Business Week e.biz -- Strategies
Giant distributor Alliant Foodservice is changing the way institutions order food
To some, recruiting the former CFO of Compaq Computer Corp. to run a food distribution company might seem downright weird. Not to James W. Rogers, chairman of Alliant Foodservice Inc. A couple of years ago, Rogers realized that if Alliant didn't act fast, it would get squeezed out by online rivals able to connect buyers and sellers directly, without interference by middleman distributors--such as his own $6 billion, privately held firm. So Rogers went on the hunt for a CEO who understood how to transform a company's distribution system. At Compaq, Chief Financial Officer Earl L. Mason headed an effort to build PCs to order, but the program fizzled, and Compaq got smoked by build-to-order king Dell Computer Corp. Rogers thought that was just the kind of painful experience that translates into wisdom. "The reason that we got Mason is he got a lesson from Dell," says Rogers.
Now, Mason is giving the lessons. In December, Alliant Chief Executive Mason gathered more than 500 of his top managers at the Westin Hotel Crown Center in Kansas City. His message: By spending $200 million on a technology overhaul, the 24-year-old Alliant could become an Internet innovator. How? By reinventing the role of the distributor middleman via a Web site that--for the first time--would let food manufacturers pitch everything from ketchup to chicken wings directly to restaurants. "We walked out with kind of a `Wow' in our minds," says Terry Shannon, vice-president of sales for the Western regional division.
Mason is rattling the age-old ways of the food business. For decades, distributors have kept a hammerlock on suppliers who funnel products to them, controlling how food is delivered--and to whom. Very few suppliers could get definitive reports on how end-customers use food. Now, though, using the Web, Alliant can cull that explicitly detailed data on the buying habits of restaurants--and sell it to suppliers. Most middlemen, Mason says, haven't "put that connection together" yet.
At the center of Mason's ambitious plan is AlliantLink.com, a Web site that lets users, such as restaurants, hospitals, and hotels, order goods sans the mess of catalogs, faxes, and phones. Traditionally, food orders have been made by sifting through pages of catalogs, listing everything from lettuce to beef cuts, and then choosing which ones fit that week's menu. The lists are generally faxed a few times a week between restaurants and food distributors, such as Alliant and $16 billion Sysco Corp., the leading distributor.
Mason's vision, however, tosses out those old methods like so much wilted lettuce. Alliant's Web site is connected to a database that keeps tabs on what's in stock, and what isn't, in 44 giant Alliant warehouses across the nation--and all in real time. These warehouses, the "bricks" part of the business, make up Alliant Foodservice, the distribution arm of the company that delivers a whopping 1 million cases of food and supplies every day. By connecting the food service to the Web site, Mason has created what he calls Alliant Exchange Inc., a holding company for the two-pronged operation.
Mason's makeover doesn't stop with food. Within a year or two, Alliant Exchange also hopes to be peddling everything from lobsters to bedspreads to insurance plans online. "People say we're in the food business," Mason says. "Not really. We are about aggregation. Fast and reliable aggregation [of services]. That's what our mission is."
First, though, Mason must outrun his rivals. Stricken with e-fever, the $162 billion food-distribution business suddenly has a slew of players making Internet moves. Old-line titans, such as U.S. Foodservice and Performance Food Group Co., are launching Web initiatives. Although most are, for the time being, no more than bare-bones sites that restaurants use to place orders, several distributors are starting to join industrywide e-marketplaces. And a group of new entrants, including Restaurantpro.com and foodgalaxy.com, are hoping to change the economics of the industry by creating online hubs that let hundreds of niche distributors bid on delivery to thousands of restaurants. Right now, 49% of distributors use the Web, according to a survey by Institutional Distributor magazine. Of those, about 25% offer online ordering for customers--but that figure is likely to explode "exponentially," says Joseph M. Pawlak, senior associate at Technomic Inc., a food-service research firm in Chicago. Driving the e-frenzy are restaurants. Within two years, predicts Deloitte & Touche, 75% of all restaurants will order the bulk of their goods over the Internet.
But Mason isn't too worried. Alliant's edge, at least so far, is in its real-time link to warehouses. A rival's Web system, for example, might not respond to a customer's order for hours, because it doesn't tap into warehouse data directly. Alliant's system does. Information that it spits out--whether ice cream is in stock, for example, and when it can be delivered--is instantaneous and accurate because the site is hot-wired right in to the warehouse database. "Alliant is best of class," Technomic's Pawlak says. "When it comes to a distributor using the Internet, they are on the leading edge today."
