Convenience Store Blues – the Cost to Serve Challenge
Image SourceThe retail logistics consultants at Go Supply Chain Consulting outline the challenges to multiple grocery retailers of expanding into the convenience space.
Convenience Store Blues - the Cost to Serve Challenge
What is happening in the grocery and food sector? The major UK grocers seem to have scrapped their plans for more hypermarkets and superstores due to a sea change in consumer buying habits. Their stores are traditionally more than 25,000 sq. ft. and some are even the size of a small warehouse.
WHAT CHANNELS MAKE UP THE UK GROCERY MARKET?
According to IGD, of the £177.5bn spent in 2015, more than 50% was with the majors. Convenience stores and smaller supermarkets make up most of the rest but the balance is shifting more towards these sectors and particularly to the discounters.
Source: IGD 2015
The price of convenience
Convenience stores (c-stores) are open for long hours and sell products from at least seven grocery categories. Stores that fall into this category are SPAR, the Co-operative Group and Londis. Their largest expenses are labour and inventory, faster turnover is a big focus, especially on perishable goods.
According to IGD, the convenience sector, already the second largest grocery channel, continues to grow and will account for nearly a quarter (24%) of food and grocery sales by 2019.
The Co-operative Group is currently undertaking a project with IGD to optimise its supply chain operations with a strong focus on cost reduction in logistics and transport. It is early days, but progress has been made with a group of invited suppliers that are currently participating in running trials and sharing data. Real change and mutual benefit is expected sometime in 2017 when the partnering program is more mature.
C-stores are typically much more expensive to serve as a % of sales than the traditional big stores. As a result, customers pay for the convenience. This sector is struggling with the global growth of the discount food stores which are encroaching on their space.
Challenge from the discounters
The no-frills discounters (Aldi, Lidl, Netto) are stealing more and more market share with their small format, low cost, acceptable quality offers. The stores are easily navigable and checkout is usually fast and efficient. Their current market share in the UK is less than 10% but is growing fast; it is projected that this sector will double in value over the next four years.
What can the major supermarkets learn from c-store operators and discounters as they continue to expand into the convenience arena? Efficiency in every area of their distribution operations is will be key. To meet customers’ expectations they need to offer maximum value at minimum cost. Areas of focus will be implementing leading warehousing technologies and automating facilities both there and in-store.
Transport costs are relatively high for small supermarkets, particularly if retailers insist on daily fresh deliveries in the morning across the estate. Transport cost to serve can vary enormously as a % of sales revenue according to store format / sales mix, geographical location, clustering, vehicle types, delivery timings, delivery frequency and a host of other factors.
Through cost to serve modelling, retail logistics consultants can reveal the truth behind the aggregated numbers that appear in accounts – and run scenarios around some of the variables mentioned above.
Multiple retailers will also need to consider adopting some of the tactics of the discounters, such as:
- Limiting their number of product lines and thereby reducing the number of suppliers and number and frequency of deliveries
- Displaying their goods in open cartons or stacked on pallets. The discounters don’t charge suppliers for shelf space
- Reducing staff to the minimum to satisfy customers but paying them better
- Cutting out extensive loyalty schemes and reducing expensive advertising and promotions. In particular, traditional multi-buy promotions don’t lend themselves to smaller formats where shoppers are not in ‘stocking up’ mode
The whole industry continues to work to drive down inventory levels in the supply chain. This can mean owning stock for as little as 24 hours before it is moved to store, and for suppliers it means becoming more responsive and being able to meet shorter lead times.
In the short-term, the majority of food and groceries will still be bought in hypermarkets and super stores. They will continue to represent over a third of the total grocery market but the trend will be towards them increasingly being used as pick-up points for click-and-collect orders and to service online home delivery orders.
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April 4, 2016
Published by: Go Supply Chain Ltd