Chief Pricing Officer

When Albert Einstein died, he met three economists in the queue outside the Pearly Gates. To pass the time, he asked what were their IQs. The first economist replied 190. “Wonderful,” exclaimed Einstein. “We can discuss the statistical variations of Ernest Rutherford’s analysis of atomic physics and my theory of general relativity”. The second economist answered 150. “Good,” said Einstein. “I look forward to discussing the role of demand shaping in setting prices for manufacturing industries.”  The third economist mumbled 50. Einstein paused, and then asked, “So what is your forecast for the budget deficit next year?” (Adapted from Economist June 13th 1992, p. 71).

Happy New Year Everyone!

Rip Gerber

Chief Pricing Officer

Recently, Dave Dewalt of Franklin Foodservice Solutions shared his perspective on the current state of foodservice price strategy with the CPO blog.

Dave Dewalt, Franklin Foodservice Solutions

Dave works with some of the largest, best-known food companies in the world to tighten up their pricing practices, tune up their redistribution programs, trim their product lines and generally improve business through improving pricing programs. Dave has a masters in marketing and finance from the Kellogg Graduate School of Management at Northwestern University and he worked with Sara Lee Bakery, Vlasic foods and Awrey Bakeries before joining AT Kearney as a management consultant. He launched Franklin Foodservice Solutions in 1996 and in 2006 helped launch the SMART Share Group of Food Service Broker Agencies, which broadened his perspective on foodservice issues.

Dave offers an excellent monthly e-newsletter, featuring an article from SignalDemand’s Chief Scientist Bob Pierce this month: “Get Smart About Foodservice Pricing.” You can subscribe to the Franklin Marketing Insights newsletter or download the current issue from the Franklin Foodservice Solutions homepage. The current volume is also posted on the SignalDemand “In the News” section of its Website, here.

Here’s what Dave had to say about the pricing challenges faced by all foodservice manufacturers today:

Most organizations believe that they are totally unique in their challenges. What shared price-related challenges do you see across all sizes and types of foodservice companies?

I see the major distributors taking an intense interest in understanding the manufacturer’s logistics costs, and working to separate them from product costs. This might ultimately lead to changes in manufacturer price structures, pickup allowance programs, and policies. Distributors want manufacturers to make transportation and warehousing costs transparent, then work with the distributors to determine the best way to share these costs.

The challenge for manufacturers is twofold:

• To quantify their costs at a level of detail which is unprecedented for many

• To share this information with trading partners, which requires a level of trust which has historically been lacking in many manufacturer-distributor relationships

In your opinion, in what way has the introduction of increased commodities volatility changed pricing for foodservice companies?

Many food manufacturers adopted “formula pricing” models for low value-added producs sold to major chains (pricing based on a published commodity cost plus a “conversion cost”). In some cases, the supporting assumptions and math were not particularly accurate, but manufacturers priced to get the business, and in times of stable commodity costs, everyone “got by.”

With significant swings in commodity costs, these programs are being called into question. In the worst cases, customers refused to accept the price increases which resulted from applying the formula to high commodity prices, sending everyone back to the table. Hopefully, manufacturers, distributors, and large operators are reconsidering these programs, and supporting them with better documentation and clearer understanding of what will happen the next time markets become volatile.

Wholesale pricing for the food industry is certainly going through a period of change, and transparency of costs is definitely emerging as a top priority. Commodities volatility is requiring that everyone evaluate their pricing programs, hopefully instigating a renewed commitment to really optimize price strategy using the technologies now available to weigh costs, supply and demand factors - rather than relying on old models that were used to eek by in the past.

Thanks, Dave!