COLD CASH 2000

MINA WILLIAMS

Third-party refrigerated warehousing is increasingly becoming a viable alternative for retailers.

With Wall Street prompting retailers to re-evaluate their total operations, especially in-house operated distribution systems and facilities, outsourcing has become one means operators are employing to free capital. Investments in new facilities and equipment, labor issues, union contracts and constant technology upgrades have made outsourcing even more attractive.

This outsourcing trend is not only affecting the supermarket industry, observers said. Outsourcing is being used by other industries caught under the microscope of investment analysts when stock swings are more of a concern than true performance.

The particular direction of services once carried out "in-house" is a matter of senior-management philosophy, said the observers. While one company may be drawn to freeing up capital, others have found that growth and shifts in critical mass have created a shortage of space and staff. Still other retailer management teams seek to concentrate on core competencies -- activities that contribute to the bottom line.

"Retailers are good operators of distribution facilities," said one third-party provider. "What public refrigerated warehousing offers is focus. Operations are our core competency."

It's that matter of focus, retailers said, that is leading operators to go the route of public refrigerated warehousing. Using PRWs, retailers report they are better able to focus on what they do best -- store operations, purchasing and customer service, for example -- leaving warehousing to the third-party operators.

"Retailers are becoming specialists," said a Western operator. "We can't be vertically integrated anymore. We want to be the best in our business every day and there are headaches in distribution, such as high capital and high labor. There are so many things that can and do go wrong at any turn of the clock," he said.

"Third-party providers are capable specialists," said Joe Andraski, an industry consultant based in Schaumburg, Ill. "The cost of capital, fixed capital requirements, working capital requirements and profit and loss all are contributing factors. Retailers' desire to outsource noncore competencies, and to apply capital to stores and marketing activities are causing many to look at options. Many want to move distribution off the balance sheet and move it to a third-party."

"Every day public refrigerated warehouse operators work at doing logistics better," said one provider. "Every day we wake up and think how we should do business better. If we can't reduce costs and gain efficiencies then we aren't doing our job."

"Consolidation of the industry has created niches for many companies to help retailers maneuver," said a meat-industry source. "There are just too many things to do and too little bodies to do them. This is paving the way for outsourcing, particularly in the distribution segments."

"The '90s have seen a great deal of consolidation among grocers and grocery manufacturers," said J. William Hudson, president of the International Association of Refrigerated Warehouses, Bethesda, Md. "This trend will continue as food companies attempt to grow their business and create cost efficiencies through size. This focus will create a greater dedication toward core competencies."

While this focus on core competencies has opened the door for the public refrigerated warehouses, industry experts said that retail acceptance remains an uphill struggle. "Retailers do not generally view refrigerated warehousing as one of their strengths. However, they remain reluctant to lose control of that segment of the supply chain," said a source with expertise in public refrigerated warehousing. "The stores have to be serviced and serviced well every day. The comfort level of turning warehousing over to a third-party is just not there."

While it is difficult for retailers going through the transition to third-party refrigeration warehousing, some are finding the struggle paying off in increased flexibility, reduced labor and lowered cost of capital.

"Significant growth of public refrigerated space over the past 15 years demonstrates both that third-party logistics providers are extending their service to a greater audience and that the food industry has placed increasing trust in these providers," said Hudson.

But this pathway may be cut short by a demand that outstrips supply. "There is a high demand for third-party refrigerated warehouse space on behalf of manufacturers. Warehouse space is at a premium. That is not to say more facilities won't be built, but the market is hot right now," said Andraski.

"Retailers are now questioning why they need to own brick-and-mortar facilities," said an industry source. "Refrigerated and frozen facilities are expensive to build and operate. The operations are more complex than with ambient air facilities because of the temperature controls. Then there are the labor issues," he said.

"When we take over a site, we install a site general manager and a team that is totally operations-driven. That gives us the professional advantage," said a source in the third-party warehousing field. "Then there is the efficiencies advantage. Because we have vision over the whole supply chain, a total view, we can drive cost out of the supply chain."

It is precisely these managerial issues that have spurred some operators into exploring third-party solutions.

"Refrigeration is just too small for us to handle well," commented an operator in the Southwest. "Outsourcing to a company that can provide the facility and management may be a short-term solution for us. But the jury is still out on how they respond to the service-critical industry of grocery."

Industry observers counter that third-party operators have been successful in reducing the size of deliveries and increasing turns, thus boosting efficiency.

Investments aside, retailers have faced another challenge in distribution as they have expanded into new geographic locations or acquired units outside their traditional market areas. These operators now seek to connect large geographic areas with a cohesive warehousing system. This desire has caused leading retailers to employ public refrigerated warehouses for their refrigerated and frozen warehousing needs.

There are more than 600 public refrigerated warehouse facilities in 40 states, according to industry statistics. This gives retailers a flexible advantage as they expand into new markets or reach a critical mass that can no longer be handled in-house.

Leading retailers, including Kroger, Cincinnati, and Safeway, Pleasanton, Calif., have found that third-party refrigerated warehouses have not only freed up capital but proven to be an invaluable bridge as the operators have moved into geographic areas outside their traditional marketing areas.

Other operators have turned to third-party refrigeration warehouse solutions in an effort to keep a step ahead of labor relations and curb labor problems, including union contracts and work rules.

"Third-party refrigerated warehousing is not a new phenomenon," said the operator in the Southwest region of the country. "It's a moving target. The dilemma is what should we be doing."

Taking the resources of warehousing outside does not relieve the pressure on buyers to also assist in driving out inefficiencies, one former Western retailer pointed out.

"Using the system of putting product in a warehouse on consignment may be easy for buyers. But they really should take more time with the buying process and give their job the due diligence it takes. In the long run it's the consumer that pays for this strategy. I prefer the system used by leading retailers where the PRW looks and acts like the grocer. Outsourcing to a warehousing expert works particularly well when refrigeration is part of a third party's operation."

"There are also quality issues to consider," said one source, a former retailer. "Adding a few more days of cold-chain management can be the death of some perishable products. Going third-party is simply a false economy for retailers looking for the easy way out."

Still, the silver lining of public refrigerated warehouses is in offering retailers flexibility for seasonal items and forward buying. For example, the prices are lower on frozen turkeys in February than in September. "We need a place to store them," said a meat buyer. "We want to take advantage of the price and create innovative marketing programs to get people's attention and change their behavior."