Volatile market forces produce mixed cost indicators for food distributors

Perhaps providing a mirror of volatile fuel prices and other market forces, key performance indicators for wholesale grocers and retail supermarket chains are mixed for 2004. The cost per mile for retail supermarket chain fleets rose 36 cents to $2.41, but the same cost indicator fell 14 cents to $2.01 for wholesale grocery distribution fleets. The same holds true for transportation cost per route, with cost rising $99 per route for retail chain fleets to $537 but dropping $13 per route at wholesale grocers to $456 per route.

This data is reported in the 2004 Food Industry Transportation and Fleet Maintenance Report prepared for the 2004 Productivity Convention & Exposition sponsored by the Food Marketing Institute. The conference was held in Dallas from October 17 to 19, 2004. Data for this cost survey was collected and analyzed by Richard H Kochersperger. His credentials include executive positions with Supervalu and in academia as Gerald Peck research scholar for wholesaling and retailing and director of the Center for Food Marketing of St Joseph's University in Philadelphia.

Although the cost per mile and cost per route experienced fairly large changes, cost per delivered case moved only slightly, dropping two cents per case to 31 cents per case for wholesale distributors, and rising three cents per case for retail chains. Prior to the 2004 survey, cost per mile had been relatively stable beginning a decline from $2.29 per mile for wholesale grocers in 2001 to $2.12 per mile in 2002, going back up slightly to $2.15 in 2003 and dropping once again to $2.01 for 2004. This stability has been clearer for retail chains with the cost per mile standing at $2.05 in 2001, rising to $2.07 in 2002, dropping again to $2.05 in 2004 before jumping 36 cents to $2.41 for 2004.

Wholesalers vs retailers

The transportation and fleet maintenance report differentiates between wholesale grocery and retail chain operations. The data usually shows that retail chains operate with a significantly lower cost structure than wholesale grocers. Apparently the customer service aspects of wholesale grocery delivery drive costs up far beyond the level experienced by retail chains that exercise tighter control over delivery operations. In the past, retail chains have delivered larger orders at each stop, traveled fewer miles per route, and spent less time handling merchandise at stores.

However, operating results for wholesale grocers and those for retail chains are much more similar for 2004, the report says. Many of the wholesale grocers responding to the survey now operate high volume distribution centers with the capacity to handle sales volumes of $1 billion or more a year. These distribution centers serve many high volume stores, including both independent grocers and retail chain stores. The higher volume for wholesale grocers has resulted in operating results in 2004 much more akin to retail chains than in previous years.

However, differences still exist. Retail chain fleets lost their cost per mile advantage in 2004, rising above the $2.40 per mile they reported in 1999, which was a huge jump from the $1.80 per mile reported by supermarket fleets in 1998. Kochersperger explains that such large shifts are probably more a reflection of which chains contributed data for the survey than any basic change in the underlying cost of retail supermarket distribution.

Mixed cost picture

Benchmark data for wholesale grocers in 2004 continues to show a mixed cost picture. Cost per mile in 2004 dropped for the second year in what may be a four-year trend. Cost per route shows a definite falling trend with recent survey data showing that an average wholesale grocery distribution route costs $529 in 2001, $501 in 2002, $469 in 2003, and has dropped to a low of $456 for 2004, actually below the most recent previous low of $464 set in 1999. Cost per delivered case remains stable at 31 cents per case for 2004 after two years at 33 cents per case. The current cost per delivered case is the lowest the survey has shown in 10 years and is well below the recent high of 39 cents per case reported in 2001.

Delivery cost as a percentage of sales remains essentially flat, with the FMI survey showing current wholesale grocer transportation costs at 1.59% of sales for 2004, following a year at 1.67% in 2003 and two years when the cost as a percentage of sales was 1.72% for 2001 and 2002. This is the lowest delivery cost as a percent of sales in 10 years, down from a high of 2.03% in 1995. In the past 10 years, this benchmark has dropped every year except 1999 when delivery cost as a percent of sales was 1.93%.

Cost per stop shows a slight upward trend at $234 per stop in 2004, up from $222 in 2003, $219 in 2002, and $221 in 2001. The most recent high for cost per stop has been $239 in 2000, and the 10-year low was $196 in 1999.

Retailer costs rise

For many cost categories, the conventional wisdom that retail chains can operate at lower transportation costs than wholesale grocers no longer seems to hold. For instance, cost per mile for retailers jumped to $2.41 in 2004, not only 36 cents per mile higher than the previous year for retail chains, but higher than the cost per mile for wholesalers in any of the previous four years in which retailer cost per mile had been consistently below that posted by wholesalers. The last time retail fleet cost per mile approached such a high level was in 1999 when the survey showed an average of $2.40 for supermarket fleets.

The same thing happened to transportation cost as a percentage of sales with retailers posting an average of 1.66%, slightly above the 1.59% reported by wholesalers. In the previous three years, retail transportation cost as a percentage of sales was quite a bit lower than the same cost levels for wholesalers. Cost per stop for retailers remains lower than cost per stop for wholesalers, but this benchmark has been rising steadily since 2001 when it was $168, rising to $188 in 2002, $191 in 2004, and topping out at $207 for 2004. Although the differential between retailers and wholesalers remains narrow, it still costs a wholesale grocer $27 more to make a delivery stop than it costs a retail chain operator.

