CRH Catering: Even Big Players Must Change to Survive

Following several decades of expansion through acquisition, this Western Pennsylvania leader joins the VMI coalition of independent operators to learn to be more efficient and provide greater customer value.

In today’s vending market, operators need to invest more to remain competitive.

Some operators envy those who have the resources to invest. But from the vantage point of a large size company such as CRH Catering Co. Inc., based in Connellsville, Pa., the choices are anything but simple. A company with eight branches doing $35 million in annual sales has plenty of resources, but knowing how to invest them is a challenge not everyone will envy.

In an industry as competitive as vending is today, with profit margins smaller than ever and few growth opportunities, there is no foolproof way to guarantee success.

Brothers Joe and Pete Cordaro, the middle aged sons of founder Guy Cordaro, believe that the business operating model they have followed over the years is being challenged. And while technology offers new products, services and operating efficiencies, many of these innovations, such as cashless readers and remote monitoring, have not been adequately proven.

Meanwhile, suppliers are making life harder by raising prices more aggressively.

And while operator consolidation has reduced the number of players, the strongest have survived, leaving a market place that is more competitive than ever.

Life at the “top” is anything but easy.

In response to all these challenges, CRH Catering Co. has joined the Vend Marketing Institute (VMI), a coalition of 16 regional leaders in non-competing markets who act as a buying, marketing and information sharing organization. For the Cordaro brothers, joining the VMI was almost a necessity. The group has allowed them to focus on addressing the most pressing problems that large independents face.

INDEPENDENTS FACE CHALLENGES

“It’s still viable to be an independent vending operator,” said Joe Cordaro, president, giving thanks in large measure to the VMI. The VMI, as a buying group, has provided some additional leverage with some product suppliers. It has also focused attention on adjusting service levels to improve profits. “Although the margins are thin, there’s still enough left to provide a pretty handsome job,” he added.

In the meantime, the Cordaros believe there will continue to be more operator consolidation. They believe vending companies doing between $500,000 and $5 million in annual sales will be rare. “When there are fewer operators, it’s going to be better,” Joe Cordaro observed.

1967: THE VENDING BUSINESS BEGINS ‘BY ACCIDENT’

Both brothers started in the business shortly after their father, the late Guy Cordaro, established the company in 1967. Guy Cordaro was a successful restaurateur who got into vending by accident. A big industrial customer asked Guy Cordaro to run their two cafeterias because ARA Services (now Aramark) had raised coffee prices from a nickel to a dime.

Guy Cordaro immediately learned that vending is more profitable than manual foodservice, so he began seeking vending accounts in the western Pennsylvania area.

The initials “CRH” in the company name stand for the last names of the owner, his accountant and his lawyer. The term “catering” is a misnomer in the company name; Guy Cordaro expected it would invite fewer truck burglaries than “vending.”

Unlike many startup vending operations, CRH Catering was involved in full service vending and manual feeding from the very first day. Guy Cordaro had a background in both food processing and foodservice, and he understood all aspects of food manufacturing and distribution. He hired vending equipment technicians and experienced route drivers.

The Cordaro family’s restaurants initially doubled as commissaries to provide fresh food for the new vending operation.

“What differentiated us was our freshly prepared food,” Joe Cordaro recalled. This holds true to the present day.

In 1970, the company was still one of many small independents and brothers Joe and Pete were in college. The company hit a milestone that year, winning its first college account, West Virginia University in Morgantown. That account immediately doubled the company’s size.

Joe Cordaro transferred from Westminster College in New Wilmington, Pa. to West Virginia University to oversee the vending operations at the new account while he also attended school there.

Joe collected money from machines every morning before classes began.

ACQUISITION LAUNCHES A PITTSBURGH DIVISION

Four years later, Joe was just finishing up his studies in accounting when his dad acquired a vending operation in Pittsburgh, Pa. that had a dedicated commissary in addition to a foothold in the Pittsburgh vending market. His dad asked him to be the general manager of the new Pittsburgh division.

A year later, Guy Cordaro bought an ice cream manufacturing company in nearby Uniontown, Pa. and gave that business to his other son, Pete, to run.

