Negotiating and managing an exclusive or near-exclusive beverage partnership is complicated and hard work. Even experienced supply chain and financial executives at large, sophisticated hospital systems are surprised at how complicated and hard this work can be.
But, all agree that the financial pay off is worth it. This is especially true if you hire Enliven to do all this work!
There are eighteen basic steps involved in negotiating and managing an exclusive or near-exclusive beverage partnership. I will cover the first nine steps here and the second nine steps in my next blog post.
1. Establish an accurate baseline volume number at the facility and system levels.
Most hospitals and hospital systems have no idea what their current beverage volume, package mix, brand mix and spend are. It’s just not a spend category that most hospitals and hospital systems have traditionally focused on. That being the case, when most hospital executives do decide to focus on their beverage business, for whatever reason, they typically ask their current business partners who deal with beverages to provide them a report. They ask for reports from their GPO or broad-line distributor or cafeteria operator. Sometimes they even ask for reports from Coke and Pepsi. If all or some of the cafeterias in their system are self-operated, they probably ask the food & beverage directors for these self-op cafeterias to provide volume and spend reports.
The problem is that all of these reports are typically incomplete and inaccurate. No single entity or person supplying the reports has the capacity to accurately capture the total beverage volume, package mix, brand mix and total expense. The result is that most such reports dramatically undercount true volumes and true expenses.
The only way to generate an accurate volume and spend report is to analyze at least three months of actual beverage invoices, and to compare those data points to hospital industry metrics built using actual invoices and accurate (audited) volume tracking reports from dozens of similarly sized and situated hospitals from around the country. That’s what Enliven does.
2. Gather all pricing information for every beverage package currently purchased at every facility.
Whenever we engage with a large hospital system client that operates multiple facilities in a given market, we always discover that pricing varies substantially from facility to facility in that same market. For example, Hospital A on the east side of town may be paying $20.85 for a case of 20 oz. carbonated soft drinks from Coke. Hospital B on the west side of town may be paying $18.25 for that same case of 20 oz. drinks from Coke. Hospital C on the south side may be paying $16.50 for that same case. The same Coke bottler is sending the same Coke truck and driver out from the same bottling plant to make delivers on the same day to all three of these hospitals, which are all owned and operated by the same hospital system. (This same scenario is just as likely to happen with Pepsi as it is with Coke.)
For high volume packages like 20 oz. soft drinks, obviously, the $4.35 price discrepancy between Hospital A and Hospital C can account for a huge annual expense difference at these hospitals, even though both might be buying the exact same amount of the exact same product from the exact same supplier.
The primary reason for these price discrepancies is that over the years (or even decades) leading up to today, individual sales reps for Coke and Pepsi who call on each individual hospital have cut deals (or not) with each individual food & beverage director to try to win more business with that hospital.
If all or some of the hospital system facilities have outsourced their cafeteria and patient feeding to one of the big cafeteria companies, then those facilities will have different prices for the same package as well. These prices will be dictated by existing contracts in place between the cafeteria companies and Coke and Pepsi.
In our experience, the only way to discover and account for such price discrepancies is to analyze at least three months of current year invoices from each facility. And the only way to negotiate the lowest possible price for a hospital system going forward to is know the lowest prices that Coke and Pepsi have already agreed to for similarly sized and situated hospitals in the same market and also in similar markets nationwide. That’s another benefit of Enliven’s expertise.
3. Review all contracts with all intermediaries and any other parties who are involved in any aspect of beverage sales and distribution.
Because all the main beverage business intermediaries who serve large hospital systems have been receiving substantial financial benefits (often “back-end” and “confidential” in nature) from Coke and Pepsi for decades, it is not uncommon for their contracts with hospital systems to include specific language that attempts to ensure that those financial benefits continue unabated.
It is very important that hospital systems that seek to enter into exclusive or near-exclusive, direct partnerships with Coke and Pepsi review all such existing contracts carefully. Sometimes these contracts need to be modified to make it clear that the hospital system will, in fact, receive the maximum financial benefits possible from such exclusive, direct partnerships.
Sometimes the contracts don’t need to be touched, but instead the hospital system needs to formally declare itself as the account holder with the beverage company, as opposed to the intermediaries.
Believe it or not, it is very common for Coke and Pepsi to continue to pay rebates and discounts to intermediaries even after entering into an exclusive partnership with a hospital system. If the hospital system doesn’t know that this is (or could be) happening, they have no way of knowing if they could have negotiated an even better deal for themselves with Coke or Pepsi.
4. Develop a realistic estimate of the value of an exclusive or near-exclusive beverage partnership for your system.
After—and only after—all the proceeding steps have been taken, a hospital system can begin to develop a realistic estimate of the potential net savings that can be generated by entering into an exclusive or near-exclusive partnership with Coke or Pepsi. Actual, current, comprehensive information on pricing, volumes, product mix, brand mix and expenses is critical.
Unless they already have 100% of your beverage business now (which is extremely unlikely), Coke and Pepsi will not know this detailed information. But, when you present it to them so that they can bid on your business, they will be able to quickly determine if the numbers you’re providing are probably accurate. If you’re numbers seem substantially off to Coke and Pepsi, they will know that you are starting negotiations from a position of weakness. They will know that you don’t really know the true value of the opportunity you are presenting them.
