Ms. Roberts

Sales & Marketing

The Pros and Cons of Group Purchasing Organizations

By Janine Roberts, Director of Sales and Marketing, Tradavo

Buying Groups, also known as Group Purchasing Organizations (GPOs) have been around for almost a century, and provide value to a number of industries, including Hospitality. The concept behind Buying Groups is laudable - small, independently run businesses can combine their purchasing power to negotiate better discounts traditionally only available to major enterprises. By participating in a Buying Group, businesses can theoretically save on purchasing costs by 'outsourcing' their purchasing capabilities to a Buying Group. It seems like a no brainer, but research indicates there are a few key pitfalls to this business model when it comes to supplying a hotel retail effort including free market independence, basic accounting and P&L tracking, and numerous restrictions that create barriers to obtaining the best pricing, technology and services once a vendor is selected by the GPO.

Group Purchasing Organizations bring advantages to buyers and vendors alike. Vendors generally prefer to secure business with large customers but recognize the value of reaching a large number of small customers through one cohesive network. Vendors are willing to extend discounts and additional service levels to the Buying Group to gain access to their large networks of buyers. This allows vendors to reduce their sales cycle and have a good forward view into demand - greatly impacting successful production and supply chain management.

While some Buying Groups are co-operatives and run as a non-profit, others are very much FOR profit corporations - so that the allowance offered by vendors is critical to the profitability of the Buying Group. But vendors have a limited budget for discounts and promotions, so anything that goes into allowances to earn business through the Buying Group is no longer available to be used for product discounts and other promotions that would directly benefit the members being served.

As a whole, Buying Groups benefit the smaller owner/operators more than the larger firms. Larger firms traditionally have sophisticated purchasing organizations and greater buying power - and, therefore, have the ability to negotiate very good arrangements on their own with the vendors of their choice. In this scenario, they are not locked into a single source supplier - one chosen by the Buying Group - but are free to negotiate with whoever best fits their purchasing needs on whatever terms make the most sense for their portfolio.

Additionally, since Buying Groups are structured to give all members a common price, larger owner/operators are offered the same pricing as smaller owner/operators, negating the normal competitive advantages that larger entities have in a free market.

All operators, large and small, forfeit many of the advantages of the free market when it comes to purchasing through the traditional Buying Group model. While a Buying Group may be able to offer good 'every day' prices, most vendors do not have static pricing. Just as hotels have sophisticated yield management programs for selling out inventory which results in price breaks and hot deals for their guests, the same is true for most vendors. Given the opportunity, vendors will offer promotions, discounts and closeouts to their customers as well as specially negotiated pricing in order to drive sales.

However, the vendors who participate in Buying Groups are often prohibited from offering discounts to members without approval from the Buying Group who commonly negotiates for a portion of the promotional dollars available that would otherwise go direct to the hotels. Even still, the programs must be offered to all members of the Buying Group and often do not allow for special volume deals or promotional programs to key accounts.

Buying Group rebates are paid to owner/operators based on their spend with the contracted vendor as a percentage of their total spend in a category. There are two potential problems with this scenario: one is that rebates come quarterly, sometimes annually, versus off-invoice. This results in cash flow going in the wrong direction. Secondly, the process of accounting for rebates and applying them to individual hotel P&L lines (which are reported back to owners) is cumbersome and time consuming.

Another downside is that innovation is often stifled in areas of price, features and functions. Once a vendor is locked in to what is typically a multi-year contract, the new vendor as well as the vendors that did not win the competitive bid, cannot introduce their products effectively to members of the Buying Group. In competitive industries like the hotel industry every innovation, efficiency, price reduction or program makes a difference. Stifling innovation, variety and free market competitive pricing makes very little sense.

It is noteworthy that the practices of some of the largest Buying Groups in the country directly contradict the basic principles of free market economics resulting in numerous cases of anti-trust litigation - sparked not only by vendors who are 'shut out' from selling in a free market, but also by the buyers who would like to take advantage of specially negotiated discounts they no longer gave access to.

Within the hotel industry, Buying Groups have been used effectively for Furniture, Fixtures and Equipment (FF&E) and for food service purchasing. In those categories, certain products, such as linens, carpeting and mayonnaise by the gallon, may not see innovation for years and may make perfect sense to use a Buying Group to secure a long-term vendor contract and negotiate low prices on items that do not vary or require consistent updating and improvements.

However, most Buying Groups lock in a vendor for a whole category, such as Food Service or Hotel Retail, which is suboptimal on many levels. Consider an owner/operator that is trying to distinguish itself with a super-premium retail offering of high end ice creams, natural and organic snacks, and a substantial Quick Meal offering - but the Buying Group has contracted a Convenience Store distributor that offers low budget fare more conducive to a Quick Mart or a 7-11 because they had aggressive pricing on Snicker's Bars and Doritos.

The owner/operator has to make a choice - scrap the idea for a custom hotel pantry offering OR go around the contracted vendor and risk dropping out of a pricing or rebate tier because they didn't reach the targeted spend set up by the Buying Group. Neither choice is optimal.

In Hotel Retail, which covers hotel markets, pantries and gift shops, the cons far outweigh the pros when it comes to utilizing a Buying Group. Most Buying Groups rely predominantly on their Food Service vendor to supply a minimal variety of chips and chocolate bars as most broadliners do not have a significant variety of products properly packaged for resale. The very nature of retail calls for a category management plan that includes a wide variety of top selling and specialty items across all categories. The shopping experience in which a guest would only find a smattering of chocolate bars and chips is not very satisfying and the revenue reflected by hotels that take this approach confirms that dissatisfaction.

