Getting properly organized is how large and small food retailers in the Middle East can get a better deal.
In the UAE as in Europe and elsewhere, local grocers and corner shops are declining as the main purchase point for food products transfers to the large supermarkets and discounters such as Aldi. Yet there’s an essential place for both.
Consumers often don’t want to drive several kilometers out of their way for a few groceries. But neither do they want to see large differences in price between the two food outlets for the same item. The solution is to exploit the advantages of Centralized Distribution.
A fresh approach to distribution
The concept behind Centralized Distribution is simple. All suppliers deliver to one central point. The centre receives orders from the end users (the retail outlets) and sends consolidated deliveries that comprise goods from a number of suppliers. The volume of delivery goes up while the quantity of delivery journeys goes down. There are two distinct phases in Central Distribution, taking a large supermarket chain as a model:
Phase 1: On-boarding
The supermarket approaches all its suppliers and mandates that all deliveries now be made to its single centralized distribution centre. The previous practice of manufacturers and distributors delivering individually to the supermarket’s many retail outlets spread across the country is discontinued.
In return for making this economy, the supermarket asks its suppliers for a supplier discount that is roughly equivalent to the saving gained by not having to undertake multiple deliveries.
Suppliers to the supermarket chain see this as a benefit because they can keep sales up and reduce administrative costs by dealing with only one order delivery point. They can put other stocks on their vehicles if they own them or reduce spend with third party (3PL) providers.
The supermarket is able to hold or lower its own prices to end consumers and maintain high product availability. The environment is supported by having fewer and larger trucks on the road. It’s a win-win situation for all.
Phase 2: Balance of power
The supermarket should start to see lower costs once Centralized Distribution is established and all manufacturers and distributors are delivering correctly and on time.
However for suppliers this means a significant decrease in power. Further discounts are then requested, If they don’t agree – which could involve removing or scaling down their infrastructure in terms of their own vehicles or 3PLs and moving over to the simplified delivery process – they could be delisted.
The high pressures and competition in the food chain leads to pressure by the final customers for lower cost produce. In turn, this compels all others to adjust their work methods. The balance of power shifts even more to the retail end.
Advantages for small retailers too
The fact that there’s a centralized source for multiple food and non-food products with the capabilities of a multi-user network (3PL) allows the smaller retails (such as local mosque shops and small independent supermarkets) to stay in the game. They can still get their supplies at reasonable prices.
What’s beyond doubt is that we’re seeing a dramatic increase in the retailers’ control of the supply chain as the trend towards Centralized Distribution in the Middle East replaces Direct Store Delivery.