As a successful hotel operator, you know that high-quality food, equipment and supplies make up more than half your total costs. So, finding the best possible prices on those purchases is key to your profitability and your competitive strength.
You need reliable access to food, beverages, equipment and supplies to ensure that your menu items are prepared to perfection, so customers are consistently delighted. Selecting specialty ingredients allows you to offer memorable signature dishes.
Find time to manage the Food and Beverage program, stay on top of your Operations, Supplies & Equipment (OS&E) inventory, enhance your service quality and control your brand standards and pay the lowest prices possible, capture all earned rebates and earn a profit.
Your guests remember having a hot breakfast at one of your hotels, they will expect the same if they stay at another in a different location. Guests want the peace of mind that comes with knowing that when they stay at a specific hotel brand they will receive the same level of service and quality.
Unpredictable external factors and evolving customer demands are creating problems for hospitality professionals. Food service operators need to stay aware of consumer preferences and try to source the trending ingredients from local suppliers, while managing food budgets in a volatile market.
One minute you may be acting as concierge, the next, presenting your quarterly budget to top management and the next, helping a guest find a lost wallet. You’re constantly juggling the needs of various groups.
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 the GPO selects a vendor.
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 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 foodservice 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 disadvantages of group purchasing far outweigh the benefits.
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 group purchasing organization benefits and disadvantages 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…
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NATIONAL REPORT – The financial crisis that started in 2007 and the subsequent economic downturn created a difficult period for the hospitality industry.Forced to do away with nonessential services, many hotels were quick to end their relationships with the purchasing companies stocking their kitchens in order to maintain their bottom line. Still, as the industry is nearing peak levels of prosperity, it hasn’t welcomed procurement agencies back into the pantry.
According to Chip McIntyre, SVP, strategic sourcing at hotel procurement and supply chain services company Avendra, many hotels believe they can handle purchasing better themselves, despite the fact that many hotel purchasing departments are understaffed for the job. In the past, hotels encountered difficulties with purchasing companies ordering generic products, and many hospitality professionals have gotten used to doing purchasing by themselves. However, McIntyre said that by passing on working with a purchasing company, they are missing out on the expertise of organizations that can identify money-saving opportunities in hotel restaurants and beyond.
“As an example, we recently worked on a contract related to olive oil,” McIntyre said, elaborating that Avendra investigated how the product would be used and determined that a Mediterranean olive oil (consisting of olives from multiple countries) would be better than olive oil drawn from just one country. “Through this approach, we were able to secure a lower price for our customers and protect against supply variability for this multi-use olive oil.”
“The main reason we exist is to reduce costs,” said Jim Guenthner, VP of corporate programs and supply chain management for Source1 Purchasing. “There were cutbacks some years ago, and our company was built on people that came out of this industry. We walked in operators’
shoes before.”
LOSING CONTROL
One of the biggest difficulties hotels face when dealing with purchasing companies is giving up control of the buying process to a third party with little invested in the hotel. Hotels can be picky with everything they serve to guests, down to ketchup; how can they be comfortable letting a company buy for them when they don’t work with guests?
“We aren’t taking decisio nmaking away from operators; we are providing data analytics,” Guenthner said. “They can still decide on what they are ordering.”
This is important to hotels because the goal of purchasing has changed to match changes in guest preferences. For example, just as Westin’s Heavenly Bed changed guests’ perception of the sleep experience, travelers have adapted to ask more of the culinary experience when on the road. In order to avoid serving guests generic products, while also buying at a premium, Source1 compares products item-to-item in a database, highlighting significant products on a
percentage-point basis.
“It seems like data and analytics came to the hospitality industry last, but it’s critical to the success of a location,” Guenthner said.
While technology and data analysis are a major part of today’s procurement process, purchasing companies also bring to
the table a base of contracts and supplier relationships, as well as additional layers of quality assurance. In their “Meet the Truck Audits,” Avendra representatives meet with customers on the day they are expecting multiple supplier deliveries, without informing suppliers beforehand.
“We engage with customers during the delivery process, as well as after the delivery when we perform price audits to ensure they are receiving the contracted price,” said Don Hecht, VP procurement
at Avendra. “You have to know customer pain points; are they being raked over the coals in pricing?” Guenthner said. “Learn the issues, their goals and objectives. Where do they see business in 12 months? Are you looking for new furniture? New menus? Are you building?”
BUYING THE FUTURE
According to Hecht, the major trends in F&B purchasing for 2016 include a greater emphasis on mobile food, clean labels and food that tells a story. “Food choices are being impacted by millennials as well as other ‘foodie’ groups that are very interested in having an ‘authentic’ experience,” Hecht said. “To support this trend, we’ve seen the desire for hotels to deliver intriguing food and beverage‘stories.’”
As an example of this, Avendra recently launched an online boutique wine service that allows customers to order from small wine producers that are not in broad distribution. Guenthner said that standardized items are dropping in popularity as guests become better shoppers, while bespoke amenities are taking center stage, with the banquet space being heavily influenced by this trend. Instead of serving cookie-cutter meals seen in banquet halls across the country—Guenthner cited the 4-ounce chicken as a traditional offender—hotels are developing entire banquet menu guides that require meticulous ordering to execute.
“The offerings from group purchasing organizations have evolved faster than the perception of the institutions,” Guenthner said. “We fight it, but savvy operators are starting to come around.”
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