Differentiation Is The Name Of The Game

With John Block, the executive vice president of the Food Marketing Institute, and president of its Wholesale Division.

Since you left President Reagan’s Cabinet in 1986, you have been closely tied to the grocery wholesale industry. What trends have you seen and what do you feel is the current climate for grocery wholesalers?

Block: There’s a lot of competition throughout the grocery industry from big-box stores now, but everyone is fairly optimistic. The collapse of Fleming Cos. [which filed for bankruptcy in late 2003 shortly after severing ties with its largest customer, Kmart Corp.], though unfortunate, fueled optimism for the industry because it opened up a lot of new business for all the other wholesalers around the country. Many have doubled the size of their businesses, like Supervalu and C&S Wholesale Grocers, but even the smaller ones have grown.

Wholesalers in general have also gotten a lot smarter. We’ve seen a lot of consolidation in the industry, and there have been a lot of warehouses that have been closed as a result. That’s creating a lot of efficiencies right now.

But, what I really think you’re going to start seeing a lot of in the coming months is regionalization and specialization.

You just mentioned that the grocery industry is seeing a lot of competition from non-traditional outlets. Even quick-serve restaurants are cutting into how much food is bought at the grocery store. So can we expect supermarket wholesalers to start supplying these other retail and foodservice channels to recapture lost sales?

Block: There is some blurring of the lines now, but no, you’re not going to see a lot of wholesale companies getting into these new businesses. C-store distribution is a lot different than grocery store distribution, which is very different from club store distribution, in terms of the product mix, how much product is picked for each order, how it is picked and how it is delivered. There’s a lot of direct-store delivery in the c-stores, and that’s not something the wholesalers do a whole lot of.

Instead, everyone is trying to differentiate themselves. The biggest way they are doing this is with personalization—knowing their customers and developing a personal relationship with them.

So if it’s not new channels, what kind of specialization will wholesalers be getting into then?

Block: Well, private labels are growing and challenging the national brands that you can get at Wal-Mart, and wholesalers are playing a big part in that. We’re also seeing a lot of wholesalers who are becoming retailers, and getting involved in very specific logistics operations as well. Supervalu is a good example of a wholesaler with both of these types of operations.

All the wholesalers, though, are providing more services to differentiate themselves. They’re all looking for that one magic thing that they will be able to do differently from everyone else, something that will make grocery shopping more fun and exciting.

Also, look for them to start offering more things like ethnic, gourmet and organic products. Some have tried the ethnic thing in Chicago and it did not work so well, but it is going over very well in southern California with Hispanic consumers.

Along those same lines, all the wholesalers are working to make sure that their operations fit the demographics of the communities around them and those they serve, and that their product mix fits into that as well.

In the past, grocery wholesalers were notoriously slow to replace trucks, trailers and equipment, and to invest heavily in operational improvements. Is that likely to continue into the future? What will wholesalers be doing to improve their operations internally?

Block: Many are starting to discover that closing warehouses alone will not work forever. Fuel prices are so high right now, and fewer warehouses usually requires longer driving distances. Many are also trying new warehouse configurations, looking at more automation, creating incentive programs for employees, and looking to adopt RFID. They are also constantly concerned about backhauls and trying to find them wherever they can.

But, things will not change real quickly because they’ve been engrained into the industry for so long. The problem is that there is not a lot of margin or profit in food, and when you don’t have a lot of excesses, you can’t buy a lot of new things.

What about RFID?

We have emerging technologies that could revolutionize food distribution. Among the most promising is the Auto-ID/Electronic Product Code (EPC) initiative. It offers solutions to many of our foremost challenges, using microchips to track product movement throughout the supply chain. This technology can dramatically improve our ability to control out-of-stocks, theft and counterfeiting. It can automate inventory management, trace products through the supply chain in recalls and provide companies real-time information on customer purchases.

RFID is being tested by retailing and manufacturing partners across the United States. I encourage all food retailers, wholesalers and suppliers to learn about this technology and explore how to apply it.

The wholesaler community faces a glass full of opportunities to stimulate economic growth, business success and improve the variety and quality of choices for consumers. The best years may be yet to come.