Assuming that your system, either on its own or with the help of Enliven, is able to present accurate volume and mix numbers to Coke and Pepsi, there are still many other factors that will help determine the size of the bids made by the beverage companies. These factors include a) other large exclusive accounts Coke and Pepsi may have (or not) in your market, b) the overall consumer brand preferences in your market, c) strategic objectives that Coke and Pepsi may have at the moment, generally and in the healthcare sector and d) whether or not the right executives at Coke and Pepsi corporate will be properly engaged on this opportunity.
After all these matters are carefully considered, and after your system is analyzed in the context of other similarly sized and situated systems who have done exclusive or near-exclusive deals in recent years, then a fair estimate of the net savings potential can be generated.
5. Get complete buy-in from senior leadership at the facility and system levels.
We’ve learned over the last ten years that it is critically important to get buy-in from senior facility level and system-level leaders before Coke and Pepsi are presented with the opportunity to bid on an exclusive or near-exclusive partnership.
It’s important that senior leaders be briefed on what an exclusive or near-exclusive beverage partnership entails—on how it will be implemented, on what may change with respect to beverage brands and beverage operations on their campuses, and on what such a deal might generate in terms of net savings.
If senior leaders are not briefed at this stage, and if they are not fully on-board with the goal of securing an exclusive partnership, then they will be susceptible to the inevitable misinformation campaigns that are often times directed at them by intermediaries who know that they will be adversely affected by such a direct partnership between the hospital system and the beverage company.
For example, it is very common for executives who run outsourced cafeteria operations or vending service companies to try to derail the effort to secure an exclusive partnership by making claims that doing so will upset employees or result in lower retail sales and retail profits. They will often make such claims to senior leadership at the facility level.
Since most hospital executives do not know anything at all about exclusive or near-exclusive beverage partnerships, they might actually believe this misinformation. Consequently, they might argue against the system’s decision to seek an exclusive partnership. Or they might send mixed signals to their teams at the facility level that may make it hard to curtail competitive product once an exclusive partnership is signed.
All this can be avoided by proactively briefing all facility level and system level executives on the benefits and realities of exclusive and near-exclusive beverage partnerships before the RFPs are presented to Coke and Pepsi.
6. Develop a comprehensive RFP to present to Coke and Pepsi.
Most supply chain executives are well practiced at creating RFPs and managing responses to RFPs. However, there are aspects of an exclusive or near-exclusive beverage RFP that are unique and that must be considered before proceeding.
For example, it’s critical to understand how Coke and Pepsi develop their financial proposals for your system, and how long this process can take. Because both Coke and Pepsi have complicated parent company-bottler relationships in many markets, and because the economics are different for bottles & cans vs. dispensed (or fountain) products, it takes months (not weeks) for each beverage company to respond fully to an RFP.
7. Engage and present to the right executives at Coke and Pepsi.
When presenting your RFP to Coke and Pepsi, it’s important to engage the right company representatives at both the local market and national levels. And it’s important to understand who at their respective companies may have divided or competing loyalties with respect to the healthcare channel.
For example, if the person at the beverage company driving their response to your RFP also happens to have primary responsibility for her company’s partnership with one or more of the major national beverage business intermediaries operating at your hospital system (i.e, a GPO or broad-line distributor or cafeteria operator or vending services company), it’s helpful to know that. If that’s the case, you may be well served to engage more directly with the local market GM for that same beverage company. Because your system’s exclusivity decision will have a potentially significant effect on her market P&L, she will likely prioritize your interests over those of the bigger, national intermediary companies.
8. Evaluate proposals on an “apples-to-apples” basis.
As they go through exclusive or near-exclusive beverage RFP processes, most hospital executives are surprised and amused by how both Coke and Pepsi are able to cite study after study and fact after fact that all seem to prove that Coke is #1 in all the ways that really matter (when Coke is presenting) or that Pepsi is #1 in all the ways that really matter (when Pepsi is presenting).
Matters can get more confusing when each beverage company seems to be proposing a lot of money, but the money is contingent upon different variables and/or paid out using very different methodologies.
If you don’t have experience with all these variables and methodologies, it becomes difficult to conduct an apples-to-apples analysis and determine which financial offer may be the best for your hospital system.
9. Select Coke or Pepsi for the exclusive or near-exclusive partnership.
If all the preceding steps have been completed, choosing Coke or Pepsi should be a fairly straightforward decision. But, in all candor, it is usually a surprisingly difficult decision for our clients to make. Especially if the net savings analysis shows that both companies have strong financial offers on the table.
We’re all consumers. We all have brand preferences. And Coke and Pepsi in particular spend hundreds of millions of dollars every year to convince all of us that their brands are somehow different, better, special.
But if you handled every step along the way properly—and especially if you have the knowledge and experience of a firm like Enliven to rely on during this crucial period—then you should be able to make a good decision and move on without much anxiety.
(This is Part One of a two-part blog posting entitled: “The Necessary Steps to Negotiate and Manage an Exclusive or Near-Exclusive Beverage Partnership for a Hospital System.” Click here for Part Two.)