GPOs (group purchasing organizations) influence the purchasing power of business groups to attain discounts based on the collective buying power of its members. Members abide by brand and volume commitments.
GPOs originated in foodservice segments such as hospitals, school districts and hotels. The success led to further entrance in these channels. Over time, valuable GPOs merged to attain greater scale, and extended their contracts to channel partners [including independent operators] – blurring lines of group purchasing power.
GPOs gain favorable pricing by replicating system buyers. Products are purchased consistently and negotiated among manufacturers and distributors.
After studying GPO-style buying groups, Darrell Karp saw a damaging pattern. He says that some GPOs only solicit discounts with manufacturers. For example, GPOs might have programs set up with every french fry manufacturer, without consolidation. Karp continues, “GPOs couldn’t grow sales with one supplier, and the suppliers ended up paying for business they already had. Restaurants weren’t required to move their business to one main distributor, so the buying group brought no new business to the distributor, either. All that was created was additional cost.”
According to Pentallect, system buyers and GPOs account for more than 60% of total industry purchasing volume. System buyers and GPOs are still outnumbered by non-aligned independent operators who collectively spend more than $100 billion annually on their purchases. High-volume individual locations and small chains are big enough to wield purchasing authority.
GPOs Focus on Independent Operators
“Large GPOs have been around, but they’ve never accommodated the independent restaurant market,” says Don Luria, president of Dine Originals. “It hasn’t made economic sense for them to do so. A $2 million restaurant might have $750,000 in purchases. That’s nothing to a company purchasing nationally. That’s why the chains have always had an advantage.”
But, GPOs do see opportunity for membership growth from the independent and street operators — the operators that provide the largest margins in the industry. The GPOs inclusion of independents is in the early stages; 85-90% of independent operators haven’t been touched, even though it’s estimated that approximately 35,000 independent operators [including “non-restaurants”] are affiliated with GPOs.
Traditionally, independent operators pay a fee to connect with a GPO program, paying x-amount in annual fees. After joining a buying group, an operator can take advantage of discounts and rebates. If independent operators who join a buying group, they’ll find time and monetary savings, as the buying group negotiates the best prices and a member can enjoy a one-stop shop. Even though restaurants can still buy the product and quantity they want, they must do so through the approved distributor to earn the savings.
What’s the Outlook?
GPOs will try to grow their independent operator influence by satisfying the member beyond initial savings and asking distributors to sign on independents to their programs. But, distributors will likely decline and remain the primary influencer of independents.
Between the manufacturer and the operator [or end user], there is a growing group of middlemen. Now, independent operators are forming GPOs to increase market leverage and obtain discounts via trade spend. According to the Dining Alliance, nearly 40,000 independent restaurant operators are affiliated with GPOs. That number is expected to grow.
Per recommendations from Pentallect, for positive outcomes for all trade participants, manufacturers should take advantage of software tools that analyze massive amounts of transactional data, using the data associated with the customer relationship to inform the seller of competitor’s offers and/or incremental sales opportunities.