Sunday, 27 July 2014
How logistics undermines big UK retailers
Many moons ago this writer warned in the logistics press how Continental, no-frills, food retailers would give Britain's retail giants nightmares if their business models ever crossed the North Sea. The occasion was my visit to Denmark's food discounter, Netto, but what has changed since then to upset the British retail model that seemingly served the market so well for so long? In summary, three events now favour the Continental model where small is beautiful but also nimble at giving the shoppers what they now favour most of all -- permanently low prices. These are a changing economic climate, the rise of online shopping and the public's attitude to the cynical pricing ploys used by all the big food retailers. But by far the greatest of these is economic pressure brought on by the credit crunch that sees many shoppers putting value for money at the top of their shopping list, without compromising on quality.
One might well ask how is it that the British retail giants like Tesco (world's number 4), Asda, Sainsbury and Morrison with their huge buying power and long experience could not easily see off the much smaller, but nimbler Continental arrivistes like Lidl, Aldi and a re-appearing Netto. The answer can be given in one word --logistics. This is not to say that Britain's retailers are logistics slouches, far from it. Many years ago, for example, Tesco created its own stock forecasting program geared to changes in the daily weather forecasts. This gave them a crucial advantage because a pending heatwave, for example, could send demand for drinks soaring four-fold in a few days, as well as spiking demand for certain kinds of clothing and food. Before such stock forecasting programs, taverns ran out of beer in heat waves, surely a most pitiable site.
What is it, however, that sees the Continental newcomers seizing market share from the big boys that sends shudders up their spines? The obvious reason, of course, is the permanently, much lower prices, typically by up to one third, but how is this achieved? There are common features to all the foreign-owned discounters which cannot be easily and quickly replicated by the big British retailers because of the latter's legacy investments. What this means is that a big British retailer like Tesco would stock up to 40,000 SKUs (stock keeping units) as against up to 1,600 for Lidl or Aldi. Such a huge difference gives the smaller discounters a great logistics advantage. Another common feature for the discounters is their no-frills food displays, with much food simply stacked on pallets and very little individual shelf pricing. Store start up costs, therefore, are much lower, especially as they have much smaller car parks. Not lost on the shoppers is also the knowledge that all prices will be permanently low, which is a potent marketing tool. But where does logistics fit into the equation that so favours the Teutonic invaders?
To return to my Netto Danish experience over 20 years ago, this writer was impressed by their slick storage and handling. Netto then had about 125 shops throughout Denmark but only one NDC (national distribution centre) to supply all their needs. All shops were EPOS*-connected to the NDC so that at the end of each trading day all details of items sold would be electronically sent to the NDC to initiate replenishment picking. A fast sortation conveyor played a key role in despatching all replenished items to all 125 shops before opening the next day. Netto's business model then was to have no more than 600 SKUs, over 90% of which were fast movers. Any fast mover that became slow was quickly dropped and replaced by another, expected fast mover. The effect of all this was that 90% of all stock at the NDC passed through it every 24 hours, thus drastically cutting the high cost of holding inventory, which can dwarf all other warehouse costs combined. Such a high throughput rate also has implications for construction costs of big NDCs since there are no large areas given over to slow movers. Obsolete stock losses would also be smaller.
The business models the big British retailers are now stuck with have been made obsolete because of the shoppers' change in habits. The retailers tried to become all things to all men by selling far more than food and regular household consumables all under one roof so as to enhance customer convenience. That model held good for many years when incomes were steadily rising but when the recession hit six years ago a sea-change in consumer sentiment saw price become king as the convenience factor flew out the window with the remorseless rise of online shopping. Arguably, that business model of relatively high prices, wide product range and convenience is now broken.
Lumbered with the legacy costs of huge stores, the British retailers have obliquely admitted that the Continental upstarts have a better business model for a changed shopping climate. They will not, of course, take matters lying down. Sainsbury, for example, have got into bed with Denmark's Netto to open small shops with permanently low prices. Tesco are pushing ahead with openings of convenience stores but so far their prices remain uncompetitive with Lidl and Aldi. It is also possible that the big retailers will enter an unholy cabal to lower all of their food prices for long enough to drive the invaders back across the North Sea. It would mean taking a hit on their profits but it could be a price worth paying to restore the status quo of comfortably high margins that they have enjoyed for so long at shoppers' expense. Such an event would be a bleak day for consumers who have been held in the grip of just four retailers controlling around 80% of the UK food market for far too long.
*Electronic point of sale