CONTINENTAL DIVIDE 1998

JAMES FALLON

LONDON (FNS) -- U.S. distributors needed the wake-up call of the Efficient Consumer Response initiative to undertake major improvements in logistics and supply chain management, but the need for such efficiencies was old news to their European counterparts.

Even today, the leading European supermarket operators are leagues ahead of U.S. companies when it comes to logistics, inventory management, category management and efficient ordering, according to top retail and wholesale executives as well as industry consultants.

"In general the United Kingdom and countries such as Holland operate a 'pull' supply chain, while in the United States and other European countries it's very much 'push'," said Lawrence Christensen, logistics director at Safeway Stores plc, Hayes, England. "Operators in the United Kingdom and Holland have invested huge sums in infrastructure and information technology."

Higher real estate and fuel costs in most parts of the continent, along with more frequent shopping trips by European consumers, are among the factors that have forced retailers and wholesalers there to maximize every possible efficiency throughout their supply chains.

"In the United States the logistics tend to be simpler, where in Europe they're more sophisticated and complex because they have to be," said Michel Eeckhout, executive director of technology and information at Delhaize "Le Lion," Brussels, Belgium, which owns the U.S. chain Food Lion.

"Where logistics resources are scarce and expensive, retailers have no option but to sweat their assets," said Barry Knichel, director of planning and development at Tesco, Cheshunt, England. "Building a warehouse in the United Kingdom or Holland costs considerably more than building one in the United States."

Industry executives stress that not all European retailers are ahead in the logistics race. Generally retailers in France, Germany, Spain and Italy are no better, and in many cases worse, than those in the United States in the logistics area.

However, such top European retailers as Tesco; J. Sainsbury, London; Asda, Leeds, England; Albert Heijn, Zaandam, The Netherlands, and Delhaize "Le Lion," are setting the industry standard when it comes to sales-based ordering, transport and even, in the last few years, customer loyalty marketing.

North American retailers note that European companies don't have to cope with the vast delivery and transportation distances they do, which makes it easier for Europeans to manage their supply chains.

Some European executives agree it's easier to deal with delivering product 80 miles rather than 1,500, but stress that sheer distance isn't really that important at the end of the day.

The main reason given for the increased efficiencies among European operators is the difference in population density. "Europe is one big city," Eeckhout said. This results in major differences in everything from land costs to shopping patterns.

European industry executives agree with another U.S. claim -- that the lack of national operators in America makes it hard to get the same economies of scale as the nationwide European chains can achieve in their domestic markets.

But they add that Europe isn't exactly a homogeneous market either. Dealing with suppliers in 14 European countries creates logistics headaches that few American retailers have to worry about, such as border issues.

Alastair Charaton, head of supply chain practice at the consulting firm Management Horizons Europe, Isleworth, England, said there is much less pressure on American food retailers to operate efficient warehouses because land and transport costs are so much lower than those in Europe.

Fuel prices in the United States, for example, are one-sixth those in the United Kingdom. Lower land costs also mean there's less pressure on retailers to worry about the performance of every single stockkeeping unit, he claimed, pointing out that most U.S. food stores carry 40,000 SKUs while those in the United Kingdom tend to carry 20,000 to 25,000 SKUs.

The larger store sizes and number of SKUs in North America means there's much less pressure to ruthlessly edit product selection in order to focus on the fastest sellers. "The basic difference is that we are fanatical about the level of capacity utilization and flow-through of product," Christensen said. "U.S. retailers talk ECR but they're basically still into deal buying."

Manufacturers note major differences between U.S. and European retailers. John Thomson, vice president of customer business development for Europe, the Middle East and Africa at Procter & Gamble Europe, Brussels, Belgium, said discussing such topics as category management with leading European food retailers is much easier than doing it with American ones.

"In many areas, like stock turns, the best European retailers knock the spots off U.S. ones," he said.

In addition, European consumers shop more regularly than their American counterparts, executives said. It's not unheard of for Europeans to visit their supermarkets every day to buy what they need, partially because they demand more fresh foods and partly because their smaller houses, apartments and refrigerators don't have the space to store more than a few days' worth of food.

The increased shopping frequency means retailers have to restock their shelves more often. That constant demand is what fuels the continual pull-through in the supply chain.

"European stores tend to be much more heavily shopped than those in the United States, even on weekdays," Tesco's Knichel said. "U.S. supermarkets can get a good return on a store with 50,000 SKUs and sales of $510,000 a week, but we couldn't make that pay in the United Kingdom. "We have to get that flow-through, which means we can't have such things as back rooms and so forth," he added. "The supply chain has to be super-efficient to fuel that continuous demand."

Another advantage some European retailers have over American ones is their experience with private-label product. Management of private label programs means European retailers are much more accustomed to such ideas as category management and supplier-retailer partnerships than those in America, executives said.

"Retailers in the United Kingdom and Holland are used to managing brands, including their own," Thomson said. "However, the problem in such markets as France is that it's still totally driven by promotions, and retailers there rely on manufacturers to do their category management for them.

"The coming of the single European currency will help, because retailers and manufacturers will have to focus on how to get to one common sell-in price throughout Europe and in some cases globally," he added. "The Euro will push a lot of supply chain efficiencies throughout Europe."

This probably will mean European retailers will widen their lead over American ones even more. While U.S. companies continue to implement ECR, many European executives believe the U.S. supermarket industry has gone for the easiest targets and that the hardest work lies ahead.

As a result, they speculate some American retailers may quietly back off from ECR concepts, which require the adoption of entirely new operating procedures.

"It's about changing the mindset," Tesco's Knichel said. "I will never say the Americans will never do it, or never close the gap with Europeans. I think it eventually will close but don't know how close the Americans can get to us. But it has to close, really, because they have so much ground to make up compared with the leading Europeans."