<B>Group Buying To Bloom</B>
<I>Companies Band Together To Form Travel Purchasing Consortia</I>
By Cheryl Rosen
The seeds of group purchasing initiatives are sprouting again this month, as two separate groups of corporations have formed to negotiate with travel industry suppliers. One, the brainchild of five members of the National Business Travel Association's council of chapter presidents, is gathering a small core of midsize companies to create joint deals with hotels and car rental companies. The second has called in group purchasing guru Kevin Mitchell, chairman of the Business Travel Coalition, to help combat escalating airfares in Iowa.
Acknowledging that "the travel industry hasn't been overly accepting of this model in the past, on the theory that suppliers would lose control of market shares," the ringleader of the NBTA group, travel manager Kevin Maguire of Tokyo Electron America Inc., nonetheless believes the group's vision stands a good chance of success. He cites three reasons: "We've done our research in advance and the fact that we are so close in size and location will ease the confusion you normally find in situations like this; the program is designed to be a win-win situation for everyone; and it's a collective umbrella in terms of rate structure but every company will have a separate contract."
The core group includes Maguire, Gary Polito of Bose Corp. in Framingham, Mass.; Linda Riley of International Dairy Queen Inc., Minneapolis; Sheila Kittle of Raymond James Financial, St. Petersburg, Fla.; and Bill Davidson of Sematech Inc., Austin. All have annual air volumes between $2 million and $5 million, similar top destinations and similar suppliers.
"When we first got together to evaluate the possibility of a collective negotiation with suppliers, everyone told us it would never work and nobody would be interested," Maguire said. "But lo and behold they are coming out of the woodwork. Our initial intent was to begin with hotels and car rental companies, but several airlines have come to us and asked if they can participate."
About 25 other corporations with air volumes of $500,000 to $40 million have asked to join, he said, "but the core group has decided to get the ground rules in place before we add additional corporations." That likely will happen in May.
The group already has talked to suppliers and is finalizing contracts, in the hope of signing with "probably a car rental company and multiple hotels in place in the next 60 days." Airline contracts, Maguire acknowledged, "will take a little longer."
While the group cannot promise a flat volume amount, Maguire plans to mandate use of the program's preferred suppliers for his internal travelers at Tokyo Electron. He is "not sure senior management is convinced" that group purchasing will succeed, but "yes, we do have their approval to proceed, and a corporate culture that believes in mandates."
Not every member of the group is willing to go quite so far as an official mandate, but each will guarantee a shift in market share to preferred suppliers. In return, they are asking for "reasonable rates in the range of 30 to 40 percent off."
Maguire acknowledged the debt he owes Mitchell for laying the group-purchasing groundwork with the Business Travel Contractors Corp. (<I>BTN</I>, July 29, 1996), the industry's most audacious effort at consolidating travel purchasing.
His goal is to "bring back that plan in a softer, gentler way. We're trying to build a better marriage by matching the suppliers with the needs of our travelers. And we're talking to hotels in locations where we already have volume."
If Wyndham International were at the other side of the negotiating table, a mandate surely would help, said vice president of business travel sales Kevin Kelly. "The idea of group purchasing is beginning to surface in the travel industry, and I don't think we at Wyndham International would have any concerns with the concept," he said. "We can't dictate the way business is done, and we have to be willing to take a look at any proposal. The real issue for us would be the control issue. So certainly, a mandate would help."
Sematech's Bill Davidson noted that the instinct to partner with Maguire, his successor as president of the Austin chapter of NBTA, came naturally. The two travel programs have similar deals with similar suppliers, and use the same travel agency. While Sematech has not historically mandated that travelers use its preferred suppliers, "mandating is the key from the supplier's perspective, and I think we have to mandate here to show good faith," he said.
Group purchasing is a new idea at Dairy Queen, Riley said, but she is eager to try it. Since the company was in the middle of a car rental bid as the purchasing group formed, she ran the idea past some bidders immediately-and found them "a little cautious, but overall they seem receptive."
On the car rental side, Riley noted, the need for separate contracts under a single unified pricing umbrella is more important than in other segments, as each company's individual policy on liability insurance--and its accident record--creeps into the negotiating mix.
<B>Iowa Buying Group Takes Flight</B>
In Iowa, meanwhile, life insurance giant Aegon USA has started the ball rolling on another group purchasing initiative, the Cedar Rapids-Iowa City Airfare Alliance. High airfares and low competition "had been a burr in the side of our chief operating officer for years," said corporate initiatives manager Lon Olejniczak.
