In 1990, Anthony Fratto, the second-generation owner of Anthony Jewelers in Palmyra, N.J., was approached by a representative of the Independent Jewelers Organization (IJO), the world’s largest jewelry buying group. The rep told Fratto that joining the 850-member IJO would not only save him money on purchasing but also help him put more money in his pocket.
Understandably, Fratto, now 63, was skeptical. His business, which his father had started in 1953, was doing well. “They told me they were going to help me make more money,” Fratto recalls. “They told me they were going to help me grow my business. They would introduce me to a lot of other jewelers from stores around the country that would become my friends. I wasn’t sure they were going to deliver all that they said they were going to.”
Upon reflection, Fratto says, he realized that if he were to see only a fraction of the promised benefits, it would be worth the membership dues, which are $495 per year, plus a minimum purchase requirement. After all, he figured, some operations at his store could be handled better.
The payoff was immediate, Fratto reports. Once they joined, he and his wife, Cynthia, now 58, sat down with an IJO staffer who examined sales reports and photos of the store. IJO made several recommendations, including the suggestion that the Frattos raise their prices slightly.
“We’d always been margin-sensitive, but they told us, ‘You need to make more money,’” says Fratto. “We came back, raised our prices and never heard a word from our customers.”
How buying groups aid independents
Buying groups aim to lower wholesale costs for independent retailers by joining them together so they can negotiate as one large chain would. According to Harry B. Ray, an attorney with Husch and Eppenberger LLC in Chattanooga, Tenn., who specializes in buying group issues, these organizations can provide a number of benefits to family business owners who want to compete in today’s environment, where big-box retailers trumpet their deep discounts.
“Without lower prices, it’s harder to get customers in,” Ray says. “So these groups offer family businesses a distinct advantage in staying competitive.”
While many are member-owned cooperatives, structured so that each member purchases a part of the company, there are also other types of buying groups. Some, like IJO, are for-profit companies that solicit members and, for a fee, pool the buying power of their members and supply other extras. Other groups provide members the use of a well-known brand name (think Ace or True Value hardware stores) as well as marketing support and branded products, in exchange for a membership share in the organization. Some manufacturers also sponsor discount programs through designated affiliate dealers.
Waters Inc., a hardware store in Salina, Kan., has been affiliated with the 6,300-store True Value co-op since the 1960s. Founded in 1905, the store has been passed down through five generations of the Waters family to Jim Waters, 55, and his wife, Beverly, 51. Jim Waters says the True Value name gives his business many benefits but notes that it’s not a cure-all.
“True Value does a good job of building name recognition, but I think you still have to be a good businessperson,” Waters says. “Co-ops can give you good ideas, but if you need to have someone tell you every detail of running your business, buy a franchise.”
True Value members receive the right to use the True Value name. (The co-op’s website, www.truserv.com, notes that prospective members must have a minimum of $150,000 available for investment.) Though members make the decisions about what works best for their stores, the co-op can provide advisers in areas like finance, technology, merchandising and marketing. Waters decided to participate in an equipment rental program that True Value sponsored. The program enables him to offer rentals through all six of his stores without laying out the cash to purchase the equipment or strapping himself with a hefty lease payment, he reports.
Beyond buying
Most buying groups charge a membership fee, which may run as high as $50,000, plus inventory costs and other financial considerations. David R. Fain, president of Fain Enterprises Inc., a second-generation family-owned office supply store in Winston-Salem, N.C., joined a national buying group in 1996. The group has gone through several incarnations and name changes and is now called TriMega Purchasing Association. The group’s more than 400 members, who are independent office supply dealers, pay an average annual fee of $3,000. TriMega negotiates with more than 100 manufacturers on behalf of its membership.
“The group looks for operational cost benefits that can be offered,” Fain explains. Those include special rates for members who need to lease trucks and a private-label brand—ValuePlus—sold exclusively by co-op members.
IJO is a good example of the evolution of buying groups beyond centers for bulk purchasing. The organization sponsors educational programs, regional and national meetings and buying trips, which members can take advantage of for varying fees, according to IJO chairman Richard Swetz. An online message board allows members to share their solutions and challenges.
The Frattos and their son, Nick, 29, who also works in the family jewelry business, say they network over the Internet with fellow IJO members. “I have 850 friends across the country,” Anthony Fratto says. “When we go to our buying shows, it’s hard to walk ten feet without saying hello and hugging someone.”
Marketing is another area where buying groups can provide support. IJO and TriMega members can obtain promotional materials, signage and discount programs, as well as tips on how to promote their businesses. TriMega’s central marketing coordinator works with vendors to funnel promotional materials to the buying group members.
