L.A. Foods, which resells excess food from manufacturers, has over the past decade built its business from a one-man operation into one of the biggest companies of its kind in the nation, with annual revenues of $22 million. So when the Canoga Park company was looking at ways to expand its market share last year, the Internet was one of the first places the three owners turned. Feeling pressure from competitors that were also looking to launch in cyberspace, partners David Fox, Max Gold and Mark Davis invested $500,000 for the launch of Direct2government.com. It remains to be seen whether the brick-and-mortar business can survive in the virtual world, but L.A. Foods has one advantage: its unusual niche is one that, so far, few others have entered online. Workers at L.A. Foods contact food manufacturers, identify oversupplies, and then negotiate for the lowest price, selling the products to government agencies like prisons and schools, as well as food banks. The operation is a somewhat speculative one; when manufacturers have large oversupplies, L.A. Foods will buy the product by the truckload, storing the goods at its warehouse in the hopes that it can find enough buyers interested in the product. The Web operation takes out much of the risk and overhead at the sacrifice of profit margins. Its clients pay L.A. Foods a markup of around 17 percent on top of the price the company was able to negotiate to buy the food. But users buying through Direct2government.com pay a markup of only 7 percent for each transaction. That’s because the Web operation hooks up manufacturers and government clients directly. Manufacturers post specific oversupplies on the site, and agencies can pick and choose what they want. The products are then shipped directly to the buyer, not through L.A. Foods’ warehouse. Because L.A. Foods’ fastest growing division is importing foods from overseas and selling it to U.S. government agencies and food banks, the company decided growth in that area would more than offset any loss in revenues from selling online. “Sure, we’ll lose some business, and everybody’s a little uptight right now,” Fox said. “We told our sales guys we’ll give them stock options; we’ll take care of them.” Fox said he expects the overseas branch to generate more than $200 million in revenues in three years because of the market potential. And Gold said the expanded selection on the Web site will drive business online. Because the site allows hundreds of manufacturers to post specific oversupplies even in small quantities, it means L.A. Foods’ clients have a much wider selection than they would if they were relying only on what the company has on stock in its warehouse. “There’s a limit on the items we could carry at L.A. Foods,” Gold said. “(With Direct2Government), we have everything. We have eight different types of pickles.” So far, 250 government agencies have signed up with Direct2government, though Fox admits orders are just starting to trickle in. Up to now, no Web sites have set out to target government food-buying programs. While sites such as Tradeweave.com and Ecfoods.com auction off food and other items, they aren’t specifically geared at government agencies or at production overruns. Sara Gill, a purchaser for the Bryant State Prison in Texas, used the site after getting an e-mail announcing its launch. After the prison ran out of tomato sauce in late May, Gill went online to compare prices. She ended up paying $7.50 a case for a truckload of tomato sauce, compared to the $11 she had been paying to buy the sauce through local vendors. “I was pretty happy about it,” she said. “Prison facilities can really use it because it’s all about cost containment.”
