BrainTrust Query: Is there a future for food wholesalers?
By Richard J. George, Ph.D., Professor of Food Marketing, Haub School
of Business, Saint Joseph’s University
As we take a moment to reflect on the last twenty years in the food marketing industry, several questions confront us.
Twenty years ago, who would have predicted…
- That supermarkets’ “share of stomach” would shrink to less than 50 percent?
- That everyone – from drug stores to club stores to dollar stores to QVC and everyone in-between – would be selling food?
- And that the “Hicks from Bentonville, Arkansas” would become the largest food retailer in the United States?
And then there’s the wholesale side of the business. Who would have predicted…
- That most supermarket operators would have abandoned procurement and distribution, outsourcing this function to wholesalers (even ones that service directly competitive retailers)?
- That the wholesaling industry would evolve into a duopoly?
- That a company such as C&S, whose product service is limited primarily to providing procurement and distribution services, would become the standard for the industry?
In general, the food marketing industry has experienced sweeping changes in the last 20 years but, with the exception of food brokers, no segment has experienced more change than the general line or broadline distributors.
Within the past five years, the two largest broadline wholesalers ceased to exist in their traditional broad line “pure play” formats. First, Fleming Companies, Inc. went out of business and, more recently, Supervalu has made extensive forays into the retailing channel with its recent purchase of significant parts of Albertsons. As of today, C&S Wholesale Grocers, with expected sales of $19B in 2006, is the largest national “pure play” wholesaler.
During this time frame, the broadline wholesaler evolved from a simple purveyor of goods and supplies to a full service backend supplier of goods and services; i.e., marketing, finance, human resource services, data processing/analysis, business planning, real estate, etc.
Economies of scale are driving food distribution and sales today. The “new” Supervalu is an example of a company that understands that leveraging of costs and buying power is one of the better ways to compete against the giants, such as Wal-Mart. Sure, it’s important that stores differentiate themselves, but consumers “vote” with dollars and their votes indicate that price is the most important point of differentiation.
On the other hand, another challenge facing mass distributors today is their loss of business segments to specialized distributors. Examples include meat, organic and standard produce, ethnic, deli, bakery, specialty products and GM/HBC. In many cases, price is not the issue. Instead, it is product selection and perceived quality.
Until a few years ago, traditional distributors had “people on the street” to assist in purchasing and selling, but that is not the case today. As the traditional distributors have moved away from direct service, their competitors (Sysco, U.S. Food Service, McLane, local meat, produce, deli and bakery suppliers) have become more aggressive in the “direct” approach. Also, some merchants (Ball’s in Kansas City as an example) are moving aggressively into organic and locally grown meat and produce. These merchants want to control the supply chain and to do so, they self-distribute these items. Naturally, the movement of these products into self-distribution represents a significant loss of sales to the traditional distributor.
Discussion Questions: Do food wholesalers, as we know them, have a future? If so, what form and function will they assume?
Any discussion of the future needs to include the continuing shift of “share of stomach” from food retailers to food service providers. Driven mostly by
the ongoing need for convenience, food service operators and convenience stores continue to evolve and to take share from traditional retailing. The strategies and systems utilized
by Sysco and U.S. Food Service in the meals prepared and/or consumed “away from home” will be integral to understanding the future of food wholesaling.
Likewise, the efforts of McLane Co., Inc. in serving convenience stores represents an opportunity for “benchmarking” by the more traditional wholesaling
players. In fact, McLane was ranked as the number one U.S. wholesale grocer in 2004 by FMI with sales of $18.698B (2005 = $24B).
Finally, any assessment of the future needs to highlight the changing face of America. The Hispanic market with all of its cultures and sizes, as well as
the Asian market, represent new frontiers for food wholesalers.
In general, I agree with Tom Zatina. The skills, capabilities, systems, structure, culture and processes to be excellent at supply chain operations are not those necessary to operate retail storefronts. With relatively few exceptions, it is almost impossible to build and maintain two vastly different “resource” structures within the same umbrella organization. Scale is one of the elements required, but there are many more. Wal-Mart, for all its size and capability, really isn’t an excellent storefront operator. Target is. Wal-Mart is, however, an excellent supply chain operator. Both chains are trying to become what the other is excellent at without losing their existing advantage. Tough to do.
