Group purchasing organizations (GPOs) are gaining a presence in foodservice, accounting for $16 billion in annual purchases and growing.
A new International Foodservice Distribu-tion Association (IFDA) white paper, The Impact of Group Purchasing Organizations on the Foodservice Industry, traces the advent of GPOs and their success in the healthcare industry, and analyzes the impact they are having in their more recent incursion into foodservice.
The white paper reveals key findings and challenges represented by GPOs and was undertaken as a catalyst for industry discussion in addressing the issue of GPO’s increasing role in the foodservice industry.
Although foodservice is a relatively small percentage of overall GPO business, sales within that channel are estimated to be between 8.5 and 9.5 percent and are growing with some GPOs having recently achieved significant increases in their share of business in foodservice. Almost all GPO companies interviewed for the report view foodservice as an area for growth.
IFDA’s report notes that operator-members of GPOs can achieve savings in the cost of goods, enabling them to compete more effectively. These same operators can also benefit from peripheral services offered by some GPOs, such as insurance, linen service, etc.
According to the report, manufacturers and distributors also can derive benefits in possible increased volume of sales to markets not currently served.
That volume, however, only goes to suppliers approved by or under contract with GPOs. In some cases manufacturers and distributors must also agree to contribute a margin percentage to the GPO as an administrative fee.
While a reduction in margins was seen as an acceptable cost when balanced against increased sales, some GPO practices are now having a negative impact on the foodservice supply chain, according to the report. In particular, the report cites the practice of “extendibility” – taking prices already negotiated exclusively for one class of trade (for example, healthcare) and extending them without discussion with manufacturers or distributors to another trade channel (such as independent restaurants).
Manufacturer and distributor executives interviewed for the report point out that the practice cannibalizes existing business, since the GPOs offer products and services to their pre-existing customers at a lower and at times unprofitable price. In certain instances, companies must also pay a fee to the GPO to conduct business that was theirs in the first place.
Some executives interviewed for the report said that the GPO model does not translate well into foodservice where suppliers hold strong pre-existing relationships, where operators use many SKUs and may need many different brands from operation to operation, and where the restaurants have requirements that add costs, such as more frequent deliveries with fewer cases per delivery.
The 50-page white paper is available to IFDA members for $95 and to non-members for $ 285 per copy. For ordering information contact Donna Rood at 703-532-9400 or go to www.ifdaonline.org.