Ask Joey

With multiple stores, what are the advantages and disadvantages for using a commissary?

Growth. Now, this is an exciting topic for this issue. Looks like we have gotten past the cheese market scares of the spring and are focusing on the most important fourth quarter goal: growing business. One function of successful growth is managing inventories. And one very important decision that is made in the middle stages of expansion is how to buy goods more effectively. Many take a position where they create a commissary for centralized purchasing and then farm out the products to the stores themselves. When is this the right decision to make? Some argue never, others say as early as possible in setting up a brand position. As always, it depends on a few key factors that can allow for a more educated decision making process.

Some Qualifying Questions:

  1. Are you a franchisor, or do you own and manage all of your operations?
  2. Are your locations local, regional or national in scope?
  3. Can any of your existing locations serve as a ship-to-facility?
  4. Is there a key efficiency that you can build that commissary around?
  5. How many proprietary products do you currently purchase/stock?

If you are a franchisor, it is possible to reduce costs for your franchisee partners and also create a small profit center for the ownership group by having a commissary set up. You can leverage your volume buying power with your vendor partners. You can also avoid the distribution layer of cost that is incurred under normal circumstances. Distribution costs to ship can range anywhere from 10 percent to 30 percent depending on the style and strength of the relationship you have with them. If you have a great relationship with your distributor, then the commissary is probably not the best decision. The only way to check that is look at potential costs through you vendors based on combined purchasing. Many vendors prefer to ship through distribution. In order to get this opportunity, you are going to have to push some serious volumes that can be verified.

You have to always consider that you will now be assuming the cost of delivering the product to your store locations. There is a substantial cost: that’s why distributors are sometimes a better fit for smaller groups. You have to look at these costs: fuel, vehicles, vehicle maintenance, labor/manpower, insurance and depreciation. Shrink percentage comes into play on all frozen or perishable items. You have to get an inventory maintenance software program and have at least one full-time person handling purchasing. And these are just the controllable issues. Envision a fire, like we just had at our landmark location. What contingency plan do you have in place in case of unforeseen circumstances? Stores need to continue to do business, so you better have a plan on how to react within hours of a concern at the commissary.

The most successful self-distributing chains I have dealt with have always had some production efficiency that they built a warehouse around. Many times it is dough manufacturing that anchors the ability to make the system work. In order to have consistency, the first product that most chains make proprietary is the dough. If you can bulk manufacture the dough at one location, it can create a cost savings and revenue base that offsets the start up and maintenance cost of the operation. That revenue savings, coupled with the savings generated by the bulk purchasing and program development, can hit the bottom line very well.

If you are developing and growing locations, it is a great idea to negotiate a marketing accrual from your vendor partners that you can then turn around and help drive business for the chain. Many groups have a marketing co-op where the revenues are pooled and then spent for advertising blasts over designated marketing areas. The commissary allows for you to gauge and track your purchases more effectively and also creates a one-point reference for tracking for your vendors. But you do not need a commissary to do this, you just need to be a high volume purchaser with good vendor relationship skills.

The most important thing to remember in this situation is there is a cost of building, maintaining and growing a commissary location. You do not reap the benefits unless you purchase in very high volume on all items you stock and ship from there, or manufacture products to ship from there to your stores. Many distribution partners do a wonderful job helping you grow your business. If you are thinking of going in the commissary direction, have an experienced advisor and a financial consultant look at the bottom line. There is a reason that a lot of chains do it themselves; you just need to make sure that the gains outweigh the losses.