After dropping for three straight years from 2001 to 2003, the cost per route for retail chains jumped $99 to $537 per route. For the corresponding four years, wholesale cost per route has fallen steadily from $529 in 2001 to $456 in 2004.

Cost per case rises

Retail chains and wholesale grocers have a comparable cost structure in cost per delivered case. In 2004, it cost retail chains 34 cents to deliver a case of goods, up four cents from 2003. In 2004, wholesale grocers paid 31 cents to deliver a single case, down from 33 cents per case in 2003. With the exception of 2001, when the cost differential was six cents per case higher for wholesalers than for retailers at 39 cents per case, the two groups have posted nearly identical cost data with no other year showing a cost differential of more than three cents. With the exception of 2004, retailers have consistently delivered at a lower cost per case than wholesalers.

Route productivity for retail chains and wholesale grocers is roughly equal. Wholesale grocer route productivity continues to grow; although, it still trails that of retailers by an extremely narrow margin. Wholesale grocers gained 285 pounds of payload per route to 31,416 for 2004, up from 31,131 in 2003. This benchmark shows a steady increase starting at 26,467 pounds in 1998.

Weight per route for retail chains was lower than that for wholesalers in 2002 and 2003. It climbed above the average for wholesalers to 331,770 pounds in 2004, up from 30,814 pounds per route in 2003. The last time retailers posted a higher weight per route was at 30,473 pounds in 2001 when wholesalers averaged only 29,321 pounds per route. This data does not suggest that retailers are less productive than wholesalers. Rather it shows the gains made by wholesalers in catching up to their historically more productive colleagues.

Slightly heavier cases

The average weight per delivered case seems to indicate that retailers and wholesalers continue to sell products packaged as single servings or as prepared convenience foods. In 2004, the average case delivered by wholesale grocers weighed 22.17 pounds compared to an average case weight of 20.68 pounds per case for retail chain fleets. Although workplace regulations designed to prevent repetitive motion and stress injuries are unlikely to be imposed again, average case weight probably will not change much as manufacturers concentrate on convenience foods.

Miles per route, an important factor in transportation costs, have grown for retailers in 2004, but dropped at wholesale grocers. For 2004, retailers experienced a slight increase in route mileage to 228 miles per route while wholesalers dropped an average of 28 miles per route to only 189 miles.

In the past, the number of stops per route has been relatively stable, and wholesale grocers ordinarily made more stops per route than retail chain fleets. That situation has been reversed since 2000 when the number of stops for both groups reached parity. For 2004, retail chains made more stops per route, 2.49, than wholesale grocers whose trucks stopped only 1.73 times per route. This is a wider differential than in 2003 when retailers delivered 2.23 stops per route compared to only 1.93 stops on a wholesale grocery route. In fact, the gap between the number of stops per route for retailers and wholesalers has been getting wider every year since 2001.

A parallel change has taken place in the number of cases delivered per stop, a category long thought to be dominated by highly efficient retail chain fleets. Beginning in 2000, that changed with retailers delivering fewer cases per stop than wholesalers and has remained so for five years. In 2004, retailers delivered an average of 618 cases per stops, down from 658 cases per stop in 2003. In contrast, wholesale grocers delivered an average of 819 cases per stop in 2004, up 79 cases from an average of 740 cases per stop in 2003.

Drivers lead cost factors

Drivers still account for the bulk of the cost of food industry delivery operations. The percentage of total cost attributable to drivers rose slightly to 58.5% of operating costs at $1.33 per mile, up 13 cents per mile from 2003 when drivers accounted for 55.99% of total costs at $1.20 per mile. Operating expenses, including maintenance, tire, and fuel add another 51 cents in 2004, up one cent from 2003. Fixed costs, including licenses, insurance, depreciation, taxes, and leases add up to 27 cents per mile for 2004.

The average wholesale grocer fleet ran more miles to serve fewer customers per route than retail chain fleets in 2004. The FMI report shows that tractors in wholesale grocery fleets ran an average of 110,646 miles compared to 101,478 miles for tractors in retail fleets. Although retail chains make more stops per route, those stops are closer together than those made by wholesalers with retailers running 89 miles per stop compared to 110 miles per stop for wholesale grocery fleets.

The average age of a tractor in wholesale grocery and retail chain fleets rose to 4.64 years in 2004, up from 4.41 years in 2003 and has been rising every year since 2000, when the average age stood at 3.9 years, the lowest average age on record. The 10-year high for this average is 6.95 years, reported in 1993.

The trailer fleet is slightly more than a year older in 2004 at 7.69 years compared to 2003 when the average trailer age was 6.57 years. The average age of trailers has been growing steadily since 2000 when it stood at 5.58 years; however, the current average trailer age still is a significant improvement from the 9.11 years reported in 1993.

Average refrigeration unit age is rising as well, up to 7.03 years for 2004 from 6.65 years in 2003. A significant portion of the trailer and refrigeration unit fleet still is older than 11 years. The percentage of trailers older than 11 years stands at 37.6% in 2004, and the percentage of the refrigeration unit fleet older than 11 years is 25.3% in 2004.

TAGS: Foodservice
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