Space age is over for supermarkets

SHOPPERS ARE turning away from megastores towards convenience. Combines with growing urban populations and stricter regulations on emissions this will test supply chain logistics to the max.

Foodservice Footprint P16-2-243x300 Space age is over for supermarkets Features Features  Waitrose Food & Drink Report Waitrose Supermarkets Retail MArk Price LCP Consulting IGD Dave Lewis

 

 

 

 

 

 

 

 

 

 

 

 

 

British supermarkets have traditionally been addicted to space. But, as Goldman Sachs reports in its Europe Retail Review, they have to backtrack. It suggests the big players close one in five stores to have any chance of meeting customer demands for convenience and stalling the rise of the discounters. The advice echoes recent comments by the Waitrose boss, Mark Price, who claimed the big four supermarkets have an estate for “how people shopped two decades ago”.

 

Foodservice Footprint P17-1-240x300 Space age is over for supermarkets Features Features  Waitrose Food & Drink Report Waitrose Supermarkets Retail MArk Price LCP Consulting IGD Dave Lewis

 

 

 

 

 

 

 

 

 

 

 

 

 

Shopper habits are changing fast. No longer do Brits wheel a stacked trolley around an out-of-town megastore as they stockpile for the week. Four in 10 people may visit a convenience store at least once a day, according to Waitrose’s 2014 Food and Drink Report. And that is forcing a rethink.

 

Tesco admitted a couple of years ago that the large out-of-town stores are a “less potent force” than they once were. Its new boss, Dave Lewis, has put the brakes on some further openings as the country’s biggest supermarket reassesses its estate. Asda is doing the same.

 

The Institute of Grocery Distribution has estimated that £3 billion less will be spent in stores larger than 25,000 sq ft by 2020.

 

It predicted that the average number of food retailing channels used by customers will climb from 3.9 this year to 4.9 in 2016. Convenience is king in the UK’s £174.5 billion grocery retail market, but the same growth is expected for the foodservice channel, as a population that is on the go will drive demand for institutional catering, restaurants, pubs and fast food.

 

Now consider research into city distribution patterns by LCP Consulting, which indicated that there will be 700,000 more people in the Greater Manchester conurbation by 2050. That’s just one city in a world where the population is exploding and everyone is heading into towns. In the UK, these inhabitants will want healthy food on the go, a network of convenience stores, click and collect and home delivery fulfilment services.

 

As a result, store service is increasing in frequency, reducing in drop size and becoming more time critical. This puts pressure on smaller retailers, convenience stores and the hotel/restaurant/café channel as they often don’t have the space to hold products in appropriate conditions.

 

Meanwhile, city and conurbation authorities are increasingly concerned with air quality and congestion. An increasingly fragmented, proliferating and complex freight and logistics picture is in their sights for increased regulation. The UK was recently reprimanded by the European court of justice, which ruled that it must act “as soon as possible” to clean up illegal levels of air pollution.

 

A key EU transport policy is for zero-carbon logistics in cities by 2030. Restrictions can be expected to increase and this may push up costs for operators and prices to retailers. The paradox is that growth in convenience may reduce passenger journeys to out-of- town outlets while adding more small freight vehicles with more frequent deliveries and an increase in particulate emissions.

 

As urban populations grow rapidly, no one really knows what this will mean for customer preferences and behaviours. The authorities  cannot wait to find out and do not have the subtle controls to micromanage the situation; they will likely tighten the screw on all transport including freight.

 

The supply chain implications of all this can be summed up in three words: fragmentation, proliferation and complexity. As a white paper by LCP Consulting in 2011 concluded, there will need to be “radical and difficult changes in freight transport policy and investment if it is to contribute fully to the twin goals of economic prosperity and environmental sustainability”.

 

The implications for distributors, retailers, outlets and producers are profound. The big supermarkets are already considering the consequences of their dash for convenience inside their distribution centres. Convenience retailing takes a much shorter range in smaller quantities with increased frequency by category; supermarket retailers’ distribution centres are not configured to handle this. The convenience channel also tends to demand smaller pack sizes and case quantities and this requires more warehouse space in the distribution centres, since they still have to service the supermarkets.

 

That is not the only operational pitfall of the current ways of working. All foodservice and convenience operators have spent the last 20 years consolidating their distribution operations to maximise distribution centre efficiency, reduce overheads and save stock. This has increased food miles. The now unwanted implication is that delivery efficiency will decay over longer distances as drop sizes reduce and daily lorry capacity erodes. The only way to overcome this is to start from closer to the customer or increase consolidation to improve the efficiency of the final delivery.

 

Then there are several knock-on effects for suppliers. First, there will be pack size proliferation that must be accommodated in their plants, reducing run lengths, increasing changeovers and eroding fixed cost recoveries. Second, there will be more points for delivery and in smaller quantities, more frequently. Third, promotional activity across channels will be more difficult to plan and forecast, with peaks combining to create supply and stock conflicts; this will drive more stock into the chain or cause more supply failures.

 

This fragmentation, proliferation and complexity will soon be further complicated by increased regulation by city authorities. Before then, the actors along the food supply chains for convenience and foodservice will have to creatively rethink their operations. Economics and practicality will force this and it will not be easy.

 

There are some useful pointers to future structures and approaches. One is collaboration; the IGD is promoting this through its Project Starfish, which has identified significant potential for drop and locality concentration by mapping activity across part of the supply base. Making this happen will be a challenge for three reasons. First, there is a cost in the consolidation process from different loads onto the same truck – not every load is viable. Second, dividing any net benefits is a difficult negotiation. And third, there are major concerns about commercially confidential information getting out.

 

Another is a feasibility project into the viability of urban logistics centres, supported by the Transport Systems Catapult. The think-tank says its mission is to identify ideas that can be converted into jobs, growth and prosperity in the field of “intelligent mobility” – the systems that create efficient movement of people and goods. Our company was part of the consortium that worked on this scoping study.

 

The conclusion has been that open-access urban logistics centres (hubs where goods are switched from diesel to electric vehicles) can be made to work, using city-friendly, zero-carbon electric lorries for the final miles. This type of operation can overcome the barriers that Project Starfish has identified and largely mitigate the perceived extra cost. The moment that cities make logistics more difficult and costly in pursuit of their easy living and environmental goals, the economic and service balance will tip in favour of such solutions. Those in the convenience and foodservice sectors should be looking at this new horizon for their operations and starting to plan; leaders will be rewarded and followers will be disrupted.

 

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