In an expansion of their ongoing collaboration, Walgreens and Kroger have established a Retail Procurement Alliance—their name for a common retail tactic called a group purchasing organization (GPO), which seeks to increase retailers’ leverage in the supply chain. Specifically, when they join a GPO, smaller retailers combine their buying power to make beneficial, strongly negotiated bulk purchases from the manufacturer.
Such arrangements are especially common for retailers that sell specific product categories, in relatively small volumes. For example, several independent office supply stores might go in together to order pallets of paper, then split the delivery across their stores. They enjoy the lower pricing of the bulk option. They even might be able to negotiate further discounts, assuming their purchase is substantial enough that a threat to take their combined business elsewhere would be a true concern for the supplier. Boutique hotels also often use such GPOs to purchase things like soaps and toiletries that their guests expect but that could be very expensive to procure in the relatively small amounts needed at any one time.
But in this case, neither Kroger nor Walgreens is especially small, nor are they highly specialized. In this sense, the Retail Procurement Alliance appears to represent a first-of-its-kind GPO that involves the retail healthcare industry. So what led to this novel option in this particular retail channel?
First, Kroger wants better leverage in its health and beauty offerings, and Walgreens wants to stock more fresh foods. Thus, by linking their purchasing through the Retail Procurement Alliance, each partner is sure to gain expertise in an area in which it strategically and actively wants to expand.
Second, though they are large corporations, neither Walgreens nor Kroger leads its market, such that their buying power still is relatively lower than that of their competitors. For example, their revenues combined reached about $253 billion in 2018, which is no small amount. But in the same period, CVS alone earned $195 billion, and Walmart took in $500 billion in revenue. For suppliers then, these competitors represent much more pressing targets, whereas they might sense greater leverage over either Walgreens or Kroger on its own.
Third, the Retail Procurement Alliance signals their continued commitment. Both sides appear dedicated to making their collaboration work well, across various operational and supply chain features. This GPO offers another area for them to solidify and affirm their mutual commitment and dedication to serving customers with the best offerings.
Discussion Questions:
- How does a group purchasing organization (GPO) affect the participating retailers, customers, and suppliers?
- How do you expect this GPO to influence the financial ratios discussed in Chapter 6 for Kroger and for Walgreens?
Source: Emma Cosgrove, Retail Dive, December 16, 2019