“That’s one of the areas where the leadership of the buying group really helps all of the members,” says Fain. “We don’t have to coordinate promotions with 100 different vendors.”
Cooperatives like True Value and Ace Hardware sponsor national branding campaigns, similar to those of franchises. There is one important difference, says attorney Ray. Most co-ops don’t have to abide by the rigorous federal franchise laws, including reporting and disclosure requirements. Groups that are owned by their members are not considered franchises under federal law, he explains.
Even so, Ray warns, 15 states have passed laws governing franchises, and some of these standards may differ from federal regulations. He advises would-be co-op members who plan to use their groups’ trademarks to investigate the laws in their state.
Buyer beware
With all of the benefits, it can be tempting to overlook the fine print. Ray notes that a close look at a group’s requirements for joining will reveal a great deal about the organization’s professionalism and solvency. Questions that prospective members should ask, he recommends, include:
• How is the group structured? Buying groups are generally either for-profit companies or non-profit, member-owned organizations. If you’re going to be using a trademark in conjunction with your buying group, it’s important that the group be structured as a member-owned cooperative to avoid federal franchise regulations. Even if the buying group is non-profit, Ray notes, it might one day convert to a for-profit company.
• How is the group funded? Most groups charge an up-front fee and annual dues but are primarily funded by rebates from manufacturers. Know what your investment buys. If you’re making a capital investment in the organization, find out if a dividend is payable to you, Ray advises. TriMega, for example, funds itself entirely through membership dues and convention revenue. The group funnels manufacturers’ rebates back to members, who can expect to collect between 3% and 9% of their total purchases in rebates, according to TriMega.
• Who pays the suppliers? Some buying groups pay suppliers directly and provide members with one invoice for the inventory that they order. This can be an incredible time-saver, says family business owner Fain, who electronically submits his reorders directly to the group’s manufacturers and then receives a consolidated invoice from the group.
• How are prospective members evaluated? Membership evaluation should be somewhat stringent, attorney Ray recommends. “You want to be sure that members are creditworthy, because businesses that don’t pay their bills drag the whole organization down,” he advises. Some buying groups interview references and other stores in a prospective member’s area to find out if the business is reputable. Fain says this helps ensure that members maintain a high level of integrity.
• What is required of me? Some buying organizations simply ask you to pay your fees; others require participation in regular meetings as well as service on committees and in other volunteer roles in the organization. Know what the group will expect of you once you become a member.
• What happens if I want to leave? In some groups, like True Value, those who leave will receive a cash buyout of their shares over time (though shares are a non-appreciating asset). Be sure the agreement with the group has a reasonable out-clause in case you find that you’re more of a maverick than a team player.
Buying groups can offer independent, family-owned businesses the leverage they need to get better prices and compete with larger stores. Still, it’s important to understand the limits that group membership will put on your business, and avoid the potential pitfalls. Read the paperwork, know what’s expected and—if it’s a good fit— enjoy the savings you’ll get from pooling your purchasing power with others.
Gwen Moran is a freelance writer based in New Jersey.
Buying groups can certainly offer major advantages, but they also can have a significant impact on your business. For some family businesses, that’s not necessarily a good thing. Harry B. Ray, a Chattanooga, Tenn., attorney specializing in buying groups, cautions prospective members to beware of the following pitfalls:
• Lack of variety: Buying groups may deny you the freedom to vary your product mix regularly. Each group has different regulations governing buying outside of the group, so read the fine print carefully. Since buying groups rely on the combined purchasing power of the membership to negotiate the deepest discounts possible, they limit their suppliers to those that appeal to the majority of their members. If you find those brands aren’t working for you, you may not be left with other options. And if the group requires you to place orders far in advance, you may get stuck with unsold inventory if predicted trends don’t catch on with customers.
• Competition: While some buying groups restrict membership to one business within a particular territory, Ray says that could potentially leave the group open to legal trouble. “If you’re the fellow who gets left out of the group, then you may feel like your competitor is getting better prices than you are for the same product under the same circumstances,” he explains, “and that could lead to a legal quagmire, including the potential for allegations of price discrimination under the Robinson-Patman Act.” To avoid such problems, some buying groups accept members from any area —including your competitor down the street. Some organizations get around this issue by keeping their membership open, but not actively soliciting new members in an existing member’s territory.
• Stability: Like other organizations, buying groups have varying degrees of stability. If your buying group isn’t solvent, it could go belly-up, leaving you in the lurch with suppliers. Ray advises business owners to investigate the solvency of the company and, in the case of member-owned cooperatives, request access to financial statements.
• Cost: With entry-level price tags running as high as $50,000, joining a buying group isn’t cheap. You need to be sure that the investment is going to pay off for you and that you will save sufficiently so the cost won’t pose a problem.
— G.M.