The bargaining power of suppliers creates persistent difficulties for restaurants. The term Porter analysis refers to company business plans and their attempt to gauge the forces that affect a company’s chances for success. The five forces include threats from new products and services, competition from established rivals, threats of new companies entering the market, bargaining power of buyers and bargaining power of suppliers. Restaurants must deal with these forces in business planning or face limited business success or eventual failure.
Bargaining Power of Suppliers Threatens Restaurant Success
Monopolistic suppliers buy out their competitors in suburban and rural areas to increase their control of prices. Government agencies and legal actions can break monopolies and prosecute secretive collusion agreements, but these arrangements are not only difficult to detect but also hard to prove in court. Bargaining power refers to the ability to set higher prices for goods and services, and restaurants face bargaining situations when buying food, paper goods, maintenance services, restaurant equipment and furnishings, and sanitary supplies.
Ideally, free market forces set prices, but suppliers charge lower prices for their best customers and raise prices for smaller companies, adding additional expenses. Big chain stores virtually set their own prices for the goods that they buy. Walmart, the biggest company in the world, has the power to drop suppliers and brands that don’t offer competitive wholesale prices.
- Ruth’s Hospitality Group, one of the top upscale restaurant chains, has tremendous buying power because it can draw from multiple suppliers from throughout the country.
- Panera Bread reduces its suppliers’ bargaining powers by making foods from scratch, baking its own bread from basic ingredients and buying raw ingredients from a nationwide pool of suppliers.
- Chipotle has enjoyed phenomenal success by embracing organic and sustainable local produce and charging a premium for menu items that customers are willing to pay.
- Subway bakes its own bread and has multiple restaurants in most areas, so the company has tremendous bargaining power with its suppliers.
Smaller restaurants don’t have these advantages in negotiations or pricing their menus. Fast food operations are particularly vulnerable to suppliers because profit margins in these restaurants leave little room for price increases without passing on the costs to customers. In the competitive food industry, people just dine at other restaurants if prices are too high at their regular fast food place.
Smaller restaurants face an even bigger threat from a landlord if the restauranteurs do not own the location. Landlords try to increase the rent at the end of a lease and can change the future prospects of a business overnight from black to red. If you can, seek out longer leases and prepare for rent hikes.
Strategies to Counter Restaurant Suppliers’ Bargaining Powers
Restaurants need to consider suppliers and alternatives before they open their doors to protect them from unreasonable price increases and ensure uninterrupted supplies. Food is the most critical supply to protect because fewer companies offer deliveries of full lines of restaurant supplies in smaller markets. Restaurants can find plenty of alternatives for services, furniture, paper goods, equipment and restaurant chemicals. Strategies to reclaim bargaining power from suppliers include the following techniques:
- Develop alternative suppliers for essential ingredients and supplies by prequalifying for accounts and emergency deliveries.
- Diversify menus to include multiple suppliers.
- Promote sustainability by working with local produce vendors, farms, dairies and butchers.
- Consider buying supplies from big box stores, food warehouses and grocery chains.
- Join organic and health food cooperatives or coalitions to increase bargaining power.
- Choose suppliers that offer dedicated sales representatives who negotiate prices, solve delivery problems and recommend cost savings and new products.
- Monitor prices regularly to spot unusual price increases, and mention any changes that seem unfair or inaccurate.
- Keep a tight inventory to take advantage of seasonal prices, reduce restaurant waste and minimize employee theft and misadventure.
Restaurant can consolidate suppliers by agreeing to a prime-vendor arrangement in return for a supplier’s best prices on supplies. Make sure that alternatives are available in emergencies or if the supplier doesn’t fulfill its promises. Small restaurants and food operations might not have the bargaining power of the big chains, but they can lower their vulnerability to monopolistic suppliers by developing alternative supply strategies.