Yeah I know, it’s a sensational headline but it gets the core message through…so I’m OK with it : )
Although this article mainly addresses Buying Groups & Retailers (and procurement divisions), the same questions must be posed to SUPPLIERS to groups, who are also subject to the same competitions acts’ legal requirements.
DISCLAIMER: I have personally been party to the development of much of what now needs change. My recent opinions on the topic is resultant of operating for 36 years in the retail sector in various capacities, and catalysed with the recent changes stipulated in the 2019 competitions commission act, currently in force. This does not suggest that my past strategic contributions to current Buying Group business models were erroneous, but merely that changing times, markets and the recent competitions commission act, makes it obvious that a complete overhaul to the concept of buying group models and volumetric leveraging for better pricing (aka bullying). This article is my opinion only. I am not an attorney although I did receive input from such in the writing of this opinion.
Why is it that many retail groups call themselves “Buying Groups” when they do no buying at all? Ie: most of their members are independent and hold direct accounts with suppliers. Then there are others that have a central warehouse to sell on to their members – ie: acting as a Wholesaler/Distributor; again, not centralised “buying”. Then you get those that offer a centralised account and a variety of the above services subject to you signing over your first born, your spouse, car and your most loyal puppy, plus tight compliance requirements and ever-changing rules…leaving members WITH NO FEASIBLE WAY OUT! This is not to say that all these groups had nefarious intentions at the outset, quite the opposite actually, the various models were needed at the time and well-intentioned…but are now past their expiry date and need to be modernised…or become irrelevant.
Most independents retailers join groups for ‘security in numbers’ and select ‘which’ group from variable offerings: eg: degree of independence, brand identity, listed suppliers, pricing, marketing operations, administrative, business eco-systems, training, joint ventures, exit strategies etc, but many do not realise what they’re getting into for the long-haul.
This article seeks to raise questions as to…
What do independent retailers WANT from a “Buying Group” or Retail Brand membership?
Why are Buying Groups CALLED Buying Groups when they buy nothing?
Why do some charge a membership fee?
Why do others charge no membership fee?
What transparently justifies the various rebates they receive from suppliers and why do suppliers (still) give rebates?
Same question for any other discounts, contributions, other reductions in pricing, commissions, in any form whatsoever?
Why do they keep X% and share Y% with their members – transparently?
Do groups JUSTIFY their takings through for services included with membership ie: is it USE IT ALL OR LOSE IT?
What is it REALLY that members require from a Buying Group?
Why has no-one yet challenged the many obvious breeches of the active competitions commission act?
Why do Buying Groups pay a portion of a rebate to members at all?
Why do Suppliers pay any rebate to groups at all?
If rebates are indeed paid by suppliers, then why do groups retain a portion and not pay the FULL rebate to the store itself?
…a lot to digest and many more to questions, but for the sake of this article I will limit them, as these sufficiently create the environment to articulate the point of this article ie: Helping or Scalping?
WHAT RETAILERS WANT FROM A MEMBERSHIP?
Obviously this will vary dependent on who, where and what stage of the business maturity curve a business is on. The list below offers a menu of the most common items.
- Competitive pricing from suppliers
- Rebates
- A retail brand
- Leverage from efficiencies
- Varying degrees of Independence
- Varying degrees of brand participation
- Operational support
- Marketing support
- Buying support – varying from central ordering, centralised accounts to direct store accounts.
- A Buying Group that “enables” members to grow their businesses ….
- Administrative and compliance
- Exposure and access to latest technologies
- Belong to something bigger – a family/community of like-minded entrepreneurs and people.
- Flexibility
- Long term sustainability
- Exit strategies
- Shareholding in the group they participate with
- …and many others, but again, you get the gist of the main offerings
OVERVIEW OF THE MAIN TYPES OF “BUYING GROUPS”
Groups with NO membership fee:
The scene: Generally offer a rebate from deals negotiated with listed suppliers, and give a varying rebate back to members. Member holds direct account with supplier. Group has no direct risk. In practice, these models create no additional value that enables improved efficiencies.
Apply the law: A wonderfully simple business with a no-frills approach. These groups need to justify the rebates received from suppliers (as comparable to others) which excludes volumes and buying power, and also the amount shared with Members. If there are (compliant) efficiencies that do justify a rebate/discount, then the FULL rebate should be paid to the Member.
Groups WITH a membership fee:
The scene: Generally, they offer a set of services that may include buying negotiations, ops & marketing support that are used to justify the membership fee and a rebate from deals negotiated with listed suppliers. Generally give a lesser rebate back to members to cover the cost of “use it or lose it” services . Member holds direct account with supplier. Group has no direct exposure to stores or suppliers risks.
