Contact: Mr Ciaran Fitzgerald
Introduction
Central Distribution
Given the timescale and the deadline involved in making a submission the Federation would like to concentrate its submission to the Group on the impact of central distribution on the food and drink sector.
The Irish Retail Grocery Market
As the table below shows three retail groups account for approximately 72% of the Irish retail grocery market. In the context of central distribution two of these groups, Musgraves and Tesco, are effectively up and running with their plans for central distribution. This leaves a situation where the other 50% of the market has not, as yet, made definitive plans with regard to central distribution.
| GROCERY MARKET
SHARES IN THE REPUBLIC OF IRELAND JANUARY 1999 |
|
|
MUSGRAVE |
25% |
|
TESCO |
24% |
|
DUNNES STORES |
22% |
|
SUPERQUINN |
9% |
|
BWG (SPAR) |
7% |
|
LONDIS |
3% |
|
MACE |
2% |
|
OTHER INDEPENDENTS |
6% |
|
OTHER MULTIPLES |
3% |
The Issue
The main drivers behind moves towards consolidation and the introduction of central distribution systems are the requirement for greater efficiency of delivery and inventory on the one hand and the availability of increasingly sophisticated IT systems on the other. This increased sophistication at the IT level facilitates not only better co-ordination of delivery/inventory and stock holding but is increasingly capable of providing suppliers and indeed retailers with much more accurate information in regard to purchasing and other consumer patterns.
Distribution in an Irish Context
As mentioned above both Musgraves and the Tesco Group are pretty much on line with regard to their own distribution systems. The situation heretofore has been that distribution was carried out by a number of parties ranging from dedicated distributors who would handle products for delivery to a number of retailers on a third party basis on behalf of suppliers and by suppliers/manufacturers themselves.
FDT Concerns
The Federation’s concerns in relation to developments towards consolidation and central distribution are two-fold.
The first relates to the relative inefficiency of future consolidation systems in a situation where each of the major retailer groups has its own dedicated central distribution system.
The second is a more fundamental and perhaps more difficult one, relating to the control of the route to market, and the impact that this movement away from supplier control to retailer control will have on the developments in the sector.
Inefficiency
The potential for inefficiencies in the new situation relates to a combination of the geo-demographics of the Irish grocery market and its relative small overall scale. While suppliers accept that the current systems of distribution are inefficient, one of the strengths currently in the system is that there are distributors who handle product for more than one retailer. Effectively in a situation where each retailer has its own dedicated central distribution system, while this may be intended to drive efficiencies on their own behalf, both the small scale of the Irish market and the requirements for delivery to regional supermarkets will result in half empty or two-thirds empty containers and will create particular probems with regard to backloading where product is sourced from the UK.
The regional dimension of this development are particularly acute when one thinks that one of the major pillars of the national development plan for the year 2000-2006 relates to the need to add a regional dimension both to the inward investment situation and the general economic development situation. A key element in inducing sustainable development in the regions will be the existence of an economically sound food and grocery retailing business in those sectors. Here again while one has to accept the inefficiencies of the current distribution systems, the fact remains that because of the multiple product/multiple retail characteristic of the current systems, a single price policy has been possible for the retailers throughout the twenty-six counties of Ireland. The loss of these synergies in a plethora of single retailer dedicated systems will inevitably result in higher prices for products which have to be distributed to the regions.
The Route to Market
The other key concern of the Federation relates to a situation where control of the route to market moves inexorably from the supplier/manufacturer to the retailer. All recent text books have identified the route to market as being a key element of comparative advantage/disadvantage in relation to the development and launching of both branded and own brand product. As distribution systems become more and more IT driven, compatibility with retailer distribution systems is becoming as important a factor as price and/or product integrity.
The major concerns that the Federation would have in relation to the complete control of distribution moving to the retailers as outlined above would be, that because of the dis-economies in relation to lack of scale and regional dimension, the facility for brand manufacturers to continue to supply would be increasingly unviable and this would inevitably lead to a greater own brand profile as retailers concentrate on their own products and compatible distribution sustems.
Solutions/Cross Docking Facilities
In relation both to the inefficiencies mentioned above and a requirement for food industry manufacturers and suppliers to be part of future distribution arrangements, a shared cross docking facility is desirable.
Such a facility would involve suppliers delivering to a hub across a range of products, possibly including both dry goods and fresh and frozen products, and retailers taking deliveries again on a shared multiple retail basis from such a hub. This would, by definition, be more efficient and more in tune with the regional dimensions of the Irish grocery market than a series of separate, relatively inefficient consolidation arrangement for individual retailers.
How Does This Come About?
In many respects the economic logic behind a cross docking shared facility are not disputed even among individual retailers. What is lacking however, both on the supplier and the retail side is a sense of ownership of the problem and a willingness to take practical steps towards implementation. In this context the Federation feels that the Government and/or policy committees such as yourselves which are attempting to look at the bigger picture for Ireland Inc., have a key role in ensuring that the national priorities are addressed in these developments.
It is only by looking at developments in distribution/consolidation based on the full range of national priorities that the most efficient system for Ireland Inc. will be achieved. Given the broad remit of this committee we would suggest that you are uniquely placed to promote the proposed cross docking facility as set out above. For our part, the Federation is working on a more detailed proposal, both in terms of the practicalities of the facility and its strategic importance which we hope to complete in the coming months.