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A case for consolidation.

The food industry--the largest in the nation--is in the uneasy process of undergoing fundamental and far-reaching changes. The traditional lines of demarcation between wholesalers and retailers, once in sharp focus, are now being blurred. An abundance of new store formats is providing the catalyst for profound changes in the future directions of retailing. The development and application of sophisticated new technology is forever altering the way the food industry does business. And, perhaps the most visible dynamic of all-concentration throughout the U.S. food industry--continues at a steady pace.

Although industry consolidation is occurring in both the retail component (where the number of stores dropped by some 4,000 units in 1983 alone) and the wholesale segment, this article will explore its effects on, and implications for, wholesale food distribution.

Despite the fact that precise data is extremely difficult to obtain because of periodic reclassifications within the wholesale spectrum, the trend is clear. Consolidation has continued unabated during the past six to eight years at a compound annual rate of perhaps as much as 8%. If this steady trend were to continue--and industry analysts foresee no reason why it will not--the number of food distributors would be reduced to less than half during the next nine years.

The reasons and rationale for the ongoing concentration throughout the wholesale food distribution industry are many. Often, the demise or sale of a wholesalership is rooted in such basic, practical considerations as there being no heir to carry on a family-owned business. However, the principal underlying forces influencing consolidation at the wholesale level seem to be the tremendous impact of recent economic conditions and new advances in technology.

The nationwide recession and high interest rates prevalent in recent years proved devastating to medium-sized distributors, in particular. These mid-range wholesalers found themselves caught in an economic squeeze between deflated commodity prices--and, therefore, fee income--and rapidly escalating carrying costs for product inventory and capital. Operations that had enjoyed the protective buffer of inflation and relatively low costs of money during the energy crisis of the early '70s were suddenly exposed to the full force of explosive economic conditions.

In contrast, and, perhaps, not surprisingly, very small and very large distributors weathered the economic storm reasonably well. Small wholesalers were able to retrench and endure as a result of their inherent flexibility and quick reaction time. And large wholesalers were able to utilize their sizable financial resources.

High-Tech Troubles

New technology, the other primary force at work in consolidation of the industry, continues to exert an even greater impact on the distribution segment. Those distributors who are financially unable, or philosophically unwilling, to make the necessary investment in electronic support systems are finding--often belatedly--that they are losing their most progressive customers to farsighted wholesalers that do make the investment.

Unfortunately, as the industry becomes increasingly sophisticated in its application of technology, this problem can only become more pronounced and more severe. In response, medium-sized distributors may someday band together to create shared regional data processing centers. However, for the moment, the inability to jump aboard the technological bandwagon is a principal cause for the difficulties currently being experienced by many mid-sized wholesalers.

As any industry matures and undergoes the process of consolidation, the obvious negative aspects of the process are usually counterbalanced by compensating advantages. This is especially true in the food distribution industry.

At the distributor/wholesaler level, one must consider the economy of scale achieved as a firm increases in size. The combination of a number of small- or medium-sized companies into a single larger entity--the historical development of most of the large food wholesalers--produces substantial benefits for all parties involved, including the distributor, retailer customers and the consumer.

In addition, virtually none of the recent breakthroughs in ware housing and transportation systems could have occurred without the staff strength and resources of a large corporation. Two excellent examples are warehouse automation equipment and truck fleet monitoring systems.

Within our company, we have utilized both of the leading manufacturers of warehouse automation equipment and had the same experience with both. In each instance, the equipment manufacturer's computer software was inadequate for our requirements because of its lack of experience in the food distribution industry. Without our internal expertise to rewrite their programming, these systems would never have performed up to their full potential.

The computer-based trip recorders installed throughout our company's truck fleet are supplied by one of the nation's leading technology companies. However, its original concept required that the data gathered from all the tractors at each of our divisions be transmitted to its data center, decoded there, and mailed back to the user. The time delay involved in this process brought into question the overall effectiveness of the program. Again, our in-house technical staff greatly enhanced the efficiency and effectiveness of the equipment by creating a usable local decoding system.