Food retailers, with the possible exception of Kroger and SuperValu, do not have the scale necessary to sustain both capabilities. Hence the rationale for supply chain operators or “wholesalers.” Further, given the impact of Wal-Mart on food retailing, it behooves retail executives to focus on the area they really can sustain an advantage in. Retail operations, merchandising, and local marketing.
The duopoly in wholesaling is an inevitable aspect of the economics and business requirements of the supply chain operator business. Scale is mandatory. Scale supports technology, which helps drive efficiency. Scale supports infrastructure, which helps support customer service, which helps sustain volume. Scale allows for rewarding and retaining top talent. Eventually, US food retail will join the rest of the world in requiring a global supply chain structure. Large scale wholesale operations are the most likely to develop these in advance, driven by the need to develop and sustain operating margins.
Both Tom and Mark have great points on this issue. Good wholesalers are very efficient, and the wholesaler who has solvent customers is the one who will survive.
The crux of the question seems to me to be “who will those customers be?”. On one hand we see the fulfillment of convenience driven food needs increasingly moving to chains. Whether it be a DG Market, a Neighborhood Market or a Walgreen’s — there will soon be a chain option available in just about every location, urban to rural. So, who will the wholesalers efficiently distribute their center store staples to? The competitive opportunity to independents is increasingly dependent on differentiation — organic, local, ethnic or otherwise. And the crux of the wholesaler’s efficiency is in volume, not proliferation.
The expertise required for delivering efficient logistics and supply chain services has been better developed and managed by “wholesalers” and the expertise to create effective merchandising and run outstanding stores has (naturally) remained with the retailer/operator. Since the battle for the customer takes place on the retail front, retailers should devote their resources (people and cash) towards that, and rely on wholesaler/distributor “partners” to do a good job of efficiently managing the supply side. This is the present and the future for most wholesalers.
A key part of this story has to be about coops. Several coops around the country have done extremely well over the past few decades, maintaining and even capturing market share. We all know the groups I’m thinking about — Wakefern, AWG, Unified Western…. These companies, and some of their smaller brethren, have done an excellent job supporting retailers that offer an alternative to Wal-Mart and the big chains. They always compete effectively on customer service, usually are competitive on product assortment and can typically stay within a few pennies of the bigger guys on price. Coops represent a growing segment of the business and it’s likely that trend will continue in the future.
Wholesalers with solvent customers have great futures. Wholesalers whose largest customers suffer deteriorating financials will die. Fleming had a major dependence on pre-bankruptcy Kmart. Wholesaling margins are too slender to buffer major customer losses.
I think that the issue for many retailers to outsource existing core purchasing and distribution functions typically relates back to a labor strategy to combat expensive and militant unionized labor forces or a financial strategy to reduce debt out of necessity.
Many successful retailers (e.g. Publix, Wegmans. HEB, Food Lion, etc.) do not rely on wholesale distributors to service their companies and in fact prefer to control the vital components of their profit margin — especially the control over purchasing, private label programs and fresh/produce/meat quality. They are also darn good at distribution, I might add.
There is a strong fit for wholesalers to service retailers when distribution labor costs become excessively expensive or when the threat of business disruption due to strikes is paramount. Retailers will outsource as a means to combat the unions.
The other main reason that retailers move in this direction is to sell off assets (DCs, inventory, trucks) to reduce debt on the balance sheet and restore financial health and, unfortunately, this has become one of the main drivers over the past 2 decades as market share moves over to Bentonville.
The growth of the mega wholesaler has come about in part due to their powerful ability to control purchasing dollars and their ability to move inside margin from the retailer’s pocket to the wholesaler’s pocket. When supermarket executives outsource these core components of the business, it is very difficult to take them back down the road due to the huge capital requirements to do so, therefore, in many ways this is a one way street with no return.
It makes sense for some companies to outsource to wholesalers and, as Bentonville keeps steamrolling forward, I believe more firms will do this to survive, so yes — more market share will go the wholesalers over the next 2 decades ahead.
The wholesaling industry has undergone a paradigm shift in the last 20 years with the need for increased efficiency, better consumer understanding, passage of Sarbanes-Oxley, and a shift for supplier responsibilities for replenishment. Independent retailers need to differentiate themselves. One method is by offering unique products. Wholesalers have a difficult challenge to increase their role when supplying smaller orders of unique products in a cost efficient manner. Wholesalers must find a way to add value to the process or be bypassed as retailers go directly to the source for unique products.