One picks up jewels in surprising places. In an intimate Atlantic City, N.J., meeting recently of the National Association of Perishable Agricultural Receivers, Tim Hammonds, president and CEO of the supermarket trade association, Food Marketing Institute, provided insight into the dilemmas facing the wholesale grocer.
Fleming, the nation’s second-largest wholesaler, has been struggling for some time. The recent appointment of a new CEO held out hope of a revival, but a revival for the industry will be difficult without a total transformation.
According to FMI statistics, full-line wholesale grocers are powerful players. But they have a severe weakness in market share: They are strongest where growth is weakest. For example, they have a 71% market share among retailers with one to 10 stores, but this market is shrinking by about 3% a year. Among retailers with 11 to 50 stores, full-line wholesalers have a robust 60% market share, but these types of retailers are experiencing an anemic 2% annual growth.
Convenience stores are another full-line-wholesaler stronghold, with a market share of 64%, but these operations are inching along with growth rates in the 2% area. Supermarket chains with more than 101 stores are growing at about 7% a year, but full-line wholesalers have only 13% of this market. Other food retailers, such as mass marketers, are booming at 12% growth per year, and full-line wholesalers have only a 17% market share in this type of trade.
Strengths & Weaknesses
Full-line wholesalers’ strength in declining and slowly growing markets and weakness in quickly growing markets is weak strategic positioning.
Hammon’s presentation also revealed that the cost structure of full-line wholesalers seems to be out of whack. Sales of a typical supermarket chain distribution center run about $650 million per year. A similar wholesaler’s distribution center runs only $400 million. Adding insult to injury, the typical chain’s distribution center includes about 14,000 SKUs, whereas a full-line wholesaler’s distribution center does lower volume while carrying approximately 21,000 SKUs. Lower volume and more products seem like a recipe for higher costs.
Full-line wholesalers can’t dictate to customers what items to stock – customers can always take their business elsewhere. This creates tremendous pressure on the wholesaler to expand product availability. It also diffuses buying power as the same customer base is spread over more manufacturers and creates operational inefficiencies as warehouses handle complicated orders.
Wholesalers don’t pick up any slack on the delivery end either. The typical wholesaler has 2.5 stops on a truck route, whereas the chains, with higher-volume stores, only have 1.8 stops on a route. To rub salt in the wound, whereas the typical chain drops 786 cases per stop, the full-line wholesaler only manages 537 cases per drop.
With these troubles, full-line wholesalers have been dropping like flies. The 366 such organizations in 1985 had fallen to 97 in 1997 and are likely to continue the rapid descent. This decline is consistent with the decline of market share full-line wholesalers are experiencing.
In 1992, full-line wholesalers accounted for 42.3% of retail volume. By 1997, that number was down to 37.3%. The big growth has been in self-distribution – distribution via a chain’s own warehouse, which in 1997 accounted for 35.2% of retail volume, a leap from 1992’s 31.4%.
It is difficult to pin down a number, but many experts think full-line wholesalers may have their costs out of whack by about 50 cents a case – an enormous amount in a business netting a bit over 1% after taxes. This difference in cost structure is not sustainable, as it will lead all the best and largest customers to leave their full-line wholesalers and look to self-distribute.
Full-line wholesalers are rejecting many stores as customers and giving up on unprofitable product lines. This will create new opportunities for DSD distributors and the specialty food trade.
DSD is on an upswing. In 1992, 26.3% of retail volume was handled through DSD distributors of various types. In 1997, that number was up to 27.5%. The specialty food arena, with its lower quantities, frequent drops and multiple SKUs, will attract full-line wholesalers looking to rationalize their operations and bring expense ratios into line.
Just as specialized produce distributors have long partnered with large wholesale grocers in areas where these full-liners supplied dry groceries but didn’t have a produce warehouse, sharp DSD distributors should be talking to the Flemings and Supervalus of the world to see if they can partner with these behemoths.
Although having a product line abandoned by large wholesalers may not seem good news, it may be a blessing in disguise. These large wholesalers have always had problems providing the range of product essential to a great specialty food section. The full-liner’s strength is in distributing goods cheaply, so focusing on that is probably a wise choice.
The specialty food DSD distributor’s strength is large product selection and good judgment on product offering. Now, here is the rub – wholesalers may turn out to do it cheaper as well. How is this possible? The expense of distributing specialty foods depends heavily on volume. If knowledgeable DSD specialty food distributors lead retailers to carry a better product mix, the increased volume could easily drive distribution and delivery costs down.
It’s a winner all around: Consumers get the products they want, retailers get increased sales, distributors win new customers, and manufacturers find new homes for their cornucopia of products. And the wholesale grocers? They get to focus on core competencies and regain their competitive position.