Key points
In a report last year, Verdict Retail predicted that UK online sales of food and grocery would grow by just under 50% in the five years to 2019, by which time this route to market would account for 8% of all spending across the sector.
The arrival of Amazon Fresh is promising to ratchet up activity in this area still further, as much through the example it sets as through its own operations.
Even if this were the only cross-current washing around the industry, that might still be enough to tug many food manufacturers' business plans off course. Others will console themselves with the thought that traditional retail still retains the lion's share of sales, and in any case, the logistical burden of coping with e-commerce and home delivery does not fall on the manufacturer.
Of course, though, this is just one of several trends promising to carry many businesses many miles from their expected destination.
At chilled (and, increasingly, ambient) food distribution company Fowler Welch, md Nick Hay says: “I don’t think people imagined that the growth of convenience – driven by Tesco – would change consumers’ shopping habits as much as it has.”
In this context, ‘convenience’ can be taken to refer both to the town-centre store formats championed over recent years by Tesco (and, inevitably, by the other multiples) and ‘convenience’ in the form of online sales and home delivery.
Changing shopping habits (Return to top)
Central to the changed shopping habits which Hay mentions is the erosion of consumer loyalty – to specific retailers and, often, to brands. “Today, we’re far savvier as consumers,” he says. “Research suggests that around half of consumers shop at four different supermarkets at least each month.”
Kantar reported that Sainsbury was the only major multiple to have squeezed out any year-on-year value growth at all over the summer, and that was less than 1%. Meanwhile, Aldi registered an 18% surge in sales, and Lidl just under 13%, over the same period.
Five or 10 years’ ago, around 90% of product might have been going to a defined number of regional distribution centres (RDCs), says Hay. “Nowadays, any manufacturer who believes that the supply chain they work in is staying the same, with the same deliveries to the same RDC, is probably naïve.”
The implications of this mutating marketplace can be felt on many levels, starting with the locations where product is being shipped. The ‘big four’ multiples may still dominate, with over 70% of the UK food and drink market, says Fowler Welch, but even they are having to innovate with new distribution hubs, most famously the ‘dark stores’ designed to manage home deliveries in areas of high demand.
Warehouse management software (WMS) provider Indigo points out further areas of movement. “Generally, we’re seeing smaller and more frequent deliveries,” says food industry supply chain consultant Mark Wilkinson. “Some retailers have moved from a single delivery every 24 hours to as many as three. There are clear implications for warehouse productivity and costs.”
But he emphasises that such changes can form part of a negotiating process between retailers and suppliers. “For example, historically, Tesco would not allow multiple ‘best before’ dates on the same pallet, or even within the same delivery,” Wilkinson reports. This is the sort of area where concessions can be wrung from a retailer looking for three-times-daily deliveries.
“Those rules have to be automated [within WMS],” he says. “And we’ve modified solutions so that those rules can be adapted.”
Double-deck trailers (Return to top)
Other areas of adaptation include the mix of vehicles within third-party logistics (3PLs) fleets, says Wilkinson. Changing delivery patterns mean that many providers have increased the number of double-deck trailers (up to 56 pallets) – as opposed to what used to be the industry standard of single-deck – to allow multiple drops at a larger number of DCs.
One reason for this shift may be the fact that manufacturers are (to generalise wildly dealing with a larger number of customers. Faced with shrinking market share, the major multiples are rethinking those strategies which saw stock-keeping units multiplying like mice in the early 2000s.
“They are recognising the need to be cleverer about their offering,” says Hay at Fowler Welch. “It may mean a smaller offering, a different offering – or both.”
As he points out, the discounters procure in their own way. Manufacturers which thought the buying policies of the multiples made forward planning difficult might want to try the discounters. “Procurement is at much shorter notice,” says Hay. “Much of the time, they buy for a fixed 13-week period.”
So, few manufacturers will find that the discounters take up much of the sales slack left by the multiples. “They are trying to find the next big major retailer to be a long-term customer,” Hay says. “But they are also scrabbling around for sales to the likes of Waitrose, Marks & Spencer and the Co-operative.”
When it comes to 3PL fleets, Wilkinson at Indigo believes that smaller vehicles may sit alongside the larger vehicles. This could be part of the strategy to service a wider range of customers and – potentially – the proliferation of smaller outlets, from local and ‘metro’ convenience stores to forecourts.
“In the sandwich market, some larger suppliers use van sales to replenish a customer base of smaller outlets, in combination with hand-held devices and vendor-managed inventory,” says Wilkinson.
This model brings with it the risk of high levels of scrapped product, a larger carbon footprint and greater food miles at a time when corporate social responsibility takes a dim view of all of these.
But once it is up and running, Amazon Fresh is unlikely to be the only online food delivery business by-passing traditional retail. Food manufacturers may hit upon a new category of small-volume, higher-margin online customers, assuming that their planning and supply chain is sufficiently agile to cope.
Gap in the market (Return to top)
At Bearfaced Groceries, due to launch nationally this month, md Philip Edge says: “We think there’s a gap in the marketplace to provide foods of the quality that consumers would find in a butchers or greengrocers.” The emphasis is on better-for-you, UK-produced foods and produce, taking families with young children as the target market.
Hay at Fowler Welch says: “For the multiples, home delivery is diluting the critical mass of an efficient supply chain by producing a more expensive one. Amazon is not diluting its supply chain. It’s bringing more critical mass to an existing delivery structure.”
Like Amazon and other operators such as Musclefood, Bearfaced plans to use the temperature-controlled courier network: an efficient infrastructure which already exists. This contrasts with Ocado, for example, which uses its own fleet. “Using your own vans for final-mile delivery is incredibly expensive,” says Edge.
Arrangements will vary, but he claims that in the majority of cases, food manufacturers will be responsible for shipping their products to the Bearfaced distribution centre. If this pattern is repeated with other online and home-delivery channels, this could have significant implications for manufacturer supply chain management.
Meanwhile, one of the more gradual but nonetheless influential developments to be feeding through the supply chain revolves around demand planning, forecasting and shared data.
Mikko Kärkkäinen is group chief executive at Relex Solutions, a provider of supply chain management technology. “Historically, the manufacturer has tended to be better than the retailer at forecasting demand,” he says. “But retailers have been improving, and [own-label] has been a significant pressure here.”
He adds: “Retailers typically have more rapid access to the data on which to base demand forecasting. But manufacturers will often have a better view of the total category or the wider market.”
According to Relex, the major multiples have been placing greater emphasis on shared forecasts in an effort to improve accuracy and, as ever, reduce costs and wastage. “As order forecasts are shared with manufacturers, that then puts pressure on the manufacturer to fully utilise that shared information,” says Kärkkäinen.
Forecasts (Return to top)
Increasingly, a manufacturer’s information technology system needs to be able to track the retailer’s shared forecasts and compare those forecasts with its own, he says.
But more intricate and faster-moving retailer relationships could make demand planning as important as if not more important than forecasting for manufacturers. Kärkkäinen believes that the differences between the two are not always appreciated.
“Demand planning is about the extra activity that I can generate in order to maximise sales by, for example, going to regional retailers,” he says. Kärkkäinen underlines the importance of planning as accurately as possible for the impacts of any promotional activity. “For best results, demand planning is linked to incoming raw materials,” he adds.
But while overarching enterprise resource planning strategies are already embedded in many food businesses, the components which are most likely to require adaptation to changing markets are arguably warehouse management and outbound logistics.
For many companies, systems will increasingly need to cater for a larger number of smaller customers and a wider range of distribution centres, faster turnaround times, narrower delivery slots and the ability to efficiently factor in new listings at relatively short notice.