Sunday, 20 October 2013

Buying Groups – Improving Sales and Profits even in a recession?

First Published April 2013

When we started our buying group, our objective was to improve our buying terms by 2%. So we were surprised when our first tender improved purchase prices by 22% on a major product group and we achieved purchase price improvements between 10% and 20% across the other product groups. Subsequent purchase rounds improved buying terms further, improved credit terms and added significant marketing support. The returns were way ahead of what we ever expected.

My company was a founder member and we were careful in selecting colleagues who shared similar aspirations and similar business views. The founding group was made up of 4 companies, 3 of which ranked within the largest 6 companies within our industrial sector. As well as sharing the rewards we invested in a central warehouse facility which allowed us to source from overseas, in shared IT and a centralised purchasing function. As a group, we marketed together, exchanged skills and tendered for national contracts. 

Ten years after it’s formation, c15% of my company’s turnover was directly or indirectly linked to the buying group.

The buying group concept can probably trace its ancestral routes back to the earliest cooperative groups in the mid 18th century. 

Although the Rochdale Society of Equitable Partners from 1844 is often cited as the earliest successful cooperative group, “The Cooperator” newspaper was established in 1828 and the earliest records go back to the mid 1700’s and the Fenwick Weavers Society of 1761. Whereas most of these early groups concentrated on selling and or social enterprise, the cooperative concept has developed across the world in various directions, including what is described as Retailers’ Cooperatives, where commercial organisations employ economies of scale to leverage purchasing opportunities and often pool marketing and other resources.  The Best Western hotel chain is a Retailers’ Cooperative whose members are independent hotel operators and who only dropped the cooperative description in order to avoid possible legal confusions within some US states.

Traditional buying groups operate in both horizontal and vertical markets.

Horizontal groups are not industry specific and focus upon generic services that are consumed across businesses in general. Horizontal groups tend to cover purchases of utilities, office supplies, building resources, packaging and generic professional services. At the small corporate level, many horizontal groups are independently owned, where the ownership is entirely separate from the membership, whereas in the large corporate arena ownership and membership are more likely to be aligned. According to research in the US, up to 20% of the Fortune 1000 use horizontal buying groups and reportedly receive improvements in excess of 10% on products that they source through these channels.

Vertical buying groups arise where business enterprises within the same industry come together to purchase raw materials, goods for resale and other goods and services within their industrial sector. Vertical buying groups are common within the grocery trade, electronics, hardware/builders merchants, plumbing supplies, leisure and hospitality, motor components, farming, healthcare and manufacturing. Some buying groups are independently owned whereas many are owned by their members. Some of these groups are enormous. “Today’s Group” claim to be the largest buying group of its kind in the UK with buying power exceeding £5bn although most UK buying groups are significantly smaller. “Today’s Group” are owned by their members.

As well as the normal commercial issues, buying groups have unique, but related, problems in terms of ownership, governance, finance and competition law.

In the early days of any group the founding members are more likely to concentrate on the practical issues and pay scant attention to the organisation. By definition, there is likely to be mutual empathy amongst the founding partners together with a shared vision. Shares/ownership will probably be allocated equally and decisions will probably be agreed by consensus, with a genuine incentive to compromise so that the project can be taken forward. Initial funding is likely to be shared equally with an agreed objective of getting the suppliers to pay the running costs by way of rebate or improved invoice prices. And little thought is likely to be given to competition law.
As the group grows, the opportunity for disagreement increases. Decision making tends to be by ownership rather than ability and there is often a tendency for decision makers to focus on the cost to their particular organisation, as opposed to the merit of the proposition. With equal funding, smaller members might be unable to fund ambitious projects. Whereas with funding linked to purchasing, larger members might reflect upon the differences in financial contribution, which might be further distorted by differences in product mix. And what happens when there is fundamental disagreement or a significant member leaves?

The legal implications are equally interesting.

In its broadest and simplest terms, it is illegal for businesses to do anything that distorts competition and which has a negative impact on the final consumer. In most cases, the purchasing process should be OK, but there is a need for caution when buying groups look at purchasing compliance rates within their membership. And additional caution is required when members start to cooperate on marketing, selling and contracting? Which, of course, is what many buying groups actually do. And extreme caution is required in terms of restrictions on membership or on member’s activities.

Buying group membership isn’t without its challenges. Members leave with possible implications upon the financial structure. New members join who may or may not share the perceived vision. Some members are fully engaged and fully supportive, whereas other members are less so. There is a tendency for secret agendas. But it works when there is a common goal and a well constituted membership agreement.
Our group produced an agreement from day one & I was responsible for drafting and negotiating a revised agreement when our largest member left, exposing operational and financial issues with the original contract. At that time, we chose to move away from a one member one vote system and to agree a voting system of my design and based upon financial contribution. It worked because we had a mature membership.
  Buying groups are not for everybody, but where they are suitable, they can have a transformational impact. Having experienced the ups and downs of a £365m turnover buying group, we have the experience to advise and guide other buying groups along their journey to success.
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Bob Drew is a Commercial FD with over 30 years’ experience in business. Having bought several businesses & sold a few, Bob has lived through a significant Exit when a large family business was sold to a private equity firm. The above Tips are borne of experience – they are not lifted from a text book.

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