Status and Outlook for Operator Buying Groups and Group Purchasing Organizations

1. J U N E 2 0 0 6 Status and Outlook for Operator Buying Groups and Group Purchasing Organizations

2. I. Introduction

3. Study Premise • GPOs gaining steam • More pressure to participate in GPO programs • Understanding business model, future important for strategic decisions GPOs

4. Analyze impact of group purchasing organizations (GPOs) Identify trends, evolutionary directions Provide outlook, implications Recommend appropriate actions Objectives

5. Definition:Group Purchasing Organization • GPO to be used generically • Operator-served • Excludes distributor, chain-specific, government-run groups • Both segment-, non-segment-specific • Examples: Avendra, Foodbuy, Premier

6. Presentation Agenda • GPO Market Impact • GPO Characteristics and Practices • Stakeholder Viewpoints • Outlook and Implications • Recommendations

7. II. GPO Market Impact

8. GPO Situation • Growing volume, market share • Expansion beyond traditional segments • Rise of GPO alliances

9. GPOs Relevant Segments GPOs Gaining Relevant Market Share 2001 Foodservice Purchases* = $92B 2005 Foodservice Purchases* = $100B 2001-2005CAGR *Relevant segments only: Excludes Top 100 Chains & Retail HostsSource: Technomic Inc.

10. Restaurants Restaurants Lodging Lodging Education Education All Other All Other Healthcare Healthcare GPOs Expanding Beyond Healthcare 2001 GPO Purchases = $12B 2005 GPO Purchases = $18B Source: Technomic Inc.

11. GPOs Explore New Ground

12. GPO Leverage Greatest in Healthcare GPO Share of Segment Purchases *Relevant segments only Source: Technomic Inc.

13. Top 4 GPOs Growing 1 2 3 4 Top 4 CAGR: 11%Market Share: 60% Source: Technomic estimates; Foodservice Director, company websites

14. Lines Blurring Between GPOs and FSMs

15. GPO Alliances Becoming Prevalent Source: Company information; company interviews

16. GPO Alliances Mutually Beneficial • Small GPOs offer specialized service to their members, benefit of large GPO cost savings • Will contract individually for specialized products not offered by large GPO • Large GPOs increase purchase power

17. III. GPO Characteristics and Practices

18. Traditional Model > 80% (up to 100%) purchase though primary distributors Several options per category available Intermediate Model Products mandated from prime manufacturers Many still require prime distributor usage Fewer options per category Today’s Evolving Model • Growth of alliances • Compliance still elusive • More distributor choice • Manufacturer rebate focus • More options • Trade association involvement • More services GPO Business Models Continue to Evolve

19. Manufacturer Program Status • Rebates/allowances processed by GPO • Multiple sourcing preferred for most categories • However, some exclusives: • Commodity (dairy, produce, meat) • Small/limited volume or customized products (to maximize volume discount) • When exclusivity yields a significantly more favorable deal

20. GPOs Offering More Options • More categories • More authorized brands within categories • Some pricing/program differential exists to motivate preferred brand purchasing • More regional options • Members going outside GPO without penalty

21. Trade Associations Offer Buying Services to Members

22. GPOs Offer More Than Just Buying Services to Their Members • Services vary by group but often include: • Operators cite menu development services as most valuable “extra”

23. IV. Stakeholder Viewpoints

24. Member Units Generally Satisfied with GPO Program • Key Benefits • Lower cost of goods • Support services, such as menu development • Offerings have expanded, restrictions have eased in recent years, improving perception of choice • Access to multiple financial benefits programs (multiple dipping)

25. Multiple-Dipping an Issue ManufacturerDollars DistributorProgram GPO Program ManufacturerRebate toOperator GPO Member Result: Possible Manufacturer Margin Reduction

26. Members Realize Significant Savings, Satisfaction Strong • “About what percent do you save on your food purchases by participating in a buying group?” “How satisfied are you with the overall pricing on foodservice products negotiated through your buying group?” Average: 21% 72% Source: GPO Member Survey (n=225)

27. Members OK with GPO Influence • “Our buying group has too much influence over the products/brands we buy.” Source: GPO Member Survey (n=225)

