FOOD-SERVICE DISTRIBUTION FACES COST-STRUCTURE CHALLENGE

DAVID MERREFIELD

WHITE SULPHUR SPRINGS, W. Va. -- The expense structure faced by the food-service distribution industry -- expenses that are substantially higher than those of dry-goods distribution -- call into question the very existence of the business.

And, said Richard J. Schnieders, senior vice president, merchandising services and multiunit sales, Sysco Corp., Houston, the expense problem is exacerbated by manufacturers who tend to treat grocery and food-service distribution as if they were identical operations.

Schnieders' comments about the future of food-service distribution came during a session at the 90th annual Executive Conference of the Grocery Manufacturers of America, held here earlier this month.

He told his audience that because of the higher complexity level associated with food-service distribution, a typical delivery of food-service products to a retail customer nets a slim $90 in gross margin to a food-service distributor, while a grocery distributor's margin is $681.

This indicates that the cost of sales for the food-service business are far too high, he said, a factor that makes the established industry vulnerable to any competitor who can lower costs. "Can the food-service industry continue to exist with the kind of sales costs we have?" he asked. "What happens when some upstart young company comes out with a system that lowers costs? We're at a significant disadvantage."

Schnieders specified that some of the costs are inherent in food- service distribution because of its relative complexity as compared to the packaged-goods retail business.

For example, there are approximately 750,000 points from which American consumers can access prepared food, as compared to the 33,000 corporate supermarket locations in the nation. Moreover, Sysco offers its retail customers some 200,000 stockkeeping units; supermarkets typically offer 30,000 SKUs.

Schnieders said costs also are increased because the food-service industry has done a poor job of explaining to manufacturers that their operations are quite different from those of grocery wholesaling.

"For instance, there's a move within the manufacturing com munity to go to tray packs with a plastic overwrap for everything from canned products to bagged flour," Schnieders pointed out. "I know that the change can save a few pennies, and it probably works in an environment where most of the product moves on pallets.

"In food service, we handle a case individually over five times during its life in our warehouses. In the average customer order of 30 cases, we have more than 15 different items, so when our product selectors go to a slot, they pull less than two cases from every slot. By the time we get to the customers' storeroom with that overwrapped case, that product is in shambles. Damage expense is high.

"Also, manufacturers direct decisions to wholesale grocery by using the standard 48 x 40 pallet," Schnieders said. "In a typical Sysco warehouse, and I think in other food-service distributors' warehouses, 60% of the slots are 40 x 32. That means we hand-stack 60% of the product that comes in to put it on smaller wood. We're fingerprinting the products. The cost to the food-service industry amounts to millions of dollars in handling.

"It's critical that we understand our customers' costs, and I think our suppliers must know more about our business and costs, too. We haven't done a good job in educating manufacturers about the costs in our system; I'm not criticizing manufacturers."

Finally, he said, margins are held down in food-service distribution because the customers they supply simply don't match the sales performance of packaged-goods stores.

He pointed out that typical commercial food-service operation will yield perhaps $1 million a year, while a high-performance supermarket will spin off that much per week.