Grocery supply chain set for revolutionary changes

By Rick Pendrous

- Last updated on GMT

Manufacturers are being urged to focus on supply chain consolidation and collaboration
Manufacturers are being urged to focus on supply chain consolidation and collaboration

Related tags: Supply chain, Supermarket, Grocery store

Increased competition, disloyal consumers, growing internet sales – and now Brexit. Grocery supply chains are set for a revolution, reports Rick Pendrous

Amazon’s expansion into the UK’s grocery sector and its recent link-up with Morrisons on fresh, chilled and frozen produce deliveries are just the latest signs that the food and drink sector and the supply chains that serve consumers are undergoing a revolution, the likes of which we haven’t seen before.

While change has been underway for a number of years in the sector, there has been growing demand for greater convenience by the public, underpinned by the emergence of the savvy shopper.

This has thrown loyalty to brands out of the window as people search for good quality food and drink at the lowest prices.

Combined, these changes have influenced supply chains, which are having to absorb increased costs, as the flow of food between growers, manufacturers, regional distribution centres, supermarket stores and people’s homes evolves.

It is forcing the supply chain to look for increased efficiencies, such as the growing use of cross-docking for chilled products.

Maybe the big four supermarkets – Tesco, Asda, Sainsbury and Morrisons – didn’t see them coming, but the limited assortment discounters Aldi and Lidl have progressively been eating the multiples’ breakfast, lunch and dinner for a number of years now, forcing them to respond to the threat.

And then came the rise and rise of internet shopping, which is set to revolutionise the way we buy our food and drink – not just from traditional grocers, but also from foodservice outlets and new kids on the block such as Amazon.

Another huge event has been the decision by the UK to vote on June 23 to leave the EU.

While the full ramifications of this are yet to unfold – particularly regarding future trade with the EU and rest of the world and the UK food and drink sector’s access to labour from the continent – its impact is already starting to be felt.

Doubts about investment 

Not only has sterling fallen in value following the Brexit vote, making imports of raw materials more expensive (although offering better prospects for exporters), it has also raised doubts about investment, due to the uncertainty it has created.

The implications for supply chains, and fresh produce supplies in particular, are also likely to be huge.

Meanwhile, a lot of food continues to be sold on promotion in supermarkets and this is unlikely to change in the near future. It has increased companies’ focus on forecasting accuracy and waste reduction in the supply chain.

The changes have put traditional supply chains under extreme strain, as manufacturers and retailers are confronted with having to fulfil consumer demand for food and drink purchased through whatever channel they choose (in store, via PC or smartphone) and delivered or collected in whatever way they want, both cheaply and seamlessly – the omnichannel.

To assess the impact of these transformations, Food Manufacture has conducted an online supply chain survey of companies of all sizes and from all food and drink sectors, with questions compiled in conjunction with supply chain specialist Hughenden Consulting.

The results described in this article and shown in charts, both here and in subsequent articles within this supplement, are quite revealing.

They highlight the challenges facing food and drink supply chain specialists, while also outlining where their priorities lie.

Perhaps one of the most encouraging findings was that 71% of respondents said their companies were planning to invest more in their supply chain operations over the coming year, as their costs rose.

Equally interesting is that 59% report they are adapting their supply chains for more multichannel/omnichannel sales.

Steal 20% of UK supermarket sales (Back to top)

According to e-commerce delivery firm ParcelHero, Amazon’s ‘Internet of Things’ Dash service for its Prime members could steal 20% of UK supermarket online sales by 2020.

It warns this transformation in shopping behaviour could even spell doom for one supermarket chain.

“Dash is an ultra-convenient device. With the simple push of a button – or even by speaking to the gizmo for some versions – it will reorder your washing powder or your coffee or one of 40 products at launch,”​ says ParcelHero’s head of consumer research David Jinks.

“It’s great news for busy people as it takes care of routine shopping chores automatically; but it’s very bad news for supermarkets as it ties consumers into Amazon for even more products.”

Jinks points out that Tesco is now the second largest online UK retailer, with online sales of £2.9bn; Asda is the sixth largest with sales of £1.2bn, followed by Sainsbury with similar figures; and Ocado ninth with £1.1bn.

“These are significant sums, but we believe Amazon is about to take a serious bite out of this income,”​ claims Jinks.

If Amazon can take a 20% slice of that online grocery market pie, it’s going to leave at least one lower margin supermarket chain struggling longer term, as shoppers desert the high street.”

He adds: “Amazon is looking to conquer the grocery market just as it has already transformed books, electronics, toys and clothes sales.

“Amazon dwarfs the UK e-commerce market with sales of £4.4bn; now it’s set to make inroads into the supermarket’s online profits.”

Operates the most efficient supply chain (Back to top)

Not surprising, then, that our survey reveals that most respondents thought Amazon operates the most efficient supply chain, closely followed by Aldi and Tesco.

As we wait to hear when Prime Minister Theresa May will invoke Article 50, signalling the start of the UK’s exit from the EU, the food and drink sector is being encouraged to start planning now for the potential impact this will have on business.

“Food manufacturers must identify to what extent they are exposed or affected by Brexit,”​ suggests Richard Walters, principal consultant and head of food and drink manufacturing practice at supply chain specialist LCP Consulting.

“Areas they should consider include migrant labour, off-shore manufacture, location of supply chain assets, and their reliance on export markets and where those markets are located.”

“They also need to be clear on what they can and can’t control. On one hand, they can’t control factors such as migration policy, trade agreements, fiscal policy and regulatory requirements.

“On the other they can control their customer proposition, sourcing and supplier base, capital investments, production and distribution networks, and their talent and skills.

“Preparation for the future is critical – and modelling the different scenarios, understanding what the economic impacts may be and building operational plans to ensure the optimum future business and supply chain model.

“Long term, and irrespective of the final form of bilateral trade agreements, there will be a big impact on supply chains because of major effects on processes, network infrastructure, organisation and people, and financial flows.”

But, even before the Brexit vote, the industry was feeling the cold winds of change, as intense competition between the major multiples and limited assortment discounters forced the big four to undertake range reviews and reduce the level of stock-keeping units they hold.

Improve their efficiencies (Back to top)​ 

Nick Hay, chief executive of third-party logistics provider Fowler Welch, urges manufacturers to improve their efficiencies, focusing on consolidation and collaboration within their supply chains.

“Suppliers, particularly small and medium-sized enterprises, need to be flexible and agile to counter this trend and avoid inefficient supply chains becoming costly to the business,”​ warns Hay.

“Supermarkets are facing a number of changes to the way their customers shop and this is in turn directly impacting suppliers, with brands finding themselves competing more fiercely than ever for customers’ money.

“Brand loyalty is a thing of the past, as purchasing decisions are based mainly on price and consumers are prepared to shop around for the best bargain.

“With this trend looking unlikely to disappear anytime soon and with the pressure of up to 40% of total volume being sold on a promotional offer, manufacturers need to be clever in the way they operate their supply chain to meet these needs in the most efficient and cost effective ways.”

Hay will no doubt be encouraged that an overwhelming 76% of respondents in Food Manufacture’s supply chain survey believe there are increasing efforts from their customers and suppliers to work more collaboratively with them.

The full results of Food Manufacture’s supply chain survey, together with a report analysing the results, will be available to readers of our free monthly supply chain newsletter.

Related topics: Supply Chain

Related news

Show more