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    Supplying Change

    Consumer demand for fresh products is altering supply chain dynamics in the c-store industry

    Nice N Easy relies on multiple wholesalers because of its expansive foodservice and grocery offerings.

    Few convenience store retailers have the size, resources and expertise to handle distribution of product directly from the manufacturer to their stores.

    Chains such as Sheetz Inc., Kwik Trip Inc. and CST Brands Inc. control their own supply chains and reap numerous benefits. They either buy directly from manufacturers or make, bake and process their own fresh goods and act as their own distributor, shipping the products ? in some cases, on their own trucks ? from their own warehouse to their stores.

    However, most convenience store chains, large and small, rely on broadline wholesale distributors for the majority of their goods (see our list of the top 30 wholesalers on page 52), supplemented by several direct-store-delivery (DSD) distributors for such products as dairy, salty and sweet packaged snacks, soft drinks and beer.

    Recent years have seen more complexity added to the c-store industry distribution supply chain as consumer demand for fresh products has driven many c-store retailers to rely on commissaries, specialty distributors and, in some rare cases, restaurant industry distributors to grow their foodservice and fresh-food business.

    In an ideal world, every convenience store operator would be able to compete on even footing with big-box retailers and have their own warehouse and distribution network. But c-store retailers live in the real world.

    Matt Paduano, vice president of category management for Nice N Easy Grocery Shoppes Inc., admits he would prefer that the Canastota, N.Y.-based retailer have its own warehouse, but it doesn?t make sense considering the retailer?s size.

    Nice N Easy (soon to be acquired by Corner Store parent CST Brands) is a chain of 77 stores across central New York State. The company operates 33 of those stores, he explained, adding that ?a small group like us having our own warehouse is not feasible.?

    Instead, the retailer relies on Gardiner, Maine-based Pine Street Trading Co. for traditional c-store products like tobacco and candy, plus four or five specialty wholesalers for its foodservice and grocery offerings. For example, it receives deliveries from Olean Wholesale, a grocery co-op based in Olean, N.Y., and River Valley Foods based in Syracuse, N.Y.

    Nice N Easy needs multiple wholesalers because its expanded foodservice program offers items traditional c-store wholesalers cannot accommodate. In addition, some of its locations are more like smaller grocery stores than convenience stores, Paduano explained.

    ?With our expanded grocery items, the traditional c-store guys can?t handle what we need,? he said. ?You need to go where the experts are and most c-store wholesalers are not experts in foodservice.?

    Multiple wholesalers, however, mean multiple deliveries and that adds up to challenges at the store level. During the average week, a Nice N Easy store receives 50 to 60 deliveries, which equal roughly eight trucks coming in and out of the parking lot each day, Paduano said. The number of daily deliveries not only takes up valuable space in the parking lot, but also takes personnel off the sales floor as they pack out items.

    Nice N Easy found a partial solution to the problem by switching its Pine State deliveries to off-peak hours, between 6 p.m. and 6 a.m. The retailer made the switch four years ago.

    ?It makes it easier for them. There is less traffic; they are able to get in and out and they don?t have to fight [for space] with other vendors,? Paduano said. ?Now, we schedule accordingly. If we know they are coming at 2 a.m., we schedule labor so as soon as the delivery is made, the items are put away.?

    Nice N Easy has tried to get its other wholesalers to make the switch, but they either aren?t equipped to deliver off-peak or they don?t have the infrastructure.

    Industry talk about consolidating distribution is great in theory, Paduano said, but high-volume stores cannot get by on one or two deliveries a week. ?You almost need four or five a week.?

    CONSOLIDATING DELIVERIES

    The nation?s largest c-store chain has been testing consolidated deliveries from multiple vendors, and it?s questionable whether even 7-Eleven Inc. has the size and clout to pull it off.

    Christy Clinger, vice president of logistics and demand chain at Dallas-based 7-Eleven, told the website Supply Chain News last year that the majority of product gets to its stores via wholesale distributors, while the rest comes from direct-store deliveries from some vendors, such as soft drink and beer suppliers; deliveries from 7-Eleven?s own trucks for the chain?s growing assortment of fresh food items that are delivered daily; and center-store items that are delivered as often as twice a week.

