GETTING COLD OUTSIDE

CHRIS O'LEARY

News & Solutions Distribution Report

A growing number of retailers are finding the best way to handle frozen and refrigerated products is to find another pair of hands to do the job.

Retailers ranging from Grand Union Co., Wayne, N.J., and Genuardi's Family Markets, Norristown, Pa., to Wal-Mart Stores, Bentonville, Ark., and King Kullen, Westbury, N.Y., are outsourcing the shipping and storage of their perishables to independent logistics firms and wholesale distributors.

Third-party service providers are coordinating product arrivals from manufacturers, storing and consolidating products in their own warehouses, and in some cases delivering merchandise directly to the retailers' stores.

Farming out perishables distribution may not be the best strategy for all retailers, however. The approach taken

by Raley's, West Sacramento, Calif., which retains control of refrigerated products while outsourcing its frozens, is becoming just as attractive, observers said.

Retailers and analysts said the growth of frozen and refrigerated outsourcing is fueled primarily by two factors:

Reduced Up-Front Costs: Transportation and storage of perishables represents a substantial and growing financial burden for retailers. Energy-related costs and the potential for product spoilage and employee injury are driving retailers to consider outsourcing.

Logistical Gains: Retailers moving to third parties also are gaining a number of logistical benefits they may have been unable to achieve on their own, such as greater efficiencies resulting from consolidated full truckloads, cross-docking and activity-based cost analyses.

The costs of storing and delivering perishables are a prime reason some retailers are moving out of handling them. Frozens present an especially large storage expense, with industry observers estimating that the cost of frozens warehousing is often three times that of storing dry grocery.

City Market, Grand Junction, Colo., decided the costs of expanding its existing freezer storage areas could not be justified.

"We didn't want to put the capital into a freezer of our own," said Jack Luster, director of warehousing and transportation. "Our frozen distribution is now done through a third party."

Kash n' Karry Food Stores, Tampa, Fla., which still controls all of its distribution, acknowledges that frozen merchandise in particular represents a major portion of its supply chain costs.

"It is more expensive to store frozen than anything else," said Mark Stewart, vice president of warehouse and distribution for Kash n' Karry. "I think outsourcing is going to play a role at some point, with the sheer cost of building additional [frozen] warehouse space at $50 a square foot."

The proximity of stores, mostly located within 150 miles of their distribution center, enables the chain to ship full truckloads of perishables. In addition, special measures are taken so that products requiring different temperatures can be stored together in a single shipment.

"We send all our outbound perishables together," he said. "We utilize items like ice cream boxes and dry ice blankets" to maintain the appropriate temperature for refrigerated products loaded in a frozens truck.

As the expense of handling perishables continues to grow, the outsourcing option becomes more attractive, Stewart said. "Everybody wants to put the money into appreciable areas rather than depreciable areas." "More and more retailers just can't afford to operate their own [perishables] facilities," added John Rotelle, president of Rotelle Inc., a division of Richfood, Mechanicsville, Va. "Rather than tying up their capital in inventory and warehouses, they'd rather build more stores."

Retailers are growing more receptive to the concept of outsourcing, analysts and third-party providers said. "I see an openness that hasn't been there before," said Hal Justice, senior vice president of United Refrigerated Services, Atlanta.

United supplies some divisions of Kroger Co., Cincinnati; Food Lion, Salisbury, N.C., and Vons Cos., Arcadia, Calif., with frozen and refrigerated products.

Manufacturers in particular have noticed the change in retailer attitudes toward outsourcing frozen and refrigerated products, said Kenneth Call, director of logistics at Americold, Portland, Ore.

"Manufacturers are now saying to us, 'You ought to talk to our customers.' In the old days it was more like, 'Stay away from them,' " he said.

Americold supplies frozen food, ice cream and refrigerated products to a number of retailers, including Safeway, Oakland, Calif., and Fred Meyer Inc., Portland, Ore., as well as retailers serviced by Fleming Cos., Oklahoma City, and United Grocers, Portland, Ore.

Outsourcing is becoming a more attractive option because the proliferation of frozen product lines and stockkeeping units is pushing the limits of warehouse and truck storage space.

"The biggest challenge to our industry is just the rapid expansion of the product lines," Kash n' Karry's Stewart said. "Frozen SKU lines are growing so rapidly that it's a challenge to bring in that many new items without a lot of capital expenditures and expansions."

Third-party providers who have service warehouses filled with a large variety of perishable merchandise and who use activity-based costing to determine more accurate deliveries are becoming adept at consolidating shipments, even the continually growing frozen food merchandise lines.

"A third-party provider will have a larger critical mass available," said one industry observer. "That will make the transportation link to the retailer, whether direct to store or to their warehouse, a much more economic run."

Consolidation is a key requirement for Daymark Logistics, Minneapolis, which handles frozen distribution for Wal-Mart's discount stores, supercenters and warehouse clubs.

"We manage six frozen refrigerated warehouses where all inbound product comes into the facilities and is stored," said Michael Stuhr, senior business manager at Daymark. Wal-Mart orders are received weekly and goods are sent in full truckloads of multiple product lines.

Retailers using Rotelle for their perishables distribution, including Genuardi's; Clemens Markets, Kulpsville, Pa., and many independents affiliated with Independent Grocers Alliance, Chicago, want slow-moving, direct-store-delivered items consolidated into larger shipments.

"We get a lot of requests to bring slow items into our facilities so we can deliver everything at one time," Rotelle said.

Retailers are also requesting more frequent deliveries. "They don't want to put [perishable product] in the back room, but just move it forward into the display cases," he said. "Then they only have to handle the product once."