So far, Mason's Web strategy is paying off for the Deerfield (Ill.)-based company. Although the bulk of Alliant's 100,000 customers have yet to sign up--AlliantLink.com is only 14 weeks old--the size of online orders being made by its 2,500 Web customers is, on average, 40% bigger than the size of the orders they place offline. And AlliantLink.com gins up other revenues, too. It plans to charge a hefty $400 an hour to amass custom-tailored reports that can pinpoint the precise buying habits of specific restaurants--valuable information to foodmakers and other suppliers. To date, the Web site is generating $6 million per week, and Mason predicts it's on track to take in well over $500 million this year. Add in those high-priced reports, and Mason hopes the company's gross margins will jump to 17.5%, from 17%, bringing in an extra $350 million a year.
That's just the kind of financial analysis you'd expect from a former CFO. Still, Mason seems a curious choice to lead Alliant's Net revolution. At 52, he has held top posts at telecom giant AT&T and at business computer maker Digital Equipment Corp. And he left his last tech job, at Compaq, in April, 1999, under a cloud. Wall Street analysts were miffed that during Mason's tenure as CFO, Compaq reported woefully low earnings without any warning, sending the stock into a tailspin. And critics huffed that two months before the bad news broke, Mason sold 94% of his shares, grossing $12.3 million--almost twice as much as he would have earned after the shares sank. Mason dismisses the criticism. "We were not dishonest," he says. "When we knew something, we told investors."
All that doesn't matter to Chairman Rogers. Mason, he says, is making all the right moves. Already, he has helped Alliant keep and land major new customers--including the nationwide Houlihan's restaurant chain. Mason's Web strategy was also a key factor in keeping a $630 million annual contract with Premier Inc., a national health-care alliance. "We could have become a second fiddle and not been able to deliver," Rogers says. "Earl is driving us fast."
But Mason isn't stopping there. Instead of simply selling ketchup and chicken wings, he wants to start selling information. In the past, middlemen tended to horde data about customers' food-buying habits--and keep it from suppliers. Mason, though, wants to change that by posting some of those details on the Web--for a price. That information might, for example, pinpoint which specific restaurants buy soda crackers and which also buy steak. "That would be radical," says Dave J. Pfanzeltar, vice-president and general manager of Keebler Foodservice, a major food supplier that is not an Alliant customer. How would such a system work? If a supplier tells Alliant which products are its most profitable, then Alliant can help that supplier hawk them over Alliant's Web site, with targeted ads that pop up on preferred customers' screens. "We would be able to track every click that you make," says AlliantLink.com President Barbara G. Moss.
Customers so far like the site, including Steve Chapman, kitchen manager at the Embassy Suites in Troy, Mich. When the hotel--on Chapman's day off--added a party to his banquet schedule, Chapman was able to avert a food-shortage disaster by logging onto Alliant's Web site from home, then ordering the Black Angus beef he would need for the event the next night. In the past, Chapman says, he would have been forced to call his computer-phobic cooks and instruct them, over the phone, which computer keys to punch to order specific food items, a process that would take about two hours.
But happy customers is only part of the payoff. So far, AlliantLink.com has helped the company cut errors--by more than 60%. Before the Web, Alliant was making up to 25,000 mistakes for every 1 million cases of food it shipped. Not anymore. By year's end, Mason hopes to slash that to no more than three errors in any given day. How? One way is to have computers check the accuracy of customers' orders. Before, say a company that owned a fleet of hot-dog carts might mistakenly place an order for turkeys rather than franks--and an Alliant customer rep might not catch the error. Now, though, AlliantLink.com gets users to verify their order before it gets placed.
So what's next for Alliant? With the Web on its side, why stick with food? Mason hints that the company might some day sell cleaning supplies and linens to hotels, and temporary employment and financial services to restaurants. It might even acquire companies to help. "We were a dowdy, run-of-the-mill food company that wasn't very exciting," says Moss, "and look at us now." Not a bad way to make mincemeat of rivals--before they've had a chance to bite.e.biz online
For a Q & A with Alliant Exchange CEO Earl Mason, go to ebiz.businessweek.comBy Roger CrockettReturn to top