Many foodservice manufacturers are struggling to gain control over the pricing and allowances offered to Group Purchasing Organizations [GPO] without placing undue risk against the volume these arrangements represent.  The need for control continues to increase as more of them are extended to locations that were not originally assumed to be eligible. 

Historically, these offers were isolated to large non-commercial organizations such as ARAMARK and Sodexo, where unit-level compliance was managed and relatively under control.  Within the past 4-5 years, the convenience of blanket allowances has gained traction with commercial segments as well.  Today, it is common to find aggressive deviated price offers for Premier, foodbuy and Avendra right alongside offers such as ‘State of Florida Schools’, ‘Café’s of the Pacific Northwest’ and ‘Summer Camps of America’.  My personal favorite is ‘RJ’s Restaurants’, where RJ was the initials of the Region Sales Manager.  The point is that the definition of the locations intended to receive a discount has become too subjective and arbitrary.  With loose definition and poor control of location eligibility, one industry executive noted recently, “We have Premier rebates being passed along to Bowling Alley’s and Gentlemen’s Clubs”.    

The increase in extension to incremental locations represents a call to action relative to control:

• The economics of the original offer did not contemplate the extension to locations that have historically contributed higher margin volumes as “street business”.  The continued erosion of pure list price business is reducing the overall contribution of the business and increasing pressure to deliver the company operating budget.
   
• Distributors who have access to those discounts are using them to their advantage in gaining the business from distributors who do not.  Those distributors who are on the losing end of the equation are left to either [a] cry foul based upon restraint of trade and Robinson-Patman; [b] request their own “private” deviated pricing offers for those same locations in order to effectively compete; or, [c] both.  Ultimately, the manufacturer is impacted by spending more and taking on additional administration.   
   
• Across multiple points of distribution, volume from many locations is contributing to rebates against more than one offer [eg, the infamous double, triple and quadruple dip scenarios].  The result is that the economic appeal of these allowances is reduced as the dollars invested are spread across fewer net actual cases than intended. 

Given the volume involved, it is not realistic to assume you can walk away from these opportunities or dramatically reduce their allowances to control the risks.  The following are 7 common sense actions you can take to build more control behind your offers to GPO’s.

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No less than 10 years ago, what many of us in foodservice now refer to as “the good old days,” the majority of operator discounts and allowances were rebates – this much per case or that much per pound.  For special situations where the volume was large and the operator actually committed to buying your product, you would reluctantly offer a deviated price.  Those prices were well-controlled and were only offered after a thorough analysis and justification process.  The reasons most folks were reluctant to “open the flood gates” back then still hold true today –

• Deviated prices carry higher administrative costs than rebates due to the ambiguity of the effective claim rate.
   
• Uncertainty around how much of the discounted price would ever reach the operator.
   
• Risk that distributors would “go up and down the street” with the hot price, upsetting balance in the market and costing you money for volume that did not require the discount in the first place [the elusive “full list price street business”]. 

Flashing forward to 2010, the new reality is that Chet’s Chevron in Small Fry, Mississippi, now receives multiple deviated pricing offers on just about every category.  The flood gates aren’t open … they have been removed from their hinges and thrown away.  It’s at this point in the conversation that I often hear “that’s just the cost of doing business in foodservice.”  Before we jump to that conclusion, consider the following statistics from a recent survey of the industry:

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In the foodservice business, one of the great topics for debate between manufacturer and distributor is focused on the operator [or end user] and the simple yet complex question, “Whose customer is it?".  Over the years, many manufacturers have publicly answered diplomatically [“Why, of course, we share that customer.”] and privately responded aggressively [“Those operators are under contract with us!”].   Over the past few years, the emerging practice of distribution bids [whereby the distributor awards preferred category supplier status within regions or clusters of local houses] has challenged everyone to seriously re-visit that simple question.  The bidding process has upped the ante and altered the debate.  The new reality is that the stakes are bigger than ever before and the implications of winning and losing are substantial.

Like most of your peers, it’s likely you have recently found yourself hunched over a conference table, surrounded by your colleagues, engaging in a heated discussion over questions like these:

• How much of the business do we have on bid or contract that we will keep if we lose the distribution bid and are “de-listed”?
   
• How strong are our relationships with the operators … will they raise their hands or even notice if our product is no longer the product they receive?
   
• If they do notice, will they do anything about it, or will they just accept the substitutes and replacements?

If the operator community accepts this power shift in the purchasing cycle, what began as a limited proof of concept will gain broad adoption as the standard approach for managing most categories.  Emboldened by success, this practice may very well evolve into an all-the-time policy with the majority of the trade.  Debating whether or not that day will ever arrive is not the challenge of the moment.  The task at hand is to prepare for that potential outcome now in order to mitigate the risk of getting caught flat-footed if it does. 

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