February 17

Coffee Service Corner

Profit Maintenance in an Expanding Route Operation

Traditional Key Performance Indicator focus is always an appropriate starting point to improve execution and thereby drive company profits. Greater service consistency helps ensure account retention, historically my most important operator metric. Growing same account sales was a close second to account retention in the KPI hierarchy in the operator’s quest for a more robust P&L statement. But when an operator considers expansion, focus can be diluted if the plan is not well-developed and short and long-term profit will be affected.

From my days as a distributor and operator and through current times, I interact with many operators and we discuss route optimization, menu management, and every topic under the sun. Most of these interactions involve discussing our fragmented industry and what the future landscape may look like. That begets the questions, “Should I add routes and expand my territory, or can I continue to be successful within my current footprint?”

To Grow or not To Grow 

My customer base as a distributor mimicked the Coffee Service Industry in that I served small, medium and large operators on a national footprint. The large operators had already made the commitment to growth, be it organic and/or through acquisitions and understood the financial necessities and implications. Interestingly, after many years of aggressive roll up activities, the top five Coffee Service operators control only approximately 25% market share. There is much more potential for acquisition activity.

Many small and medium-sized Coffee Service operators seemed to be in a perpetual quandary regarding the question of whether to add routes or remain in a holding pattern. For most, it was a matter of funding the growth and belief that a commitment to adding a route(s) came with a fixed amount of additional personnel and expense coupled, with a timeline that they believed would only yield more cost and diminished profits.

Many operators have experienced success through aggressive organic and/or acquisition growth strategies. Some operators have new account activities centered only on replacing lost accounts, with only modest objectives regarding adding accretive business.

Adding routes – Some do’s and don’ts

Then there are those operators that decided to add route(s) and that have had limited success. I share some common missteps that I have observed:

• Deciding to add new route(s) organically while there was existing route capacity

• Adding additional route professionals and having the new hire “help with warehouse work” rather than having a well-thought plan regarding other job activities

• Adding new dedicated salespersons too hastily

• Considering acquisition candidates without performing efficient due diligence

• Marginalizing employees coming from the acquisition.

• Shifting key person roles too far away from core management and leadership activities towards the expansion efforts

I admit that at various stages of my career as an operator, I made more than one of these missteps. And from these missteps, I share some helpful hints that might impact your growth-driven results:

• Do a complete needs analysis of your existing route and customer base:

☐ Understand your footprint. Where are my accounts?

☐ What is the volume per machine on location?

☐ Does my route person(s) have capacity? Do they spend time doing non-route activities?

☐ While you’re at it, look at product penetration reports. Do you have a need to focus first on adding new items at existing accounts?

• When doing your personnel needs analysis, consider hiring a “hybrid” sales/ops type of person. Locating a pro that can efficiently sell as well as one that enjoys route work and install/service duty is a solution that can fast-track the account-adding process and morph into a full-time position either as a route professional or a sales pro.

• Do not short-cut your due diligence. There are critical areas where you must know the answers:

☐ Will efficiencies be gained and capacity created by melding the new routes with my existing routes?

☐ How will cost of goods be affected through this acquisition?

☐ Are too many eggs in one basket with disproportionately large accounts? Do we have binding contracts?

• Understand which of the employees in the new business own the relationships with the customers. Nurture them.

• Do not be too hasty to eliminate personnel at any level. We all have the inclination to protect and keep our current team intact, but there are usually some gems in an acquisition that might have redundant titles with your team. Give them consideration.

• Map out your product conversion and SKU rationalization process patiently. A plan that is too rapid might expose you to account loss.

An Evolving Industry

The toughest competitors that I encountered as an operator were most often the local and regional operators. The owners were engaged with their customer base and owned the relationships. Frequently, when some of these operators were bought out, the owners did not remain for long and those that did, more times than not, became custodial managers with much less interest in the business.

Not to say that the large companies are not capable and formidable. They are!

While I foresee more acquisition activity over the next five or so years, I do believe that a small or midsize operator can thrive. Growth plans need not be grand, but growth should always be a part of route business process. And there are methods to preserve short term profits and build toward even higher long term profits.

Until next time!

Ken

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