Some independent restaurants in Houston are about to unveil the future of group purchasing.
Buy-side economics have never been nice to the little guy. Lacking the leverage that comes with volume, as well as the efficiency and purchasing discipline required to drive down costs, small operators have had little choice but to simply pay more for the same products purchased by larger competitors.
But a groundbreaking new initiative aims to change that. Kicking off this spring in Houston, the program will allow independent restaurant operators to tap into the $2.1-billion buying power of heavyweight Avendra, a group purchasing organization, or GPO. Founded in 2001 by a consortium of major hoteliers, including Hyatt and Marriott, the Rockville, Maryland-based Avendra has until now only served those companies, other large hotel and club chains and the cruise ship industry.
“Large GPOs have been around, but they’ve never accommodated the independent restaurant market,” says Don Luria, president of Dine Originals (formerly the Council of Independent Restaurants of America). “It hasn’t made economic sense for them to do so. A $2 million restaurant might have $750,000 in purchases. That’s nothing to a company purchasing nationally. That’s why the chains have always had an advantage.”
Luria, who owns Tucson’s Terra Cotta restaurant, spent two years working on a GPO concept for independents. He ultimately teamed up with retired Marriott purchasing executive Ray Currid and representatives of the Houston Originals, a local Dine Originals chapter, and approached Avendra last fall.
“We normally work with much larger customers, but the fact that Dine Originals could potentially deliver critical mass under one umbrella made it more attractive,” says Bob Waggoner, senior vice president of sales and services for Avendra. “We looked carefully at what these operators were buying and determined that we should be able to deliver some value.”
In late March, operators were just signing on for the three-month trial. Currid, now a partner in the Houston consultancy C&S Purchasing, which administers the program, says 15 restaurants will participate in the pilot. Luria says each stands to save 10 percent or more on food purchases (nonfood categories may be added later). “For an independent, that’s a dramatic savings that goes directly to the bottom line,” he says.
Alex Brennan Martin, Houston Originals chapter president, co-owner of Brennan’s of Houston and part of the New Orleans-based Brennan restaurant family, says the program has the potential to finally level the playing field for independents. “It won’t be for everyone. Some independents just aren’t joiners and aren’t willing to change how they do things, but we think there’s real value to be gained and many of us are willing to try it,” he says. “And once we get it going, we’ll have access to product categories beyond F&B, such as office supplies and tabletop items.”
Currid says the program’s comprehensiveness is what makes it so appealing. “Avendra has corporate buyers working full-time to negotiate contracts with manufacturers; they have field offices throughout the country implementing their programs; and they have a network of approved distributors in place.”
Waggoner adds that most traditional GPOs “work deals around volume discounts and rebates based on volume. We go much deeper than volume pricing discounts to provide full procurement management services. We don’t even call ourselves a GPO. We include full quality assurance and inspections at the manufacturer, processor and distributor level. We have commodities experts tracking the markets, we follow issues such as BSE and avian flu that could cause significant pricing swings. All of this type of market information is communicated to our customers regularly. In effect, we function like their purchasing department. Many of the operations we service are higher end, and for them it has to be about more than price.” He says some 70 percent of products available through Avendra are on negotiated pricing.
“Most GPOs just pass on a portion of the allowances or rebates they get from manufacturers through distributors,” Currid says. “We’re able to piggy back on distributor contracts negotiated by Avendra, as well as on their direct manufacturer contracts, of which there are nearly 1,000. When Avendra goes in with more than $2 billion in volume to negotiate with manufacturers, they get results. That translates to better pricing for our operators.”
Restaurateurs pay C&S a monthly fee to administer the program. “It’s pretty minimal,” says Waggoner.
Hypothetically, a $1-million restaurant might pay $1,000 a year but stands to net more than $100,000 in savings.”
And while they can still buy what they like in the quantities they want, they must do so through the approved distributors to realize the savings. “We go over each restaurant’s menu, matching up current inventory needs against what the distributor carries,” Currid says. “We don’t force specifications and we don’t pool volume. But we do try to direct them to products that will work for them that are under Avendra contract pricing. Independent restaurateurs ... have to be flexible if they want to realize the benefits. The more they buy, the better the mark-up they get.”
Participating also means giving up cherry picking among distributors and foregoing sales rep visits. To get competitive pricing, you must place larger orders less often. “If the restaurant doesn’t do that and drop sizes go down, their margins go up to cover the distributor’s cost,” Currid says. “But on the pure pricing side, there’s no flexibility. Prices are contracted and if the manufacturer increases a price, all of the operations get the same increase.”
In Houston, the Avendra broadliner is Glazier Foods, a $270-million family-owned distributor. Participating restaurants commit to using Glazier as their prime supplier to get Avendra pricing. “Glazier’s happy because they get a new multi-unit-type account and have an opportunity to grow their business with local restaurants,” says Currid.
“For almost all of the distributors we work with, we’re their second- or third-largest customer,” Waggoner says. “For independents, that means enjoying leverage that they’ve never had. It’s in the distributors’ interest to be responsive and to keep the clients happy.”
If the Houston pilot succeeds, the plan is to roll the program out to other Dine Originals chapters around the country. There are currently 17 chapters representing more than 700 independently owned and operated restaurants.
A Tale of Two Groups
No matter how it’s done, the bottom line is savings
Before starting Tucson-based leading Restaurants of America eight years ago, Darrell Karp studied GPO-type buying groups and saw a pattern of self-destruction. “Some were no more than a means of soliciting rebates with manufacturers,” he says. “They’d have programs set up with every French fry manufacturer, but no consolidation. They couldn’t grow sales with one supplier, and the suppliers ended up paying for business they already had. Restaurants weren’t required to move their business to one main distributor, so the buying group brought no new business to the distributor, either. All that was created was additional cost.”
Karp set out to build a purchasing initiative that functions more like a chain than a buying group. LRA negotiates exclusive agreements with a distributor and service providers in a market, then restaurants commit to buy primarily from those vendors. “Together they’re a cross between a street account and a contract account in terms of their relationship with distributors.”
LRA clients get called on by sales reps, but not often. The reps work on a maintenance fee instead of commission. “The price that an operator gets depends on how much they buy and how efficiently they buy. If they’re committed, we can improve their bottom line by 30 to 50 percent.”
LRA now manages purchasing for 450 operators in six states, handling $100 million in annual purchases.
The Sarasota-Manatee Originals Broadline Rebate Program is part of the 65-member Florida chapter of Dine Originals. “Our group is so diverse,” says Michael Klauber, chapter president and co-owner of Michael’s on East. “Everyone was buying different products on different terms. We talked to distributors and they said 80 percent of us had to buy 80 percent of our food items for it to work. That wasn’t going to happen.”
But the local Sysco house came up with a different plan. “They set up a rebate program for our chapter,” Klauber says. “There are no minimum purchases, but any purchases group members make through Sysco generate a percentage back to the chapter for marketing programs. In the first year, it totaled more than $100,000. We used it to build a great website promoting our restaurants and to advertise in local publications.”