    As a result, individual stores could get as many as 50 deliveries per week, with each delivery disrupting operations at the store level. In an effort to reduce that disruption and save on delivery costs at the same time, Clinger told Supply Chain News the retailer has been using a different model on the West Coast over the past couple of years. In this model, 7-Eleven moves some former DSD products into its distribution centers (DCs) and then delivers all DSD, fresh food and center-store products on a single truck three times per week. This has cut weekly deliveries to some stores by more than half, to just 17 or 18 per week, according to Clinger.

    Executing this strategy on a national scale has its obstacles, though. For example, laws in some states guarantee the rights of local soda and beer bottlers to deliver products to retailers within their territories. Attempts to get bottlers to deliver product to the chain?s DCs proved too challenging, Clinger said, so instead it began buying Coke and Pepsi products from the wholesale club Costco by the truckload, bringing them into its West Coast DCs and then picking those products for store delivery along with other items ordered by the stores, according to the Supply Chain News report.

    ?As retailers get bigger, there is definitely a threat to traditional wholesalers that these retailers will take over their own product distribution,? Edward Davidson, a former, longtime 7-Eleven executive, told Convenience Store News.

    Davidson feels ?it isn?t right? that Walmart ? a direct competitor to c-stores ? can sell motor fuel for less than the cost to a c-store retailer. C-store retailers have to make difficult decisions about what products, or even product categories, they should sell if they can?t be price-competitive, he noted.

    CONVENIENCE DOESN?T COST MORE

    Tom Joyce, vice president, global customer and industry affairs at The Hershey Co., describes the perception that customers must pay slightly higher prices in exchange for the luxury of convenience as just that ? a perception, not reality.

    ?Traditionally, convenience stores have had higher prices on products than a traditional grocery store,? he told CSNews. ?But in today?s world, the convenience store retailer has very competitive prices with the other retailers like grocery stores and dollar stores.?

    One reason for this is that convenience is no longer the only major benefit the channel can offer, according to Joyce. As c-stores have expanded the variety and quality of the products they offer, as well as their quality of service, customers are more likely to seek out their favorite locations. ?It?s almost a destination for some customers.?

    Hershey utilizes wholesale distributors for the vast majority of its c-store customers. Certain chains, such as Sheetz, buy directly from Hershey, but in these cases, the c-store chain acts as its own distributor, shipping the products out from its own warehouse to its stores.

    The use of wholesale distributors instead of direct store delivery has been a key part of Hershey?s development into a candy category leader, according to Joyce.

    ?Distributors started selling cigars and tobacco to corner stores and shoppes over 100 years ago. Some salesman convinced them to put candy bars on their cart. I don?t know who it was, but they should build a monument to him,? he said. ?When he went in to deliver his tobacco, he asked the owner if he wanted some candy. ? He took in the box of candy and put it by the cash register. That certainly helped establish our company because it increased our distribution to many locations.?

    Since then, and in the years since Joyce joined Hershey nearly 40 years ago, the world of wholesale distributors has seen increased consolidation, but there are still a ?tremendous? number of distributors in operation, he said. Those that remain have had to adapt to a changing marketplace.

    ?Not only have the distributors become more sophisticated; the distributors have done a good job trying to figure out how to increase their growth with less tobacco sales because tobacco is declining,? Joyce said.

    Keeping up with advances in technology is also crucial for all parts of the industry, he said. ?Everybody has to grow with technology in order to be efficient and to survive.?

    DEMAND FOR FRESH

    Still, the biggest impact on wholesale distribution during the past five years has been the need to keep up with consumers? changing tastes, according to Christopher Hobson, senior vice president for Core-Mark Holding Co. Inc. Today?s consumer seeks products that are either freshly prepared on-site or ones with limited shelf lives.

    ?This new consumer demand has expanded the amount of refrigerated product a retailer must carry and a distributor must deliver,? said Hobson. ?The expansion of refrigerated products has placed many challenges on the distributors servicing the small-format stores. Today?s broadline distributor must possess the ability to handle multi-temperature platforms in the warehouse as well as on the delivery vehicle. In addition, a broadline distributor must ensure the integrity of the products moving through each stage of the supply chain.?

    The investment needed in cold-chain assets is very costly, into the millions of dollars, Hobson added. ?It is essential a retailer partners with a distributor who is or has been willing to invest in the cold chain,? he said. ?Today?s c-store supply chain has come a long way over the past decade. But with that said, it is still highly inefficient compared with other retail formats a c-store must compete with for shopper spending.?

    Steve Montgomery, president of b2b Solutions LLC, a consultancy that specializes in working with retailers and suppliers in the convenience retail and petroleum marketing industry, also sees the demand for fresh products as one of the biggest challenges facing distributors today.

