November, 1998

From the Editor

Commissaries Unmasked

Commissaries are the hot ticket right now. Rare is the month that goes by without my getting a call from a retailer looking for the inside scoop on setting up commissaries. The enthusiasm over commissaries is, however, not so much a positive pilgrimage to a shining city on a hill. It is, instead, a mass exodus of refugees from the horrors of in-store preparation.

Logically enough, all the talk of restaurant-quality food led retailers to think about opening restaurants in the stores. The sit-down versions have mostly failed. Restaurants were filling up with retirees, unemployed people, down-trodden vagrants, etc., who bad enough, sat around all day spending enough to buy a cup of coffee. Even worse, many of those customers tied up the best parking spaces for hours at a time!

The in-store cooking operations without seating haven’t faired all that much better. The ability to run a supermarket has precious little to do with the ability to run a restaurant. Add in the fact that many supermarket foodservice operations have taken on a task few restaurants ever do – namely to prepare hundreds of dishes in many different cuisines and, in doing so, creating food that is, generally speaking, not real restaurant quality anyway.

Besides, all those big numbers bandied about regarding the market for food away from home are really overstated. This seemingly juicy-sized market segment often includes food consumed in prisons, hospitals, in highly subsidized corporate cafeterias on isolated corporate campuses and other such venues. All these are markets for which supermarkets simply can’t compete. Add in those other occasions – people on vacation, teenagers on dates, anniversary dinners, etc. – that supermarkets are unlikely to win over in most parts of the country and one quickly sees that it is very difficult for individual stores to sustain the volumes necessary to keep the food fresh and the store staffed.

So, take less demand per store than was hoped for, a desire to upgrade quality and free up in-store space for other purposes, toss in a healthy dose of concern over food safety and one sees where all the excitement about commissaries is coming from.

In most cases, however, supermarket-owned and operated commissaries are a bad idea. If you are talking about full-scale USDA-approved facilities, the concept deserves even harder scrutiny.

To begin with, the commissary concept puts supermarkets into the food manufacturing business. This is, in general, not where supermarkets have their expertise. The managerial cost is substantial. It also ties up valuable capital, which could be used for remodels, new store openings, etc.

Yet, given all this, in the short run, the numbers may make commissary operations seem like a sensible way to proceed. The problem is the long-term.

What would you think about the idea of signing a perpetual contract with a manufacturer to supply a chain with unknown items, at unknown prices, on an unknown schedule? Sounds ridiculous doesn’t it? Yet very frequently that is what a wholly owned commissary turns into for a retail chain.

Building an in-house food manufacturing facility, which is what a commissary is, creates a vested interest in a company that operates completely independently of what is good for the retail operations – or the consumer.

Once the capital is invested in building the facility and the management established in the organization, of course, the commissary has to get the order to produce the product. In effect, the commissary becomes insulated from competitive pressures.

If the commissary isn’t innovative – it won’t lose an order. Labor will want wage hikes without concern for the need to win a competitive bid. Product that is produced but not in demand will be forcibly distributed in the stores, thus saving the profitability of the commissary and hurting the chain’s ability to serve the customers.

It has been written that capitalism without bankruptcy is like Christianity without Hell – the concept just doesn’t work. This is another way of saying that we need the downside to stay sharp in business. Retailers are much better off in contracting with independent manufacturers because the desire to keep the business is what will keep innovation strong, quality high, and prices reasonable.

Chefs have their place as showmen in supermarkets, and in certain types of stores, in-store cooking can be most successful. But just as overenthusiasm over in-store cooking is helping a lot of restaurant salvage guys today, so might overenthusiasm on commissaries help the junkyards of some future date. Rushing to build a commissary seems like an easy solution because one can order it, whereas working with manufacturers and developing distribution networks involves painstaking negotiation.

Out of that negotiation, however, grows the kind of mutual understanding that makes partnership possible. Despite all their talk, the question for many retailers comes down to this: Is partnership just too much trouble to bother with?   DB