When it finally "bubbled up to the top of the COO's priority list," he suggested that Olejniczak and project manager Matt O'Rourke find a solution, using a model Aegon employed six years ago to slash its healthcare costs: creating a consortium deal with a group of local corporations.
"Our COO told us to duplicate that model, to go find partners that have large expenditures and the same concerns that we do," Olejniczak said.
Like the airline industry of today, "the health care industry wasn't used to negotiating with purchasing groups either," he noted, but eventually the lure was too big for the suppliers to pass up.
Olejniczak and O'Rourke--neither of whom had any experience in travel purchasing--eventually gathered 13 other corporations into the Airfare Alliance, and tapped the experience of BTC's Mitchell. Mitchell's studies found that Iowa City's businesses are paying double that of cities with low-fare competition.
With almost no direct flights, Iowa City travelers are accustomed to changing planes en route to their destinations. The Alliance therefore plans to ask the city's incumbent carriers--American Airlines, Delta Air Lines, Northwest and US Airways--for concessions in return for moving large volume through the hub of their choice. That should not be overly difficult to achieve, as it makes little difference to travelers if they change planes in St. Louis or Pittsburgh.
Mitchell now is collecting travel data from the initial group of 14, while the Alliance allows another two weeks for additional corporations to sign on. "Then we'll start looking at all the data and thinking about strategies we can put on the table--including e-ticketing, online booking and even a Chamber of Commerce Web site that all local companies can use," he said.
Regarding the NBTA chapter presidents initiative, Mitchell said, "What these guys are doing is absolutely the right thing. The group purchasing train has left the station. The auto makers are putting $240 billion worth of purchases on the Internet and that's going to propel e-business into the mainstream. And electronic business is group purchasing."
He also agreed that mandating is clearly the way to win a supplier's attention. "Mandating is the only way that group purchasing is going to work," he said. "In the BTCC days, we were guaranteeing the airlines 80 percent of our business--and you can't achieve that without mandates."
And hotel is a good place to start. "The airlines resisted BTCC because they always believed they could get better market share from individual corporations than from a group," he said. "The industry has always resisted group purchasing--and that resistance has been extreme in concentrated segments like the airlines. With little competition, they can afford to say not only, 'No,' but 'Hell no.' But in a fairly open market, like hotels, suppliers realize that if they say no, you'll go to a competitor."
Maritz Travel Co.'s new corporate travel division president Jack O'Neill (see story, page 3) agreed that each sector presents a different negotiating environment.
"All I can do is speculate at this point, but thinking back over the past 10 years, it's fairly evident that the major airlines have invested hundreds of millions of dollars in systems designed to give them the best possible yield, and they have not been willing to negotiate with these groups. The hotel business may be different, with many more competitors and much less consolidation, and likely some will be willing to deal if they believe they can gain share through reducing price. A handful of companies with common travel policies and patterns is a tighter unit, and I'd be surprised if they can't find some interest."
But Mitchell--whom O'Neill called "a smart guy, no question"--believes that times have changed since the great Business Travel Contractors Corp. experiment of 1996. The Internet is bringing new models for business-to-business purchasing that no one could then have envisioned, and that makes the timing right to take on the biggest slice of the travel purchasing pie.
"Priceline proves that if you can aggregate enough customers, if you can put $3 billion of purchases on a Web site, the airlines have to be there," Mitchell said. "If US Airways sees that Q3 looks soft, but it can go to one place and fill up that quarter, how can it resist that? We are going to have an aggregation of buyers on the Internet. The dynamics of the market are at play here, and the airlines cannot hide from it."
That's not to say that Mitchell expects an easy negotiation in Iowa City. As in the past, he expects the carriers first to lower their published fares for everyone, to dissuade corporations from joining the Alliance, "and that's delightful too," Mitchell said. "What the carriers don't want is for us to succeed, and for the model to be replicated in Albany and Syracuse and Mobile, Ala."
That's precisely what happened with BTCC, Mitchell said.
"The airlines said, 'Sure, we can do net fares for you. We can move travel agencies away from commissions to fees.' They began to respond and move in the direction customers wanted as a way of subverting the buying group and diminishing support for us. There's nothing wrong with that. It's just the marketplace doing its thing.