Fixed-price agreements: Contracting for profit

10/13/2003 12:00:00 AM
Tom Burfield

BENEFIT FROM ITS ADVANTAGES

The advantage of having a contract is obvious when the market price for bananas is $18 a box, and you’ve locked in a $12 price. But what about when the opposite is true?

Kneeland admits it’s irritating to see others buying on the open market for less than his contract price, but as long as that’s an anomaly, he can live with it.

Koster of Mann Packing says contracts are only as good as you negotiate them, but, in general, retailers come out ahead.

“Even if the markets remain flat for the entire year, the contracted price … allows them to make a profit,” he says.

Dierbergs’ Duello agrees that, in the end, retailers will profit from contract buying. But he says with so many small suppliers around and with his proximity to the terminal market, he often comes out ahead by playing the market on heavy-volume commodities.

Extreme weather can alter contracts. “They have ‘act of God’ clauses in almost all contracts,” says Fitzpatrick of D&W Food Centers. That typically means that a shipper can raise its price if the market price reaches a certain level. Although, if costs do increase from the contract price, they usually remain substantially below the market, he says.

Most retailers and suppliers think the trend toward contract buying will continue.

In fact, some large retailers now demand contracts as a condition of doing business, says Koster.

“Retailers would much rather be contracted so they can set their profit,” he says.

And with retailers cutting back personnel as a result of consolidation, the practice of contract buying makes even more sense, Tanimura & Antle’s Alcocer says. Retailers often view contracts as a “tool that can stabilize pricing,” he says. That means eliminating the need to constantly change invoice or purchase order prices and not having to change the shelf price.

“At the same time,” he says, “it gives their customers a very stable price on a daily basis.”


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