The way we shop is changing and it’s having an impact on supply chains. It seems we’ve fallen out of love with a big weekly shop and now we’re mixing and matching where we shop, hunting for bargains and shopping online. Mark Price, the boss of Waitrose: “The big weekly shop is over. The notion that you are going to go and push a trolley around for the week is a thing of the past”. Instead, we’re moving from superstores to corner shops.
So how is this change in shopping habits affecting the supply chain?
- The obvious effect is that big supermarket chains are seeing sales decline as shoppers become more adept at seeking out the best deals and spreading their purchasing power across more stores. This means underutilised distribution capacity and increased costs as a percentage of sales.
- The big supermarkets are trying to price match the discount stores but what makes the likes of Aldi and Lidl such good value is their high proportion of own brand lines and a limited range. To compete the big supermarkets can only cut their prices. Cutting costs is much more difficult.
- Sales per square foot in the big hypermarkets are falling and Tesco and Sainsbury are trying to sub-let, franchise or find something else to do with some of the space. The consequence is that they are shipping less to these stores reducing transport efficiency.
- Sales are rising in local stores but they are harder to get to and have less backroom storage so distribution and delivery becomes less efficient – further raising costs.
- Online sales are rising but distribution costs are much higher and few are making any money from it.
So what can they do about it? Apart from the cost of the goods the other major costs for Supermarkets are staff (hard to cut without risking service and quality), property (some are trying to sell and lease back where they can but you can only do that once), head office functions (easy to cut but have a habit of creeping back up again) and distribution. So it looks like it’s down to supply chain professionals to get leverage from incremental changes:
- Transport costs are a major part of overall distribution costs and most distribution networks were developed when those costs were lower than today. Although oil prices have fallen recently the long term trend is for transport costs to rise faster than inflation. This means that the number and location of distribution centres needs to be reviewed. The trend will be towards more regional distribution solutions.
- With more volume being shipped to local stores with restricted access, particularly in town and city centres, smaller vehicles may be needed, operating out of more regional, perhaps cross dock hubs.
- Distribution centre operating costs have to come down. Use of automation needs to increase to do this.
- Techniques for measuring on-shelf availability need to improve. Despite all the advances in stores management systems, retailers still find it hard to accurately track store stock. Better stock control would improve sales, enable stores to carry less stock and reduce waste.
- Stores are staying open for longer hours (some 24/7), but distribution does not seem to have caught up. Visiting a store in early evening, one is likely to be presented with lots of empty shelves and therefore lost sales.
- On-line shopping has got to be made to pay. The jury is still out as to whether the highly centralised Ocado model is the way forward or the more distributed model so far followed by other retailers. If transport costs do continue to rise, more distributed solutions are likely to win out. Whichever, automation is even more important for this channel.
- “The aggregation of marginal gains”. Dave Brailsford, former head of UK cycling, uses this phrase to describe his highly successful approach to winning. As improvements get harder to find, supermarket chains need to look at everything – a 1% gain in every part of the business builds to a very substantial overall improvement.
- Third party logistics (3PL) service providers were once big players in running distribution centres for the supermarkets. In recent years those supermarkets have gradually taken back control and this trend is likely to continue unless the 3PL’s can do much more to add value. One possibility would be to provide shared user facilities to provide more localised services to local stores.
- This idea of sharing could go further. The recent announcement that Netto is re-launching in the UK in a joint venture with Sainsbury opens up one opportunity for behind the scenes resources to be pooled.
These are just a few ideas. With new bosses at the helm, Tesco and Sainsbury are clearly trying to find a way out the mire and development of the supply chain is going to be high on their shopping list of improvement.