28. Category Participation High, Large Pricing Perception Gap *Those indicating price is better when purchasing through a GPO, less those indicating price is worse Source: Technomic, Inc., GPO Member Survey (n=225)

29. But Some Member Issues Exist • Reported “Drawbacks” • Member fees • Fewer incremental savings opportunities • Some loss of purchasing discretion • Overall these are not perceived as significant drawbacks

30. Distributors See Benefits, Drawbacks to GPO Program Participation • Key Drawbacks • Potential volume (& profit) rarely realized • Negative margin impact • Burdensome administrative requirements • Major issue: GPO pricing extended to street segments • Key Benefits • Significant volume, profit potential • Unit-level coverage/ exposure/ penetration • Can improve overall efficiencies (SKU rationalization) • Can reduce sales costs

31. Members Say Distributors Give Better Service “Do you believe the level of service you receive from your distributor(s) is affected by your participation in a buying group?” “How do you think your servicehas been affected?” Source: GPO Member Survey (n=225)

32. Manufacturers Troubled by GPO Proliferation • Despite claims, price still the major criterion • Compliance lacking • Limited contract length • More volume  lower costs • Numerous GPOs exist, various programs • Extendability • Paying more for current business • Margin erosion on current business • Cost cuts required in channel • Pricing program impact on other businesses • Weakened manufacturer-operator relationship • Double- and triple-dipping

33. However, Positives Do Exist for Manufacturer Involvement • Greater volume potential • Increased distribution • Facilitates new product exposure • Avenue for penetrating strategic segments • Programs often manufacturer brand-oriented

34. Manufacturer Relationship Still Valued by GPO Members • “This is pretty important to us. They help provide a personal touch when discussing products and menu strategies.” “How important is it for you to still see broker or manufacturer representatives?” Source: Technomic, Inc., GPO Member Survey (n=225)

35. Guaranteed Benefits Disappearing • GPOs acknowledge volume/compliance not guaranteed • Benefit to manufacturers expressed as “potential” • Manufacturers expected to play active role to realize this potential • Several GPOs say they rely on manufacturers to tell them how their members are complying!

36. Successful Manufacturer Programs Characterized by Strong Support

37. V. Outlook and Implications

38. Significant Growth of GPOs Expected • Share to increase • “Commercial” segments a major expansion area • Traditional segment (healthcare) flat • Growth could vary significantly based on large volume customer penetration

39. Outlook #1:GPOs to Grow by $6B in Five Years GPO Purchase Volume$B *Relevant segments only Source: Technomic Inc.

40. Lodging Will Gain Most GPO Volume, But Restaurants a Wild Card Source: Technomic Inc.

41. Outlook #2:More Alliances Between GPOs • Streamlines purchasing • Benefits both parties • Small GPO gets better pricing for its members • Large GPO increases its reach & negotiating power with manufacturers

42. Outlook #3:GPOs in Mature Segments Enter New Territory • Limited room to grow in traditional segments • Expanding definition of member type to include: • Other non-profits • Other social services • Other segments

43. Outlook #4:New GPO Models Arising • Trade associations • Need to increase relevance • Members want more value for belonging • New segments/niches, such as: • Recreation • Vending • Small chains

44. Outlook #5:Compliance Will Become Even More Elusive • More operators joining • Multiple programs • Manufacturers not walking away from business due to lack of compliance • Multiple-dipping to continue in absence of control systems

45. Outlook #6:Distributors Will Increase Program Funding Demands • More distributor volume covered under GPO programs, limiting margin growth • Street pricing can’t increase enough to compensate • Will want spending to compensate for GPO programs, extendability

46. VI. Recommendations

47. Recommendation #1: Prioritize GPOs with Whom to Align Prioritization Factors Should Include:

48. Multiple-dipping, extendability are problems Need to develop policies on limiting program qualifications Goes beyond just GPOs; includes FSM, chain, distributor business Recommendation #2: Develop a Strategy around Exclusions

49. Recommendation #3: Implement Systems to Track Spending • Managing programs is critical • Track spending, compliance using software solutions • Understand true costs to serve • Dedicate personnel to manage spending

50. Recommendation #4: Use Compliance Enforcement As a Negotiation Tool • Pay for performance, volume • Perhaps pay higher for “guaranteed” volume • Regular, timely reporting on volume movement should be a requirement