The Impact of Pricing Strategy & Purchasing Power in Healthcare Food & Nutrition Services

An Interview with Aaron Richmond, Senior Vice President, Compass Group USA

Let’s talk a little about the current financial backdrop. What are the recent trends?

Core inflation is finally starting to cool after hitting a 40-year high in 2022. Many industries across the country are experiencing relief, but foodservice is largely excluded.  Supply chain disruptions and CPI may have improved, but the Food Away From Home index is still sitting at record high levels, which is a subset of CPI that directly relates to food away from home including hospital food and nutrition services. From our point of view, it will take time for our industry to experience measurable relief.

Does this present an opportunity?

It does. Morrison Healthcare is in a unique position to help our healthcare clients weather the storm. With our scientific methodology and unmatched purchasing power, we can mitigate market influences, shield from the full brunt of inflationary pressures, and secure viable solutions through our pricing strategy.

How do you determine fair pricing for your clients?

It’s all about value. Hospitals must rely on quantitative data to determine pricing, and we help our clients understand their prices versus similar products in their market through value pricing assessments. Our clients are then encouraged to set fair market value benchmarks. In foodservice, that necessitates integrating national and local data into our decision-making, particularly in our retail outlets.

What is an example of a pricing benchmark?

Well, a cup of coffee at Starbucks is a common national benchmark used to determine fair market value, but there is more to the story. Too often I see analysts stop at this benchmark, rather than understanding how regional and local pricing impacts fair market value. The pricing pressures in Huntsville, Alabama differ from the drivers in a market like in Miami— even though they are both technically in the Southeast. We always assess local and national pricing to develop fair market pricing. This level of market intelligence allows us to design plans to support a sustainable business model.

What is the role of purchasing in relation to pricing strategy?

The right pricing strategy will only get you so far when it comes to driving margin and optimizing your approach. And when it comes to purchasing, size matters. There’s purchasing and then there is purchasing power! Hospitals that self-operate have little negotiating strength or ability to buy in bulk, limiting their ability to generate higher consumer value in their pricing strategy. In comparison, hospitals that utilize strength through volume purchasing are positioned to better tolerate inflationary pressure.

What can Morrison Healthcare clients expect, in relation to purchasing power?

Our clients greatly benefit from our relationship with Foodbuy, a Compass Group sector with $29B managed spend in the US. There is only one Foodbuy. This competitive advantage, unmatched within the industry, allows our clients to drive margin improvements while still delivering high-quality outcomes and experiences. Purchasing power helps our clients secure diverse suppliers, build wellness programs and meet their sustainable sourcing requirements.

In regards to wellness programs, how does the temptation to maximize profit with something like sugary beverages, directly relate to these initiatives?

Profit margins on sugary beverages are incredible–90 percent—versus that of bottled water, and conventional pricing wisdom tells us to look for high-margin, high-volume items in these spaces. That’s pricing 101. But many of our clients need our help– to not only drive margin– but to build criteria for wellness charters and retail planograms to encourage retail customers to make more mindful choices. Through procurement and pricing strategies, we can find opportunities for hospitals to increase their margins, particularly in the retail sector, while supporting their wellness initiatives.

How is Morrison Healthcare’s pricing strategy different?

No one else has a centralized pricing team, working to design targeted strategies that align with the specialized needs of each client. On average, we are 35% below the market. Anytime they go into a Morrison Cafe, they are getting value, and we can prove it to our clients.

What happens without a pricing strategy in place?

Hospital leadership could not predict these unprecedented pressures. 43 million egg-laying birds were lost due to disease—which contributed to higher costs and impacted revenue downstream. The war has inflated oil prices, increasing transportation and freight costs. And COVID accelerated supply chain disruption, making it impossible to forecast demand. When in crisis, there is a tendency to cut corners, reduce quality, or, ignore pricing altogether, creating a business model that is not sustainable. This ultimately stresses the relationship between Morrison and our client, which we clearly want to avoid.

How does creating a sustainable pricing strategy with our clients help build a valued relationship?

The client partnership begins with transparency and communication. By helping our partners fully understand market conditions, we can go further, highlighting the acute pressure that impacts both their pricing strategy and their margins. Our goal is to be transparent and proactive in our conversations because we want our clients to realize the long-term benefits. Taking a valued-partner approach ensures that we are creating efficient and effective strategies that eliminate the guesswork and create a winning strategy.

How can Morrison Healthcare prepare its clients for what’s next?

We can’t predict inflation. But we know that a consistent procurement and pricing strategy is critical. We can shield our clients from it, working together to find palatable solutions, sharing insights and best practices, and taking a deep dive to fully understand and assess all of the dynamics at play.  Their success starts with us.