own “preferred partnerships” with distributors, which only perpetuate monopolies and price opacity.
Can the private sector create greater market transparency?
While creating pricing transparency for independent restaurants is a massive undertaking, it’s clear that success is possible. A precedent for this kind of large-scale disruption exists.
Before the 1980s, there was no transparency around bond prices. Everyday investors had no way of ascertaining whether they were paying fair prices—until the Bloomberg Terminal gave them visibility. By empowering more customers to participate in the bonds market, Bloomberg Terminal ultimately created value for the supplier as well.
Almost half of Americans say restaurants are indispensable to their lifestyle. It follows that giving restaurants the tools to thrive would massively increase the overall market. With the right technology and an open mind, independent restaurants can finally get the fair pricing they deserve.
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