Retail Food Distribution: The Race to Efficiency
By Jean KinseyAbstract
Consumer surveys reveal a disdain for grocer shopping in general, but a wide variety of preferences for shopping experiences are found among the population. About one fifth treat grocery shopping as a leisure activity, one-fifth are time pressed but want high quality meat and another fifth care most about the natural attributes of the food and whether it has been gown and processed in an environmentally friendly way. The diversity of consumer preferences foretell a diverse set of retailers, each of whom will seek their most profitable niche. In a mature industry where real, same store sales has declined in 4 of the last 6 years, one can expect fierce competition, restructuring, experimentation and consolidation within the sector.
Competition for retail food stores is as fierce from the food service sector as it is from within. Groceries have fought hard to take back a larger share of take-out food sales, the fastest growing form of food being sold. Internet shoppers and category killers also threaten to steal sales from grocery stores, but their main obsession is with the competition from large, efficient, self- distributing chains like Wal-Mart and Kroger. Internet grocery shopping has less than 1 percent of the total food sales. It is a method of doing business that is irresistible to many companies; it is full of promise, empty of profits, and evolving into a "clicks and bricks" operation in order to survive.
Price competition from discount sellers like Wal-Mart have driven reorganization, cooperation, and consolidation in the industry. The 1992 industry wide effort under the banner of Efficient Consumer Response (ECR), was an attempt to induce and coordinate the use of electronic information (scanner data) to streamline ordering, inventory control, category management, and consumer service. Although many in the industry declared ECR dead by the year 2000, it left in its wake many efficient management practices, and lead to a new internet platform (UCCNet) that should allow even small operators to communicate with their suppliers with electronic speed and sophistication. I remains to be seen whether the business-with-business e-commerce will be widely adopted and whether cultural barriers to sharing data between retailers and vendors will dissolve as cost efficiencies tempt them to communicate in a new way.
The consolidation at the retail and wholesale junctures of the food supply chain have left wholesalers in a vulnerable position. A notable shift in volume from third part wholesalers to self-distributing chains' own distribution centers, and direct store delivery practices, means that the channels of distribution are changing. Benchmark studies of wholesalers show that costs are lower in the self-distributing channels and the trend is for these channels to grow with retail consolidation.
How the mix of low cost, efficient retail operations and high service, high value stores and food service establishments will look in 5 or 10 years is still unknown, but it looks like there will continue to be diverse store formats meeting a variety of consumer preferences and few stand- alone internet grocery companies. One stop shopping remains a strong attraction and boutique, gourmet food shops show up inside otherwise efficient, cavernous retail spaces. A long term trend towards value-added food products will continue as consumers tastes grow more diverse and the technology and science of food production delivers healthier and more convenient food in more places and from more places than we can even imagine today.
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