Three Major Mistakes
These are just the obvious ones. Contact us to discuss an in-depth analysis of your situation and get expert insight.
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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. It makes their economics very predictable.
But it makes your economics unpredictable. 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.
We have seen many clients whose terms have pushed well beyond the expected time frame, simply because the expectations of volume purchases were wrong.
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 having a contract that lasts well beyond your expectations.
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 without regard to underlying commodity pricing.
Limit soft drink companies to one price increase per year and limit the increase to a palatable level by applying portions of their increase to your rebates.
Reliance on Relationships
We can’t count how many times we 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.
There is a cardinal rule in the soft drink business when it comes to negotiation. The rule is “nothing happens without competition.” 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.
Relationships are important for many reasons but they are not to be relied upon during a negotiation for exclusive pouring rights.