    ?In order to deliver ?fresh? items, a distributor has to be at the store at least twice per week,? Montgomery told CSNews. ?This raises the cost as the per-stop invoice declines. We are already noted to be a high-cost-of-delivery industry.?

    Pointing out that retailers with one to three stores comprise a large portion of the industry, he said another challenge is finding a profitable way to service the independent retailers who tend to buy their goods at warehouse clubs or cash-and-carries.

    ?This results in [retailers] often having too high an inventory per item, wear and tear on their vehicles, time out of their stores, etc.,? Montgomery explained.

    Bill Scott, a convenience store consultant and president of StoreReport LLC, agrees that c-stores carry too much inventory. Through his studies and data analysis dating back to 2009, he said c-stores have twice as much inventory in their store than they need to meet customer demand.

    ?Inventory specialists at the distribution centers were used to putting inventory in grocery stores so they just adopted the same kind of method of supplying convenience stores. A culture evolved,? Scott said. ?First thing we need to do is reduce the amount of inventory in the stores and get suppliers to cooperate. If we can do that, we are on the way to real success in the stores.?

    To achieve this, Montgomery believes there are big challenges on the distributor side, specifically the vast amount of items they must carry in order to meet the needs of their customers.

    ?I have seen studies done that indicate the sales breakdown goes far, far beyond the 80/20 rule, even excluding cigarettes,? said Montgomery. ?On the other side, we have seen retailers who carry items that have minimal movement. Working together, distributors and retailers do a far more effective job of SKU rationalization.?

    David Bishop, managing director of the c-store consultancy Balvor LLC, agrees with both Hobson and Montgomery about the impact of changing consumer needs. The same market factors influencing retailer strategy are impacting how wholesalers go to market.

    The decline in cigarette volume and margins has spurred retailers to shift to fresh-food sales for the revenue growth, higher margins and ability to differentiate, according to Bishop.

    ?Fresh food has been challenging for wholesalers,? he said. ?An increasing number of chains are investing in their own distribution. Some have their own infrastructure, like Kwik Trip and Sheetz, while others own their own distribution center but outsource management to a third party.?

    THE PROS OF DOING IT YOURSELF

    CST Brands, the 1,000-plus convenience store operator based in San Antonio, is a hybrid of sorts when it comes to distribution. CST owns its own distribution center in Texas, but it contracts the operation of the warehouse to a more experienced wholesaler ? Core-Mark.

    ?We don?t have any dreams that we could have done this on our own,? said Hal Adams, chief marketing officer of the fast-growing retail chain. Adams said the retailer?s initial reason for going the self-distribution route was the opportunity to accelerate the consolidation of vendors and eliminate as many separate truck deliveries to its stores as possible.

    ?We had delivery trucks for bread, milk, pastries, two different soft drink companies, newspapers ? every day or several times a week from each of them,? Adams told CSNews. All these deliveries represented real and hidden costs to process invoices, stop and count the product upon delivery, large trucks taking up customer parking spaces, etc. ?By consolidating those deliveries onto fewer trucks, we could reduce back-office and unseen costs.?

    The retailer also saw benefits from more regular deliveries of fresh and perishable food to its stores, supporting its strategic push into foodservice. And, by being so intimately involved in its own supply chain, CST learned to do a better job of controlling the amount of inventory it holds at the store level. ?We?ve brought down inventory levels, the stores look cleaner and we have better turns on shelf-stable, non-perishable products as a result,? Adams said.

    Owning its own DC ?enables us to get into the P&L [profit and loss statement] more deeply,? he added. ?Maybe what you?re seeing is that retailers who self-distribute think more globally about logistics and understand logistics better. They think differently.?

    The pros of self-distribution are easy to understand as retailers can control their own supply chain, noted Hobson of Core-Mark. They can carry the products they want and make as many deliveries as they desire to their stores.

    But he stressed that self-distribution comes with one major negative: cost.

    ?The broadline distributor has the ability to spread the fixed costs associated with being a distributor over all of the customers it services. ? In addition to cost, broadline distributors have developed systems, technology, processes and a talented pool of individuals to ensure their operations are as efficient and economical as possible. A retailer who chooses to self-distribute will normally not have these resources in-house and will have to outsource these needs.?

    Being transparent and agreeing on proper returns on the assets deployed for each party are the best ways the convenience store industry can work together to improve supply chain efficiencies in the channel, said Hobson. This would take price off the table and allow the focus to shift to strategic components of the supply chain.

