As the leading supermarket brands get ever larger, so must the distribution hubs that supply them. And handling this vast logistical challenge is now a pressing business issue. By Noella Pio Kivlehan
Four years ago, when US retail giant Wal-Mart bought ASDA, it did what any good parent would do. It showered its newly acquired son with all the love and knowledge that a million-dollar company has to give, in the form of the introduction of a hi-tech in-store distribution system.
The “Breakthrough” programme improves sales forecasting and product ordering efficiency by giving sales teams and individual stores 15-minute updates of stock levels, bringing, as press releases at the time boasted, “the power of Wal-Mart systems to the sharp end of the supply chain”.
The Wal-Mart connection has also enabled ASDA to forge links with 52 new suppliers via its parent’s worldwide general merchandise supplier, PREL.
“We’re sending out more product than we had planned every single week, and there’s no sign of the pace letting up,” ASDA distribution director David Gibbons said last year. “We’re looking forward to welcoming 1,250 distribution colleagues to enable ASDA to be first and freshest for supermarket deliveries.”
Distribution leaders
Not that its rivals have been standing still. Over the past decade, Tesco, Safeway Sainsbury’s and Somerfield have learned that good distribution systems – local, regional and national – are crucial to their success.
As Colin Chivers of Insignia Richard Ellis puts it: “Supermarket chains need to have systems that cross the whole country because they are dealing with food and its short shelf-life. This is why, when it comes to distribution, supermarkets are the real leaders among retailers.”
The supermarkets have made many changes in the way they run their distribution networks. Key among them is ownership of sites, technology, and the size of sheds. They want sites that can accommodate the needs of their growing stores – indeed, shed requirements have escalated from a 1980s average of 150,000 sq ft to an average of 750,000 sq ft today.
ASDA pioneered the development of the modern supermarket distribution centre when it took 1m sq ft at Magna Park, Lutterworth, in 1989. Since then the other chains have followed suit.
Sainsbury’s, which has nine sites either in use or under construction, is widely considered to be the distribution king, due to its level of efficiency. Its sites average 600,000 sq ft now that it has closed smaller depots.
“Our advantage lies in economies of scale and having distribution centres in the right places to service stores quickly and efficiently,” says a Sainsbury’s spokeswoman. “The greater size of centres enables us to handle more volume and become more economical.”
Staff shortages
The question now is whether supermarkets’ distribution hubs will end up surpassing 1m sq ft. Chivers thinks not, and believes that 750,000 sq ft is the optimum size. There are already staff shortages in some areas, he says, and, if sites were even larger, then stores would have to poach staff from each other.
Then there is the matter of handling the goods within such a monster outlet. “Over 750,000 sq ft, they would not be able to manage stock rotation,” says Chivers.
Richard Howells at GVA Grimley disagrees. He argues that as long as the company has the latest technology and distribution systems in place it can occupy ever-larger sheds. “If you have the right software, there’s no limit to how big you can go. It could be 1m or 5m sq ft.
“Theoretically, it should be easier to control a single big site than manage a distribution system based on 20 small sites,” says Howells.
To prove that gigantic sites can work, Howells points to the US and Wal-Mart. It has spent millions of dollars on systems such as Breakthrough for its 1m sq ft-plus distribution sites. It has also seen its profits increase year on year.
Of course, the US has the land available for its supermarkets to be that much bigger. While, as Steven Johnson at King Sturge points out, the UK has a shortage of land, which makes it much harder to find a locations for mega-sheds. Plus the land needed would cost a good deal more in the UK than in most other countries.
Not that British supermarkets follow the trends set by other countries, anyway. For example, the distribution network here is “very much a UK thing”, which has not taken onboard many practices from other countries abroad. Whereas Continental Europe uses intermodal rail transport extensively, the UK’s goods transport is based mainly on the roads.
So what will be the next big thing in supermarket distribution hubs if they cannot grow very much larger in physical size? Industry observers believe the chains will continue to buy their own sites, but will intensify their use of technology and may turn to third-party operators to run them.
And all the time they will be looking over their shoulders at their rivals. As Rupert Visick at Jones Lang LaSalle, says: “It’s fair to say that the latest development in supermarket distribution is always the one that has had the benefit of seeing the mistakes of all the others.”
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Safeway’s largest sites |
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Mixed sizes (sq ft) and ownership |
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600,000 |
Bellshill |
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445,000 |
Aylesford |
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400,000 |
Leicestershire |
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380,000 |
Warrington |
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360,000 |
Bristol |
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350,000 |
Tamworth |
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290,000 |
Coventry |
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250,000 |
Bathgate |
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200,000 |
Gateshead |
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Source: Insignia Richard Ellis |
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The battle for Safeway |
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In January, Bradford-based supermarket chain Morrisons rattled its rivals by announcing a £2.9bn all-share offer for the Safeway chain. |
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For a few short days, Morrisons was alone in its bid for the company. But then heavyweight rivals Tesco, ASDA/Wal-Mart, and Sainsbury’s waded in with bids. Next they were joined by Philip Green, the man behind Bhs, and then for a brief spell came the US-based firm, Kohlberg Kravis Roberts, which subsequently pulled out. |
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At the time of going to press, the prize for whichever company buys Safeway is ownership of the UK’s fourth-largest supermarket chain and its 480 stores. |
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But equally important, especially in these times of planning restrictions and lack of development land, are its 20 strategically located distribution sites (see table above right), which include five composite sites and two national hubs. |
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The location of the units is the most important element to their value, as some agents say the sheds themselves are “a bit dated” and that Safeway made a mistake by not using third-party logistics operators for all its sites. |
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However, Safeway’s supply operations director Mark Aylwin says that all but four of the sites are third-party, although these are the biggest. “It still means that 50% of our volume is in-house,” he adds. |
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“We work on the basis that if they are operating well then that’s good. We don’t want to put all our eggs in one basket in terms of how we run our sites. It’s a good mix.” |
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Most agree that the future of a distribution site will be how near they are located to the various Safeway stores. They also all agree that whoever gets Safeway will get one over on its competitors. GVA Grimley’s Richard Howells says: |
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“If you got rid of a distribution site in a really good location, another supermarket chain will move in there. It’s a case of blocking your enemy’s advance.” |
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As Rupert Visick at Jones Lang LaSalle says: “Open A1 consents are very valuable.” |
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What would the winning bidder do? With the Office of Fair Trading referring all bids – except Green’s – to the Competition Commission, none of the four supermarket groups wanted to comment on what they would do with the distribution sites if it landed Safeway. But agents certainly have predictions. |
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Sainsbury’s Sainsbury’s is expected to want to keep the shops in choice locations, but would scrap Safeway’s distribution system and use its own system. |
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Tesco Tesco would be likely to cherry-pick the best of the Safeway stores and distribution sites and keep the ones that best suited its system. Tesco would eventually phase out the Safeway brand. |
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ASDA/Wal-Mart Even though ASDA already has a very good distribution system, it may take some of Safeway’s better locations. But it is thought that the company would not want to make too many changes. ASDA would eventually integrate the Safeway distribution system into its own network. |
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Morrisons Because Morrisons’ distribution system is weaker than the other three, it would benefit the most from Safeway’s distribution network. |
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