The ice cream acquisition was not intended to support the vending business; food manufacturing was Guy Cordaro’s strongest passion.

As the Pittsburgh economy expanded in the 1980s, CRH Catering rode the growth. The Cordaro brothers absorbed their father’s grasp of business economics and sought to develop managers who could grasp it from them.

The brothers assumed most of the decision making for the vending business in the early 1980s while their father focused on other endeavors. They identified employees with management potential, then gave them opportunities to manage.

The Cordaros’ management method was to give the manager financial objectives to meet, then let him (or her) figure out how to do it. This was how the brothers learned from their dad.

The brothers bought into the concept of growth through acquisition early on. Joe Cordaro believed that with sufficient volume, a vending operation could support a dedicated sales staff, which in turn would sustain growth. “In order to attain growth, you pretty much have to acquire it,” Joe Cordaro said.

The company made a series of acquisitions over the next two decades that expanded its reach to five states: Cumberland, Md. (1981), Altoona, Pa. (1983), Norfolk, Va. (1991), Harrisburg, Pa. (1992), Richmond, Va. (1998), and Allentown, Pa. (2000).

COMMISSARY PROVES VITAL

The company eventually moved its commissary closer to its Connellsville, Pa. headquarters. The Connellsville commissary has served as the company’s central food warehouse. Even the prepackaged frozen food, which now accounts for one third of all food sold, goes to the Connellsville commissary to be thawed, then delivered on refrigerated trucks, pre-kitted with the freshly prepared food.

Food is an area where high volume continues to give a vending operation a competitive advantage. Because CRH Catering Co. services around 500 food machines, they are able to maintain an extensive menu and make the complete menu available daily. Unlike smaller operations that rotate their menu, CRH Catering’s commissary produces most food items daily. Refrigerated trucks make daily deliveries to all branch operations.

CUSTOM BUILT SOFTWARE

Shortly after the Altoona, Pa. acquisition, the company developed its own management software. Amy Shelkey, who was hired as a receptionist, brought a background in computer programming. She and Pete Cordaro, who is now vice president, developed a machine auditing program that they use to the present day. The system allows managers to measure route productivity.

Drivers record meter readings manually and the branch money rooms compare cash to meter readings. Branch managers review collection reports which reveal shrinkage and overages, as well as service frequency.

Shelkey, who is now the company’s information technology manager, has examined commercial vending management systems over the years, but she believes the custom built software provides the reports the company needs. The software now interfaces with a companywide server that customers can log onto.

In recent years, the industry has matured and sales growth has slowed. Operators have had to rely more on price increases to grow sales. Costs, meanwhile, have been rising faster than operators’ prices.

BOTTLES: NEW GROWTH, NEW CHALLENGES

The company’s last growth phase occurred in the last decade as 20-ounce PET bottles replaced 12-ounce cans. In recent years, however, competition has restrained the vending operator’s ability to raise 20-ounce bottle prices enough to keep pace with rising costs.

“Our industry has been on a steady decline since we switched from cans to bottles,” Joe said. “The whole industry hinges on the retail price of the 20-ounce bottle. We cannot allow the 20-ounce bottle to go the way of pastries, where there’s so much (price) disparity between us and the c-stores.”

He said bottles account for close to 30 percent of his total company volume, and he needs to keep product cost at 40 percent. “We can’t allow our highest volume item from creeping up,” he said.

VMI: SUPPORT OF COLLEAGUES

Low profitability encouraged the Cordaro brothers to work more closely with other operators. The VMI has been a great educational resource for them. VMI members meet periodically to discuss issues of mutual concern, and they communicate regularly via email.

One VMI member recently gave a seminar to the group on route productivity. The different members compared route productivity information, and they learned that companies with the most productive routes are the most profitable.

One VMI member convinced the group that service schedules need to be adjusted to maximize collections per delivery. To do this, it is sometimes necessary to limit product variety.

The Cordaros realize that limiting variety can compromise good customer service, but compromising operator profitability, they argue, ultimately destroys the operator’s ability to service the customer, period.