Technical Clout

In both of these cases, the substantial investment in talent and equipment by the distributor made solutions possible. Many other similar illustrations could be drawn from the experience of the other large corporations in our industry. The key consideration is that technical clout is expensive and available only in large organizations. Consolidation is creating larger average-sized distributors with greater opportunity to make the investment in and support the application of new technology, which will increase the efficiency of the entire food distribution system.

Industry concentration through acquisition and merger can also yield additional benefits. For example, the smaller company can gain immediate access to increased capital for reinvestment, and also gain access to sophisticated support systems it might never have been able to develop internally. As a result, the retailer customers in the geographic region where the acquired company operates become the beneficiaries of better support from a stronger supplier.

At the retail level, the advantages of having a stronger supplier are even more apparent. Particularly in the case of affiliated independents, the relationship between supplier and customer is more of a partnership than a traditional business arrangement.

Both partners choose one another carefully, for the fortunes of each depend on the success of the other. Modern food distributors are sources, not only to product and support, but of capital and growth strategy for their retailer customers. Just as the distributor with inefficient or short-sighted customers is limited in its growth potential, so, too, is the retailer unable to grow beyond the resources of his supplier.

The '70s was a decade of shrinking productivity. this condition manifested itself throughout U.S. commerce and industry. The retail trade found itself with diminishing returns, and scrambled to find solutions. Productivity improvements have emerged in the 1980s, and the principal source of that improvement is electronic technology. Only now is the true potential of electronic frontend systems becoming fully apparent.

Researching indicates that electronic order entry by hand-wand scanners not only saves up to half the labor, but is infinitely more accurate than other traditional methods. Shelf allocation systems also contribute to speed and accuracy, in addition to being extremely important merchandising tools.

These and many other sophisticated tools in use today are the products of the joint efforts of technical vendors and large food distributors. Support for scanning alone represents three years of concentrated effort by an expert team in our company. Our proprietary shelf allocation system has been the subject of periodic improvements for more than 10 years.

Obviously, large distributors bring such innovations to their retailers first; but, eventually, the entire industry benefits.

The Retailer Route

Industry-enhancing innovations are also emerging from the recent move of distributors into retail. While such moves could be viewed as a threat to established retailers, a careful analysis of this activity indicates that it is primarily a defensive strategy.

In general, distributors enter retailing as a method to keep or acquire market share is regions where no strong retail organization exists. These retail ventures have had the beneficial effect of improving the breed and sharpening the market. Again, the new concepts and new formats being introduced are the developments of major companies with the resources to devote to research and development.

Despite this current trend, the vast majority of the new concept stores built in the future will be owned and operated by independent retailers and corporate or regional chains--not by wholesale food distributors. Our primary objective is to develop innovative concepts and successful store formats for the use of our retailer customers. We have learned over the course of 115 years that our growth is tied to their strength; our success is linked to their achievements.

Finally, while not readily apparent at first glance, the real beneficiary of our industry's continuing concentration is the consumer. Not only are the efficiencies resulting from increased productivity being passed along to the consumer in the form of retail prices, but the very existence of the neighborhood grocery store is often attributable to the large distributors.

As corporate or regional chains abandon a given market--for whatever reason--major wholesalers often purchase and resell the stores to independents. This preserves the conveniences of a local supermarket for the consumer, and retains employment for area residents.

The new retail formats, including super warehouse stores and specialty outlets, are all based on providing advantages and value to the consumer, either through sharper pricing, higher quality, or both. Consumers are able to select from much larger product varieties, and yet, spend no more for better quality.

There is not disputing or denying the fact that the force of consolidation is hard at work throughout the wholesale food industry. We are not alone in coping with, or benefiting from, this phenomenon. All available studies unequivocably indicate that virtually every elements of the broader distribution industry is becoming increasingly concentrated. The most prevalent symptoms of this growing trend are vertical integration into retailing and accelerated consolidation through merger. The reasons behind consolidation, as well as the overall benefits to the economy, parallel those in food distribution.

In the end, those with vision and resolve will reap the benefits of the dynamic forces at work in our industry, and they will prosper. But they must bear in mind that "nothing endures but change."
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Author:Wetterau, Ted C.
Publication:Progressive Grocer
Date:Mar 1, 1985
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