    ?We could then build the most efficient consumer-built distribution platform,? Hobson continued. ?It would serve all our needs, but more importantly, it would be focused on consumer demands, desires and wants, which would be the secret sauce. The supply chain we have today was built without strategy or well-thought-out plans and that is why it does not serve its constituents terribly well. It basically gets by in an ?adequate? mode.?

    DEFENDING DSD

    Size does matter when it comes to direct store delivery. ?DSD can be an expensive route to market, but we have the scale to make it a powerful advantage for our convenience retail customers,? said Jay Ard, vice president, convenience retail channel for The Coca-Cola Co.

    Speed is the key difference and advantage of DSD distribution. After an account manager visits a store to discuss business-building opportunities, checks the in-outlet presentation of products and writes an order for product replenishment, the order is processed and delivered within 48 hours.

    Coca-Cola also works with customers that have the ability to send electronic purchase orders. ?This process typically happens once a week, but it can be more or less depending upon consumer demand at the outlet,? Ard said.

    As a major supplier, Coca-Cola has the resources to provide a professional team with the experience and expertise that many smaller format retailers lack. The DSD model is used for most Coca-Cola products, but some of its chilled juice products use the warehouse route to market due to the need for a temperature-controlled supply chain, Ard noted.

    In his view, the greatest impediment to a smooth supplier-retailer-DSD relationship is a lack of quality data regarding c-store sales. When store operators are able to provide accurate data on a daily basis, their needs and the needs of their customers are much easier to meet.

    ?The biggest thing retailers can do to help improve service levels and supply chain efficiency is to provide DSD suppliers with their point-of-sale scan data,? said Martha Buffington, vice president, customer solutions, Coca-Cola Refreshments. ?Coca-Cola is using this real-time data to become more demand-driven, meaning that orders and deliveries are based on actual consumer pull rather than on forecasts.?

    Predicting demand allows the company to flex delivery frequency, thus improving in-stock rates while optimizing inventory for its customers.

    THE FUTURE OF DISTRIBUTION

    So, how will c-store distribution continue to change?

    Ard of Coca-Cola predicts that greater use of data, along with developments in technology, will make DSD a more demand-driven system. ?Sophisticated retailers will be able to provide suppliers with data on real-time sales, on-hand inventory and expected demand,? he said.

    Hobson of Core-Mark thinks it will be critical for retailers to consolidate their vendors into a broadline wholesaler. This will enable retailers to purchase the products their customers want on a multiple-times-per-week basis, including fresh foods. Additional retailer benefits would be greatly reduced out-of-stocks, increased inventory turns and better capital utilization.

    Montgomery of b2b Solutions anticipates more consolidation within the industry. He foresees larger distributors purchasing local warehouses to extend their reach and/or increasing their volume through their existing facilities.

    Balvor?s Bishop noted that some retailers might look more closely at self-distribution, but he feels it is more likely that through advanced technology, retailers will help develop and execute more efficient supply chain practices, and that as they invest in this technology, the cost savings will be shared across the supply chain.

    Finally, Adams at CST Brands acknowledges that self-distribution ?is not for everyone,? but he does put the responsibility for lowering supply chain costs on the retailer. ?Instead of looking for distributors to fix our problems, we need to look at what costs or practices we could change to make it easier to serve us. Do we have restrictions on delivery times? Do we allow electronic invoicing or XML processing of invoices? Do we force suppliers to go through a lengthy check-in process when they deliver to our stores??

    Adams noted that if retailers could work more closely with their wholesalers and suppliers, they could bring down the cost of goods.

    Retailers should be thinking about: ?What can I do to make it less expensive for that guy to do business with me?? Adams concluded.

    ?Instead of warehouse and DSD competing for space, both sides need to step back and ask: ?Is there a better way?? It will mean breaking down the existing systems.?
    ? Kit Dietz, Dietz Consulting LLC

    ?Not only have the distributors become more sophisticated; the distributors have done a good job trying to figure out how to increase their growth with less tobacco sales because tobacco is declining.?
    ? Tom Joyce, The Hershey Co.

    ?Instead of looking for distributors to fix our problems, we need to look at what costs or practices we could change to make it easier to serve us.?
    ? Hal Adams, CST Brands Inc.

    ?Working together, distributors and retailers do a far more effective job of SKU rationalization.?
    ? Steve Montgomery, b2b Solutions LLC

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