Purchasing Power

When negotiating prices, restaurants find there's strength in numbers. Katy Keiffer sizes up some unfurling buying-group banners.

Katy Keiffer
Posted: February 18, 2009

"Group buying is not the same as bulk buying." So says John Davie, president and founder of The Dining Alliance, a buying group, or co-op, based in Webster, New York, that serves restaurants nationally. Buying co-ops are a growing trend for small independent restaurant groups. According to Darrell Karp, president and founder of Leading Restaurants of America, a similar group based in Scottsdale, Arizona, "There are two ways to improve the bottom line: increase revenue or lower costs." Obviously, now is not an easy time to increase business or raise prices. But, Karp proposes this equation: If restaurants participate fully in all the buying programs his company offers, "they can save tens of thousands of dollars without making any investment in staff, infrastructure, or equipment." Susan Koehler at Sam's Club echoed his promise of savings, saying that Sam's Club business members can glean anywhere from $5 to $25,000 in savings. That is pure profit. Sounds good, doesn't it?

Buying co-ops are not such a new idea. Bill Lewis, vice president of sales at Frosty Acres Brands, an independent distributor, reminds us that "independent Greek coffee shops in Chicago got together in the 1980s and drilled down the price of coffee to something even distributors couldn't match."

Frosty Acres also works on a co-op plan, putting smaller independent distributors together to leverage better prices from major manufacturers. Distributors such as Frosty Acres can then work with a restaurant buying co-op. According to Lewis, essentially the buying group comes to a distributor and says, "I am bringing you x amount of business, and I want a guarantee of the markup schedule over costs that my customers are going to get." The payoff for the distributor obviously is negotiating a guaranteed volume: the buying group must commit, for example, to at least $3,000 per drop and an agreed upon number of drops per week. The advantage to working with a smaller distributor is they may be more flexible in their terms than the giant broadliners.

What really matters is how buying co-ops decide which entities are going to be the vendors of choice. Davie offers this explanation about their vendor selection process: "We have a mix of fine and casual dining operators on our board, and they help us decide who has the best quality and best service along with the best prices. Our restaurants don't want to sacrifice any quality. We actually see an increase in quality by leveraging buying power because we're bringing the vendors so much business."

Karp says, "We select our vendors based on capability and price for the most part. Capability being having the quantity and quality of products we need, along with delivery, reporting, and support capabilities. Yes, the restaurants play a vital role in the selection process from beginning to end."

So, the good news is that buying groups not only negotiate favorable contracts with broadline distributors, beverage companies, produce, meat, and dairy, they will also include paper, linens, and tabletop. Not only that, they can offer reduced rates on credit card percentages, property insurance, and in some states, the cost of energy! An additional value is that the time involved in sourcing and nailing down prices, or comparing prices of one company to another on a daily basis is reduced to just the categories that fall outside of the co-op parameters.

Sam's Club offers their members one-on-one consulting sessions where they go through a list of products and services and compare the invoices to identify where their savings can be made. They too offer credit card savings and, unlike the other buying groups, can provide a conduit to health insurance savings.

Operators who use these groups tend to be small independents with five to 15 properties and who are normally shut out of the kinds of deals that big chains are able to cut. Over 15 units in one company generally means that they have the leverage to negotiate on their own and probably wouldn't need to be part of a co-op. But for those that fall into the smaller category, as Karp says, "It's time to stop competing with each other and time to start competing with the chains."

So why isn't every independent in the business beating down the doors to sign up for these great deals? Now we get into the nitty-gritty. With the exception of Sam's Club, all buying groups require varying, but substantial, participation in their programs in terms of what the restaurants buy, generally around 70 percent of their purchasing. Some charge a fee for signing up, and some don't, depending on how participation is structured. More importantly, restaurants must commit to a certain level of volume. If they can't absorb the delivery and payment schedule, they are dropped from the program.

But most significantly, it means that operators must use the vendors who are affiliated with the group. If you prefer Hormel to Boar's Head but your group only buys from Boar's Head, then you too will be buying from Boar's Head. Not only that, if, say, the paper goods supplier in the group doesn't carry all the products you need, then you have to track down one who does, or alter your expectations. For many chefs, the ties that bind them to their favorite products are very hard to sever, even with the carrot of a 10 percent or greater savings. This is not to say you can't buy from your favorite produce farmer or protein supplier, but you have to be sure that you are buying pretty much everything else from the group.

What else can buying co-ops offer? Each of the two businesses profiled here are either working on or have added significant new elements to their programs. Both programs offer an audit feature which tracks every item from every vendor to make sure that they are honoring the prices agreed upon from week to week for the length of the contract. No restaurant has the time or the manpower to do that kind of monitoring for price creep. At Sam's Club, their massive buying power keeps the prices of their items low, so for paper goods, janitorial supplies, and generic grocery items where the provenance is not so important, clients can feel pretty secure that they are getting a rock bottom deal.

Leading Restaurants of America is also looking to build their services to extend to group marketing, and they are considering programs to improve hiring. As Karp points out, "It's incumbent upon independents to do a better job of sourcing, hiring, training, and motivating employees, and that can translate into marketing."

Is a buying group the right decision for your operation? Depending on your number of restaurants, type—or types—of menu, and overall costs, it's certainly a compelling option to consider. Buying groups can work if the restaurant is willing and able to make changes in how they buy, and who they buy from. Without that openness to change, a buying group can be a tough fit. Still, the advantages seem huge, and the disadvantages, in today's economic climate, may not be so significant. In the end, as Karp puts it, "There is nothing we can't do better than we're doing now if we work together."