Business consultant Michael Jacobs reflects on lessons learnt from a high profile career in optics, giving mivision his ‘two cents worth’ on the future for independent optometry, Australian-style. In this article he talks about the future of buying groups.
As a proportion of sales, cost of goods sold (COGS) represents about 30 per cent for the typical independent optometry practice and reducing this cost is often a major focus of the practice owner. A 10 per cent reduction in COGS can deliver a substantial improvement in profit which no owner can afford to ignore. Not surprisingly then, buying groups who offer members significant discounts feature largely in the independent optometry landscape. It is thus reasonable to assume that buying groups are good for group members and their suppliers, but in this article I will argue the opposite, and thus suggest that if there is not a change in the structure and strategy of many buying groups their future may be in doubt.
Let’s analyse a typical scenario. Most suppliers offer discounts to practices based on sales volume or other key performance indicators (KPIs). In this example supplier “A” currently gives a practice a 10 per cent discount based on their sales volume both in recognition for their current support but also in the expectation of increased future sales. Then Supplier “A” decides to join a buying group. Qualification to become a supplier to this particular buying group requires Supplier “A” to offer a flat 20 per cent discount to all members of the buying group, regardless of volume. Additionally Supplier “A” has to pay a 5 per cent commission to the buying group. This 15 per cent added discount to the typical group member would have to be made up by an almost 20 per cent increase in sales volume just for the supplier to break even. Furthermore, many buying groups impose additional costs on suppliers through extended warranties, advertising, training and supporting member functions among others.
Supplier “A” is clearly going to look to the buying group to modify the behaviour of their members by increasing sales or increasing the number of members in the group, but what tools do buying groups have to change behaviour? I would suggest very few. Their members are, after all, independent. They joined a buying group because they didn’t want to be alone but they didn’t want to be part of a franchise either. The facts are that buying groups have little control over their members because their members do not want to be controlled.
…if there is not a change in the structure and strategy of many buying groups their future may be in doubt…
Furthermore, the buying group does little to reduce the suppliers’ costs. They make no upfront commitments to quantities of product to be sold. They hold no inventory in their own right. In many cases they do little or no marketing. For Supplier “A” it would seem the only thing that has changed is that their costs have increased with only a hollow promise of some future growth in sales.
Buying Group Perspective
On the other hand, the buying group has costs, and it needs to recover these. Some buying groups do this solely from the group commissions on member purchases. Other groups have varying forms and degrees of membership fees in addition to supplier commissions. Depending on the ownership structure of the buying group and its stated goals, the priorities of the buying group must be understood. If the buying group was established only to maximise the returns to the owners/shareholders then their major objective will be to maximise returns to the owners with only secondary consideration of the members. Even those buying groups owned or controlled by the members have potential conflicts of interest between growing their own organisations and increasing returns to members.
Buying groups are constantly looking to:
- Maximise income from commissions on supplier sales to member practices by
- Maximising the number of suppliers in the stable
- Maximising the commission to the buying group (at the expense of the practice discount?)
- Selecting suppliers who already have significant sales to members
- Select suppliers that offer the:
- Highest commission to the buying group
- Highest existing sales to existing members
- Not necessarily select suppliers based on an analysis of the needs of their members.
Lastly, buying groups of sufficient size could easily enter into contracts for the direct importation of products from their source country (usually China) for the benefit of members but are unlikely to do so for fear of losing their existing suppliers and the commissions they generate.
Members of buying groups should make themselves familiar with the objectives of the buying group they belong to and try to understand how the commission their purchases generate is used by the buying group.
Questions practices should ask include:
- How are group suppliers selected?
- Who are the legal owners of the buying group and how are the profits of the group distributed?
- Could I get as good or better discount by consolidating my purchases to a small number of suppliers and buying direct (no buying group)?
The future of buying groups depends on many factors but it is becoming clear that suppliers cannot afford to continue giving large discounts and buying group commissions without seeing a significant change in the performance of the group’s member practices.
Independent practice sales growth has stagnated since 2008. Competition is increasing. Exchange rate decreases are putting even more pressure on prices of imports.
Savvy suppliers will look to alternative ways to improve their sales/profits:
- Creating their own buying groups (e.g. CR Surfacing)
- Abandoning the “push” model of driving the market through retailers and instead, focusing on creating consumer demand with a “pull” model. This has already been successfully demonstrated by Transitions and the brand stable of Luxottica (in fact Luxottica wholesale is a good example of the likely direction of some larger suppliers. Luxottica Wholesale offers minimal but targeted, brand related discounts to a select number of retailers and does not offer commissions to buying groups).
- Others suppliers will seek growth and efficiencies through mergers and acquisitions.
There is one thing we can be sure of: buying groups need to deliver real benefits to their suppliers and their members or they will wither on the vine of obsolescence.
Michael Jacobs is a business consultant and columnist for mivision. He was the former Chief Executive Officer of Eyecare Plus for 10 years until early 2015.