The Evolution of Group Purchasing Organizations (GPO)
Define and Evaluate GPOs
What is a GPO?
A group purchasing organization (GPO) is an entity that is created to leverage the purchasing power of a group of businesses to obtain discounts from vendors based on the collective buying power of the GPO members.
The Current State of GPOs
A foodservice GPO focuses exclusively on the $600 billion foodservice marketplace – including food purchasing, contract negotiation and supply chain services.
These negotiations are made with supplier / manufacturing agreements and purchaser contracts.
- Volume and spending related to operator GPOs has dramatically increased and continues to escalate across the industry
- The challenge is growing more complex with certain of distributor-based GPOs and an entire industry of “faux GPOs” seeking to collect allowances
- Research indicates broad and deep issues with location-level integrity and compliance
- “Growth” of GPO volume often sources from converted “street” business (it’s just recorded differently)
The Previous Paradigm
- Business & Industry
- Hotel & Lodging
- College & University
- Vending & Office Coffee
Actual National Accounts
- ARA Services (Aramark)
- Canteen / Morrison’s (Compass Group)
- Marriott Management Services (Sodexo)
- Westin / Marriott / Sheraton / Hyatt
History: GPO & Healthcare
Explosion of popularity due to Medicare and Medicaid. Formation of Volunteer Hospitals of America (VHA) in 1977
GPOs began collecting more than the targeted 3% administration fee and in some instances resulted in cost increases of more than 30%
Formation of Premier in 1996. Formation of Novation in 1998.
In 2002, the Senate Judiciary Committee’s Antitrust Subcommittee imposed stricter standards and began requiring adoption of a Code of Conduct
History: Foodservice & Non-Commercial Customers
The non-commercial segments of foodservice (hospitals, schools, C&U, hotels) were traditionally the domain of “contract feeders” and “foodservice management companies” such as Aramark, Marriott, Morrison’s and Canteen.
Those accounts were treated similarly to commercial national accounts given their ability to purchase on behalf of the locations they managed and control an authorized distribution network.
In 1989, Kraft Foodservice and Baxter aligned – forming a dedicated business unit known as ‘Dietary Products.’ Over time, Kraft divested the distribution business and it evolved to what has become US Food Service.
The agreement with Baxter was the catalyst for the distribution agreement US Food Service continued to leverage with Premier and Novation.
Foodservice GPOs started in the ’60s and went through a period of rapid adoption. Today, there are 61,000+ restaurant buying group members with more than $33 billion in purchasing power.
Foodservice Beyond Healthcare
The breakup of Marriott Corporation led to what we know today as Sodexo and Avendra.
The Compass Group of the UK consolidated its purchases of Canteen, Morrison’s, Levy Restaurants and Bon Apetit to form Foodbuy. Foodbuy remains a subsidiary of Compass today.
Lines began to blur. GPO became a standard label for any organization operating in non-commercial segments… and began offering the same aggressive discounts to loosely formed memberships as they offered Sodexo and Aramark.
Traditionally, GPO programs offered a rebate payable to the GPO on a monthly or quarterly basis. More recently, manufacturers have begun to offer deviated pricing as an element
The Criteria to Look at When Considering a GPO:
- Discounted pricing options
- Suppliers and partners
- Minimum order requirements
- Online ordering and tracking options
- Shipping and tracking options
Implications and Pain Points
- Margin erosion due to re-classification of ‘down the street’ accounts to group members
- Growth of spending due to multiple memberships and double dipping
- Discount integrity issues given exposure of ‘contract feeder’ rates
- Trade flow friction across distribution partners due to inability to control extendibility
Taking Action – What Can We Do?
Provide a set of definitions and expectations that will drive more effective qualification and classification of opportunities within your organization. Support decision makers with consistent assessments of each opportunity, along with benchmarks vis-à-vis existing programs and offers.
✦ What differentiates ‘real’ organizations that actually negotiate purchase from loosely-knit confederacies that collect rebate dollars?
✦ What would you like to know in order to differentiate ‘Purchasing Group X’ from Sodexo?
✦ What behaviors or practices differentiate customers who actually purchase from those that merely collect rebate dollars?