Buying Groups may contract a particular distributor which does carry a long line of products from a variety of vendors, but each of those vendors will be required to contract with and pay the allowance to the Buying Group - resulting in higher prices. Research of one of the largest nationwide Buying Groups' Retail Vendor showed that, on average, their prices are higher than other nationwide retail suppliers by 12% in the Hotel Retail categories. Additionally, using a contracted distributor that has only regional coverage locks out the possibility of using other distributors to get coverage of an owner/operator's entire portfolio. For this reason, it is nearly always the best choice to opt out of the Hotel Retail category when negotiating with a Buying Group when the goal is to truly drive revenue, profitability and guest satisfaction.

Certain hotel retail solution providers provide all the benefits of a Buying Group but without the downsides. This new breed of companies negotiates low prices from manufacturers and distributors and passes 100% of all promotions, rebates and discounts directly to hotels, off-invoice. Companies like Source 1 Purchasing (www.source1purchasing.com) have evaluated the pitfalls of traditional buying groups and have made substantial adjustments to their programs to innovate the group purchasing experience - particularly for their hotel retail offering - to ensure that their members are reaping more of the benefits and eliminating the barriers and restrictions that contradict the buying needs of the members who select their program.

Group Purchasing Organizations have established themselves as an important resource in the purchasing sector. The leverage and purchasing power they offer small companies can be a tremendous asset. But it is important to consider all the pros and cons involved when selecting a GPO. You may be forfeiting as many benefits as you are receiving when restricting your purchasing flexibility to the many program restraints of a Group Purchasing Organization.

Janine Roberts, Director of Sales and Marketing for Tradavo, a retail services company specializing in design, optimization and supply needs of the industry. She works to improve retail profits and the automate management of hotel lobby shops. Janine developed and implemented the Retail Services element of Tradavo to provide hotels assistance in selecting, merchandising and effectively pricing inventory. She also created the highly successful Grand Opening Program to help general managers preparing for a grand opening and to launch their retail operation. Ms. Roberts can be contacted at 303-883-2335 or jroberts@tradavo.com Extended Bio...

HotelExecutive.com retains the copyright to the articles published in the Hotel Business Review. Articles cannot be republished without prior written consent by HotelExecutive.com.

Receive our daily newsletter with the latest breaking news and hotel management best practices.
Hotel Business Review on Facebook
RESOURCE CENTER - SEARCH ARCHIVES
General Search:

MARCH: Human Resources: Inspiring a Journey of Success

Sandy Asch

Baby boomers, Gen Xers, and especially Millennials, who now make up more than 50 percent of the workforce, want a sense of purpose at work. It’s clear that today’s workforce is increasingly concerned with doing good. People are tired of just showing up every day to perform a job. They want lasting fulfillment at home and at work. In his book, Drive, Daniel H. Pink suggests that we are in a time where individual desire to have a positive impact in the world often ranks higher than pay scale when selecting a job. Millennials, in particular, want to feel like their work has real purpose, and they want to be home for dinner. READ MORE

Whitney Martin

As new properties explode on the scene and traveler choices abound, hotels know they have to pull out all the stops to make every guest experience a positive one. Are staff friendly are courteous? Are rooms clean? Are meals excellent? Are bills accurate? We rely on our employees to execute their jobs, not just correctly, but with enthusiasm. And, if they don’t, business suffers. We do our best to hire good people (in a competitive market), we give them a little training, and then we HOPE they create raving fans. Ever heard the expression “hope is not a strategy”? READ MORE

Joyce Gioia

Worldwide, the hospitality industry is going through a transformation. In response to workforce shortages, many employers have looked for---and found---ways to reduce staff by using automation. Despite this trend, there are continuing shortages of skilled workers from front line housekeepers to general managers. Hospitality leaders are looking for and finding innovative ways to find the talent. This article will give you an overview of what’s working for general managers and their human resource professionals to find the people they need to staff their properties. READ MORE

Paul Feeney

A recent report from the U.S. Bureau of Labor Statistics, showed that close to 3 million people voluntarily quit their jobs a couple of years ago, a 17% increase from the previous year, proving that opportunities for employees are abundant and we have shifted back to a candidate-driven marketplace. Why is this important? Employee retention should always be of utmost importance, but requires awareness as to why employees leave to begin with. Numerous statistics show that the #1 reason people quit their jobs is a disconnect or poor relationship with their boss or immediate supervisor or manager. This shows that turnover of staff is mostly a manager issue. READ MORE

Coming Up In The April Online Hotel Business Review




Feature Focus
Guest Service: The Personalized Experience
In the not-too-distant future, when guests arrive at a hotel, they will check themselves in using a kiosk in the lobby, by- passing a stop at the front desk. When they call room service to order food, it will be from a hotel mobile tablet, practically eliminating any contact with friendly service people. Though these inevitable developments will likely result in delivered to their door by a robot. When they visit a restaurant, their orders will be placed and the bill will be paid some staff reduction, there is a silver lining – all the remaining hotel staff can be laser-focused on providing guests with the best possible service available. And for most guests, that means being the beneficiary of a personalized experience from the hotel. According to a recent Yahoo survey, 78 percent of hotel guests expressed a desire for some kind of personalization. They are seeking services that not only make them feel welcomed, but valued, and cause them to feel good about themselves. Hotels must strive to establish an emotional bond with their guests, the kind of bond that creates guest loyalty and brings them back time and again. But providing personalized service is more than knowing your guests by name. It’s leaving a bottle of wine in the room of a couple celebrating their anniversary, or knowing which guest enjoys having a fresh cup of coffee brought to their room as part of a wake-up call. It’s the small, thoughtful, personal gestures that matter most and produce the greatest effect. The April issue of the Hotel Business Review will document what some leading hotels are doing to cultivate and manage guest satisfaction in their operations.