Apply the law: A slightly “more-frills” approach that attracts certain types of members, however, simply “stating” the cost of “use it or lose it” services is insufficient to justify rebates from suppliers (as comparable to others) which excludes volumes and buying power and also justify why the full rebate is not given to Members. The group should generate it’s income by billing for services sought, and rendered, and not simply retain a portion of the rebate in lieu of payment for services that may, or may not, be used.
This model does raise the next question of how does selling services to members translate into a justifiable rebate/discount from the supplier ie: How does the supplier receive an efficiency to justify the discount or benefit at all (excluding volume)
Groups WITH DC’s and a mix of varying membership fees:
The scene: Generally, these are more mature groups that offer services including: brand, ops, marketing, distribution centres, central buying (centralised accounts), buying power, rebates and variations thereof. This model, for me, is one step short of a franchise, as they are generally owner-run by passionate entrepreneurs, but “controlled” by corporate compliance that may limit flexibility and the full capability of those serial entrepreneurs. Ie: is the tail wagging the dog?
Apply the law: A more mature business model that does add value to members and takes some of the risk exposure via central buying and centralised account. Still needs to JUSTIFY rebates from suppliers and the percentage given back to members. Questions must be asked as to who benefits from rebates, discounts, early settlements etc and why is it that the full rebate does not go back to the stores?
Corporate groups (with their own network of stores)
The scene: These are generally the big corporate owned store brands (often listed companies or multi-nationals). This is their own business. They employ their own staff to deal with their needs and outsource elements as needed.
Apply the law: Mostly a fully matured retail business that does not need to pass on rebates or discounts as its stores are self-owned. The pricing they receive from suppliers (including all forms of discounts or rebates) must be justified from efficiencies, if challenged, and may not be as a result of volume-based buying power. The nett result is that the starting point of price parity is identical to a owner operated small retailer and any price benefits must be derived from efficiencies, not buying power
Franchises:
The scene: The term franchise speaks for itself and franchisors need to comply with franchise requirements. Similar to a typical “buying group” but generally more compliance oriented.
Apply the law: A well-known business model with many benefits. The pricing they receive from suppliers (including all forms of discounts or rebates) must be justified from efficiencies, if challenged and may not be as a result of volume-based buying power.
At first glance it would seem to the average reader that the menu of Retailer needs are sufficiently covered by group options, however, not even one offers a solution that is properly aligned with current law, the capability to develop sustainable business and the flexibility required for business in our unique business environment.
If one applies the law most groups and suppliers would fail to comply.
EVERY retailer, whether a large corporate, a franchise, an independent store or a small spaza must receive the SAME PRICING as the starting point and EARN reductions or benefits from justifiable and verifiable EFFICIENCIES if (more like when) investigated.
Simply put, Buying Power can no longer be relied upon to get a better price…PERIOD!
In every example of the “Buying Groups” or Retail Brand model, summarised above, volumes and buying muscle is heavily relied upon for the price points/discounts received, rebates and all other forms of discounts or tiered target structures given.
RETAILERS:
- Be aware of the new laws
- Don’t accept blind and false commentary that the law is not yet in effect. IT IS!
- Itemise the service and support benefits that you actually USE whose costs are embedded in your membership fee.
- KNOW that you’re entitled to the same starting point pricing as anyone else before applying relevant efficiencies.
- Reasons for better pricing, compared to others, can only apply through verifiable efficiencies.
- When picking a group to join (or have joined), define the value that you attribute to the Brand you select, the services offered that you want, the efficiencies they leverage for improved supplier pricing and the growth they can bring you.
- If you have evidence that a competitor receives a better price based on their volumes, you can lodge a complaint directly with the competitions commission. Sounds good, but remember this applies both ways ie: A spaza shop can make the same claims about you. The burden of verification lies with the defendant if investigated – (Justify your efficiencies to receive that price).
SUPPLIER RECOMMENDATIONS:
- Almost all of the above
- Ensure you get verifiable efficiencies that justify a verifiable value before discounting (in any form, whether immediate or delayed)
- Never pay a rebate based on volumes or bully power (the law has got your back)
- If you justifiably know, or have evidence that a competitor is breaking the law, you can file a complaint (anonymously if needed) – Remember any of your competitors can do the same to you.
- Demand efficiencies from buying groups and retailers.
SUMMARY:
Yes, you will likely have some time to make the transition, however, the timeline you have is dependent on how long it takes for someone (anyone really) to file a complaint for investigation, freely and autonomously and backed by powerful, enforceable legislation. Without attempting to be alarmist on this topic, the risks are high and the timing is right to make the change that is inevitable and be part of the transition…or face the inevitable music, the change (costly) or even be relegated as irrelevant in time.
