As you explore negotiating or re-negotiating a pouring rights agreements for your business, you’ll encounter a critical decision: should you go with a term-based contract or opt for a volume-based one? This decision is not insignificant, as it shapes the dynamics of your partnership for its entire duration. Let’s dive into the details and weigh the pros and cons, keeping your business needs at the forefront.
Stability and Predictability with Term-Based Contracts
Term-based contracts offer stability and predictability, spanning durations typically ranging from 5 to 10 years. With clear timelines, you can forecast expenses accurately and plan ahead with confidence. This predictability provides a solid foundation for strategic planning, menu design and marketing calendars.
More Risk with Volume-Based Contracts
Volume-based contracts operate differently, tying agreements terms to a set volume of product purchased within a specified period. These contracts extend until the volume commitment is met or until the contract term expires, whichever comes last. These agreements provide the beverage companies with more certainty, which potentially could induce them to offer more favorable terms for you. But volume-based agreements also introduce the risk of extended contracts beyond what you may have intended.
Advantages of Term-Based Contracts
More Predictable for You
Term-based agreements provide you with predictability. You can mark on the calendar exactly when the beverage agreement expires. This allows you to plan your marketing calendars, purchasing forecasts and beverage expenses with confidence. And there’s no risk the contract will extend months, years or even decades beyond what you expect (and yes, we have seen contracts extend many decades due to a volume-based contract!).
Incentivizing the Beverage Company to Sell More Product
With a term-based agreement, you give the beverage company an incentive to help you sell as much product as they can in a specific amount of time. More beverage sales for you means more beverage concentrate being purchased — a win for your beverage partner. Because they are only guaranteed your business for a certain allotment of time, they should be motivated to maximize sales for the time they have your business.
Setting the Stages for the Next Negotiation
A term-based agreement also allows you to enter into the next beverage negotiation with more control and power — you can dictate the RFP calendar. You aren’t reliant on your beverage partner to tell you when you are free and clear to negotiate the next partnership.
Advantages of Volume-Based Contracts
Accessing Up-Front Funds
If you’re enticed by substantial upfront financial incentives (like a significant signing bonus), volume commitments may seem appealing. Beverage companies are typically more willing to advance money in a contract if it’s tied to a volume commitment.
However, proceed with caution. Treating the beverage company as a financial institution will likely lead to stringent terms and unfavorable payback terms (not to mention a significant discount rate on the money fronted). If you treat the beverage company like a bank, they’ll act like one. If you need an infusion of capital, it’s best to pursue more traditional options.
Speed of Negotiations
It’s common for beverage companies to initially propose (and even insist on) volume-based terms. Because volume commitments reduce risk for a beverage company, it’s easier for the beverage company’s finance teams to approve the proposed deal terms. A significant variable of risk has been removed. If you are up against the gun and need to get a beverage deal inked, caving on the term structure could help move things along.
Trading Term for Another Variable More Important To You
Beverage contract negotiations involve a complex mix of many variables. You may decide that you are willing to cave on the structure of the contract term in order to really focus on contract elements that are more important to you and your business. There are many levers you can pull in a beverage negotiation and you may choose to strategically cave on a term like this — which can be meaningful to your supplier.
Risks of Volume-Based Contracts
Dramatically Longer Term Than You Intend
Nearly 100% of the volume-based contracts we’ve analyzed have extended beyond the expected term. In fact, we’ve seen agreements that were intended to last 10 years extend to well over 100 years — simply because of an unrealistic volume commitment. If you sign a volume-based term, simply expect it to go beyond what the beverage company tells you. There are a number of reasons for this: beverage companies can often use exaggerated growth rates in their projections, the economy could go through a recession during the course of the agreement, you could sell off locations, etc. Whatever the reasons, chances are you will be partnered up for longer than you originally intend.
Declining Soda Sales
Soft drink sales have been declining for decades. Consumers are trading in their sodas for waters, sparkling waters, teas, juices, coffees, energy drinks — really, anything other than sodas. If you enter a volume-based agreement, you are fighting gravity. Why should you be penalized for a decline in demand for your supplier’s product?
No Incentive for Beverage Companies to Help You Sell Product
While a beverage company is incentivized to sell more product in a term-based structure, the opposite is true in a volume-based arrangement. If sales slump in a volume-based agreement, it only serves to elongate the contract — extending the time in which their competitor is locked out of your business. A volume-based agreement actually dis-incentivizes the beverage company from growing beverage sales at your business.
Ceding Power for the Next Negotiation
In a volume-based arrangement, you are reliant on your beverage partner to provide reports forecasting when your agreement will come to term. When we’ve had the opportunity to analyze these reports, its more common than you might imagine for these reports to contain errors — errors which benefit the legacy beverage partner. It becomes difficult to plan for the exact date when you can offer your business to competing suppliers, and you give up some degree of power in the negotiation by not being able to completely dictate terms without consulting your beverage partner.
Rule of Thumb: Avoid the Volume Commitment
Unless you really need a significant upfront payment from your beverage supplier, it’s best to insist on a term agreement. There’s just too much risk involved in a volume commitment to justify it. By leveraging a bonafide negotiation between multiple competing beverage companies, it’s likely possible to achieve a term-based agreement structure without sacrificing the financials.
How to Protect Yourself in a Volume Commitment
If you find yourself in a situation where you must accept a volume-commitment, make sure you build in some protections. Here are some options to consider:
- Thoroughly investigate the growth assumptions built in — and make sure they are captured in writing. Consider discounting these growth assumptions in calculating the commitment.
- Negotiate on a reasonable way to buy out of the agreement once you hit the calendar limit — even if the volume commitment has been met. This can simply be equivalent to paying back any “unearned” funding previously advanced.
- Build in exceptions to the volume commitment if beverage incidence rates decline by a certain percentage. Try to provide incentive to prevent the beverage company from extending the agreement and to market in a way to grow incidence.
- Ask for a reward (a bonus payment or ability to terminate the agreement early, for instance), if the volume threshold is met early. If you get penalized for a lower volume, negotiate a reward for beating expectations.
- Ensure you are satisfied with your price protection clauses. You will need to absorb all price increases over the course of any potential extra term.
Ultimately, your business is unique, and the decision between term-based and volume-based contracts should align with your specific needs and goals. As consultants experienced in negotiating pouring rights agreements, we generally advise against volume commitments unless there’s a compelling reason driving that decision.
Expert Guidance Tailored to You
As you navigate pouring rights agreements, Enliven is here to provide expert guidance tailored to your business. Our goal is to ensure a mutually beneficial and sustainable partnership, supporting you every step of the way.
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Photo by Eliza Diamond on Unsplash
