Learn to Flex Your Buying Muscles
It is one of the many challenges for independent pizzerias. You are competing for the customer’s pizza dollar with franchises of large corporations who can purchase the same ingredients for less money. Let’s face it: customers factor the price they are paying into their buying decision. As do you.
What if you could buy your ingredients at the same price as your competitor? This would allow you to sell your pizza at the same price, eliminating price as the decision factor in your customer’s buying decision. Now you can sell pizza based on your (much better) recipes and flavors. Wouldn’t that be a game-changer?
Before we get into how to increase your buying power to match that of your large-chain competitor, I would be remiss if I did not address the elephant in the room.
The independent pizzeria owner is oft quoted as saying “The customer will pay more for quality”. I submit to you that these words are ‘fluff’, and not a true point of differentiation that will allow you to compete by charging a higher price. If you do successfully differentiate yourself from your competitor, it will never completely supersede price. So, let’s get to work on how you can increase your buying power.
Here is a blueprint you can use to flex your buying muscles. It involves three new terms you will want to add to your vocabulary:
- Primary Vendor Distribution Agreement (PVDA)
- Group Purchasing Organizations (GPO’s)
- Manufacturer Deviations
Primary Vendor Distribution Agreement
A Primary Vendor Distribution Agreement is a contract signed by you and by your distributor (the company that brings you your food) that sets the exact margin the distributor will charge you above their cost. The contract usually separates these margins into categories, for example Cheese, Meats, Dry Goods, Produce, etc. A contract may read like this:
Cheese = .25 per pound
Meats = 8%
Dry Goods = 10%
Produce = 15%
The contract requires you to purchase most of your food and supplies through that primary vendor, usually at least 80 percent of your total purchases, and specifies the ‘drop size’ meaning the minimum dollars required for them to make a delivery. This means you may receive a delivery once per week or even once every two weeks. Distributors know how much it costs them for every stop, and factor that into the drop size. The idea is to create a win-win where you get good pricing, and they still make a profit. By signing this contract, you eliminate the middleman; there is no longer a commissionable salesperson. This saves the distributor money which they can pass along to you.
Selecting a Primary Vendor and getting a contract signed is Step 1 to flexing your buying muscles.
Group Purchasing Organizations
As an independent, or small chain pizzeria, having a PVDA is not enough. The Distributor does not have the resources to ‘go to bat for you’ with the manufacturers. For this reason, your next step is to become a member of a GPO.
A group purchasing organization is a platform that allows any business to join a group of other buyers who are interested in the same products. The GPO has buying muscle because they represent a lot of small independents, whose total purchasing power can equal, or even beat, a national chain operation. The GPO negotiates pricing and members benefit by paying much less than if they purchased the products on their own. GPO’s are very specific to the type of member. For example, pizzerias benefit by buying together because they all purchase flour, sauce, cheese and toppings. A GPO for fine-dine restaurants would not help a pizzeria. Membership to a GPO is often free. The GPO makes its money by retaining a percentage of the Deviation they get for you. The GPO has already negotiated with many manufacturers to get a ‘Deviation’, that is, a price that is less than their list price. A GPO will manage all your Deviation Programs. Some examples of GPOs that can help pizzerias are Entegra, Source1 and Restaurant Buying Group. However, your Primary Distributor can also find you the right GPO. You would provide them with a Letter of Intent which would empower your Primary Distributor to contact GPOs on your behalf.
Becoming a member of a GPO is Step 2 in flexing your buying muscles.
Which brings us to defining ‘manufacturer deviation’. A manufacturer deviation is a discount off the regular price. Manufacturers will give customers who order lots of their products this discount. These ‘deviation agreements’ require some management. They may expire every six months or one year. They require the submittal of Usage Reports on a regular basis. Your GPO will manage these agreements. Here is an example of how the savings work for you. I’ll use a common ingredient for pizza, pepperoni. Let’s say you purchase pepperoni, and the manufacturer case price is $100. Your GPO has negotiated with that pepperoni manufacturer to get their members a $10 deviation. If your GPO charges 1% of your purchases, in this case $90, they will retain .90 per case and you will save $9.10 per case. Combined with the savings you achieve with your PVDA Agreement, here is how that savings looks for one case of pepperoni:
No PVDA & no GPO
Manufacturer = $100
Distribution mark-up of 12% = $12
Price to you = $112
With PVDA & GPO
Manufacturer = $90.90
Distributor mark-up of 8% = $7.27
Price to you = $98.17
A savings of $13.83 for every case of pepperoni!
Working with your GPO to align your products with their manufacturers is Step 3 of flexing your buying muscles.
Step 1: Sign a Primary Vendor Distribution Agreement
Step 2: Become a member of a Group Purchasing Organization
Step 3: Align your products with your GPO’s negotiated manufacturers
Now you are buying like the Big Boys. By eliminating price as a factor in your customer’s buying decision, you may focus on what truly differentiates you from your competitor!