Should I Work With a Food Service Group Purchasing Organization?

The food service industry is infamous for its tight margins, high overheads, and dramatic turnover rates within the first few years. Yet overall growth remains strong. Never before have consumers had such a choice of niche, independent businesses, or large chain franchises.

Here, though, is the rub. The food service landscape might present a homogenous face to the consumer, but it is deeply divided within. When it comes to sourcing the supplies the business is based on, independent businesses often find themselves not only at the back of the line, but also blindfolded, shackled, and voiceless.

There are pros and cons to every sourcing technique, be it large chain franchises, independent distributors, or Group Purchasing Organizations (GPOs). Recently, the industry is trending toward large franchises and GPOs. However, this can hurt small to medium sized restaurants and other food service businesses. Before opting to work with a food service Group Purchasing Organization, consider what they offer, how they work, and what are the alternatives.

 

What is a Group Purchasing Organization (GPO)?

A Group Purchasing Organization amasses giant contracts with vendors to give businesses a one-stop supply chain partner. In simple terms, a GPO applies the principle of “supply chain networking” to rope small businesses into fee-heavy contracts that reduce their supply sourcing freedom. For independent restaurants and businesses in the food service industry, this can be a nightmare.

The food service marketplace in the U.S. is valued at $731 billion according to the USDA. Although 7 in 10 restaurants are single-unit operations, food supply and distribution is dominated by a handful of giant global corporations. A disparity in scale puts independent businesses at a massive disadvantage when it comes to negotiating not just prices, but also access to their chosen brands. This hurts restaurants that rely on consistent brand quality in their day-to-day work. GPOs intensify the struggle by squeezing suppliers for low margins and allowing low-quality products to enter the buying pool.

 

The Background of GPOs

Group Purchasing Organizations first emerged in the healthcare sector in the 1970s. These then expanded into food services, before dedicated non-healthcare GPOs came into existence in the 1990s. GPOs are now a standard feature of schools, hotels, and convenience stores. In the food service industry, GPOs now account for 25% of purchases, and The Hale Group projects GPOs’ market shares will be 15-18% of manufacturer sales by 2020.

 

What Does a GPO do?

Food and equipment sales make up more than half of food service costs. For the small independent business, this means researching, tracking, and negotiating agreements with food service distributors. The process is time-consuming and complex, and should be rewarded with a great distributor-to-business relationship. Unfortunately, when it comes to GPOs, the rewards promised rarely matches what is sacrificed.

A Group Purchasing Organization can offer lower rates on dry goods, disposables, and independent labels. However, this frequently leads to spot buying of lower-quality brands in the name of price. In essence, a Group Purchasing Organization offers a small measure of convenience while forcing members to sacrifice their independence and choice.

Membership of Group Purchasing Organizations usually requires a membership fee, or they charge a commission on discounts and services. Any independent business contemplating membership of a GPO should thoroughly research the membership and commission structure, the grievance and compensation procedure in case of late or missing deliveries, and the freedom to choose suppliers.

 

What is the Difference between Buying Groups and Group Purchasing Organizations?

Collective bargaining can be beneficial to independent businesses who feel they have little say versus large suppliers. When smaller businesses join together to form an organization, it’s called a buying group. Forming buying groups allows businesses to come together with suppliers on equal footing. The major difference between buying groups and GPOs is that GPOs specialize in group purchasing, not just networking. Members of buying groups can use the organization as a tool to source products. Members of GPOs are subject to restrictions and fees in the name of convenience.

 

What Are the Advantages of Joining a GPO?

Membership in a food service GPO promises access to competitive prices from a wide range of suppliers. Frequently GPOs secure their member's product lines based on lower price, not quality. However, there are some benefits to joining a GPO:

  1. Save money and increase margins by touching price points not available to independent businesses.
  2. Save time on tracking and comparing prices.
  3. Share and receive important insight on sector trends and price fluctuations.
  4. Traceability through the supply chain in case of food recall or safety scare.

 

What Are the Disadvantages of Joining a GPO?

While the industry momentum is toward Group Purchasing Organizations, there are significant disadvantages to independent businesses. Here are the common downsides to joining a GPO:

  1. An upfront fee is required. Few struggling independent businesses need to commit to any extra expenses. A GPO that requires a membership fee could potentially load a business with extra fees that are not recouped in savings or benefits.
  2. Membership imposes a loss of identity. The independent business should be free to sign partnerships with any supplier available, and any restriction on choice should be approached with caution. Especially for a niche business that is defined by bespoke product lines, a GPO may not be able to deliver the range of product choices customers expect.
  3. Direct contact with suppliers is essential. A key benefit of dealing with a GPO is the ability to outsource procurement on a day-to-day basis. But for the small, independent business built upon a close affinity with an eclectic range of suppliers, membership in a GPO sacrifices brand capital. If the identity and narrative of suppliers is a key business element, a GPO might not add any benefit.
  4. Delivery schedules are inflexible. Members could find themselves subject to few and large order deliveries, placing a strain on storage space and manpower.

 

The Benefits of Working with an Independent Distributor

Some independent businesses may be tempted to join a GPO once they hear the potential benefits. However, many of the problems that GPOs claim to mitigate have been circumvented by independent distributors for years. Before you consider joining a Group Purchasing Organization, consider working with an independent distributor. Here are some of the key benefits to end users:

  1. Consistent quality brands. When working with a large organization, be it a GPO or large food service distributor, there is a risk of spot buying. If you opt to work with an independent distributor, you can count on the same quality brands every time you order.
  2. Nuanced supply that matches your unique business. If your restaurant prides itself on fine Italian cuisine, you need the food and non-food items to match that promised quality. Because GPOs limit their network based on price, a nuanced restaurant may benefit instead from a relationship with an independent distributor.
  3. Better customer service. GPOs are large entities that stretch over continents. They can dwarf the needs of an independent restaurant. Working with an independent distributor will allow you to establish a relationship with your supplies source which can lead to better pricing, flexibility, and reliability.

 

Conclusion

Choosing a supply sourcing model that fits the ambition and scope of your independent business can help you grow margins, reduce overheads, and ensure product quality. Securing the right fit, however, is key. Before joining a GPO, consider the alternatives. Independent distributors can offer you trusted brands and high-quality foods without the fee structure.

 

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Sources:

https://www.ers.usda.gov/topics/food-markets-prices/food-service-industry/market-segments/

http://www.restaurant.org/News-Research/Research/Facts-at-a-Glance

http://www.teamfourfoods.com/uploads/2/5/8/0/25800406/t4_article_white.pdf

http://www.halegroup.com/~halegrou/wp-content/uploads/2012/05/GPOs-in-Foodservice.pdf

https://www.cardfellow.com/group-purchasing-organizations/