If shopping locally has given a modest boost to independent retailers, the same cannot be said for foodservice customers. And with eating out in decline, suppliers are falling over each other to cut their margins to keep their piece of the shrinking pie.

“There are players in the market that, to all intents and purposes, will buy contracts at a very low margin,” says DBC sales and marketing director Michael Barrett. Foodservice wholesalers need to emphasise the service and innovation in their offering to keep margins from being eroded. DBC offers flexibility that the two giants cannot, he says, something that has won the company £50m of new contracts this year.

But DBC’s pre-tax profits margin is slim even by industry standards, at 0.48%. Charging a premium for superior service is out of reach for most.

“In fact,” says one industry insider, “Brakes has turned into a contract distributor signing seven-year logistics deals with Mitchells & Butlers and Compass. That side of the business has a much lower margin. That spells trouble.”

On top of this, suppliers are trying to pass on the cost of commodity price hikes to foodservice wholealers, with more than half demanding price increases in the past three months.

“Raw material cost inflation has been rife. That will be a continual threat to the market,” says Barrett. And if competition and food inflation don’t get them, fuel will. At 132.6ppl, the UK average for diesel was 16.8% higher in January 2011 than 2010.

“If fuel is allowed to continue to escalate along with the ingredient costs, it will cause damage to the sector and its ability to offer value to consumers,” warns 3663 MD Alex Fisher. “The fuel increase is horrendous, coupled with food costs. Can companies in the peripheries offer a competitive meal to people wanting to dine out? I would suggest not, going forward.”

Barrett agrees, and describes fuel as one of the biggest threats to any delivered foodservice wholesaler. “The smaller players are perhaps facing a worse threat because they cannot absorb the costs.”

With hikes in input costs showing no signs of abating, foodservice wholesalers say they have little choice but to increase their prices.

“Everybody will be in the same boat. Certain groups will go up by 5% to 6% but overall the level of increase will be much nearer 2%,” says 3663 commercial director Ian Crawford.

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