Joe noted that maximizing collections also benefits the driver who is paid on commission. “It’s not their (the drivers’) fault they’re not producing enough; it’s our fault,” he said. “They don’t want to work 15 hours a day, and who can blame them?”

“We were servicing lots of machines at $30 a collection,” Joe noted.

Because the company has always believed in independent management at the branch level, there has never been a companywide training program. Their involvement in VMI might change this, however.

The drivers place their orders daily, but management controls inventory at the warehouse level. Drivers are given a planogram that gives them some independence in selecting product.

The company will be changing planograms twice as frequently through the VMI purchasing/merchandising program, Joe noted. In the past, planograms only changed twice a year, and there was one planogram for the northern branches and another for the Southern ones.

TECHNOLOGY: MORE QUESTIONS THAN ANSWERS

Their involvement in VMI has exposed the Cordaros to the benefits of wireless remote monitoring, but they are not sure this makes sense for a company like theirs that primarily serves rural markets. “I don’t think we rural vendors can enjoy that technology yet,” Joe said.

Joe holds a similar view about credit card readers. He has tested them, but he has not found them great sales generators.

Another challenge for large companies is to know which services to provide. Large companies typically enjoy the advantage of offering a wide range of services: manual feeding, OCS, ice cream vending, catering, bottled water, etc. While offering a variety of services has many advantages, it is also extremely capital intensive.

For a company to win the largest accounts, it is necessary to provide manual foodservice. Coming from a foodservice background, CRH Catering was able to master this service more easily than many. However, the manual feeding business has become less profitable in recent years.

To protect itself, the Cordaros have opted to eliminate all “P&L” manual feeding arrangements, whereby the service provider assumes all costs upfront. Instead, the company insists on a fee on top of all costs incurred, assuring itself a profit. This is sometimes known as a “cost plus” arrangement.

EXPANSION: BOTTLED WATER

After selling the ice cream business in 1996, the company used the 300,000-square-foot facility for its equipment refurbishing and added a water bottling plant. They have developed a growing private label water business under their “Laurel Ridge” label.

The expansion into bottled water has given them a tool to serve smaller accounts successfully.

Smaller accounts by their definition are those that do less than $500 a month in candy and soda sales. By adding OCS and water service, such an account can be profitable. “We can make money since we bottle the water ourselves,” said John Berardinelli, the company’s corporate sales manager.

One area they did not expand into was OCS, which in retrospect, was a mistake. The company only provides OCS to vending clients.

“The one thing I regret in my career is we never put much emphasis on OCS,” Joe said. They are hoping their involvement with VMI will help in this area since the VMI has a private label OCS program.

VENDING MANAGEMENT: FRIEND OR FOE?

As a large regional player, CRH Catering works closely with vending management companies. They have found that some of the management companies have become more understanding of their needs in recent years.

Berardinelli said human resource managers in general are beginning to understand the value that vending offers the employees. One sign of this is that there is less of an emphasis on commissions than there was 20 years ago. “They’re looking at vending much more as an HR issue than a purchasing issue,” Berardinelli said.

Berardinelli said the healthy food programs have made a difference to many customers. “I’ve gotten accounts because of the progressive attitude toward healthy items,” he said. As part of VMI, the company offers a private label healthy food program, “The Right Choice.”

“We need to implement it to be the best company we can be from a marketing standpoint,” noted Joe, who said that consumer purchases are not yet strong in this area. “It’s just slowly moving towards health consciousness, and not rapidly,” he said of consumer choices.

Paradoxically, candy and snack preferences have been upsizing. Large size candy and snacks are standard fare in their machines. “There’s another paradox,” Joe said.

Berardinelli acknowledges that too many operators are willing to concede too much in the way of both pricing and commissions to accounts, which hurts the industry. “If you don’t make the piece of business decent to start with, it’s hard to fix it later,” he said.

FUTURE FOCUS: PROFITABILITY IN EXISTING ACCOUNTS

The Cordaro brothers do not plan on resuming acquisitions any time soon. Most operators interested in selling have an unrealistic view of what their company is worth to a buyer.

The present focus is on improving profitability with the existing business.