By Louisa Hosegood, Digital and Strategy Director, Bis Henderson Consulting
The businesses that bring food and drink to our tables are facing a period of fundamental change, unprecedented in its speed and scope. Bis Henderson Consulting is working with many leading companies to help them establish what this means for their sourcing, stocking and distribution operating models and assets.
Historically, the food industry has been fertile ground for innovation, whether this be in manufacturing, preserving and packaging techniques, the development of novel product groups, or new retail models. But the industry has always been in control – and has often been criticised for this. But now, companies are having to navigate in crosswinds that are not of their choosing – there are significant changes in consumer preferences, sourcing and supply, routes to market and new challenges from innovative competitors.
Many of these trends are pulling companies in different and conflicting directions, and in a low-margin, high-volume industry a trend doesn’t have to capture a large part of the market to be seriously disruptive.
Consumers, in difficult times, are more than usually sensitive to price, but on the other hand there is increased demand for the novel and the unusual, for foods with ‘authenticity’ and provenance, foods that are ethical, and carry less packaging. ‘Plant-based’ eating, from occasionally vegetarian to full-on vegan, is increasingly significant, as is fresh produce. Products hitherto considered ‘premium’, and priced accordingly, are now mainstream. This presents new opportunities for smaller, specialist brands but only if they can align their costs and processes – especially in logistics – with the needs of the major physical and on-line retailers.
Import and export disruptions brought about by Brexit may or may not become a permanent factor and international lanes generally have been massively disrupted by COVID, but there are deeper forces at work on traded commodities such as wheat, soya or sugar. Some manufacturing is being re-shored to reduce risk and shorten distribution lanes, but for many products, from fresh citrus to tinned tomatoes, this is not an option.
The biggest changes are visible in how we actually buy our food. ECommerce and home delivery have, in a year, reached levels that were expected to take a decade. ECommerce isn’t going to be the dominant route to market, but it is sufficiently large that it can no longer be run as a ‘loss leader’ or resourced by piggy-backing on the physical store system.
Consumers expect home deliveries with speed and convenience, and at little or no ‘extra’ cost – although the costs have to be recouped somewhere. But the pandemic has also brought, at least a significant uptick in use of local and convenience outlets. These necessarily have higher costs to service than the larger supermarket outlets, traditionally reflected in higher prices, but that differential may no longer be acceptable to consumers. They may also be challenged to widen their assortments.
There is further uncertainty for businesses supporting the hospitality and events sector – as to what extent, and at what rate, ‘eating out’ will bounce back is at present unknowable.
Home delivery is an additional, not a replacement, activity and there are growing concerns about the country’s ability to resource all this – shortages of physical assets such as suitable warehousing or sites for micro-fulfilment centres, shortages of warehouse labour (redeploying retail assistants is not that simple), and especially a shortage of drivers.
For the established players there is new competition – the discounters, Amazon, suppliers delivering Direct to Consumer, new grocery fulfilment specialists. And as if this dish needed any more seasoning, the markets are active – Asda already sold, and interested parties circling Morrisons.
Against this complex background, Bis Henderson’s food industry customers are seeking our help in three distinct areas.
1. PHYSICAL NETWORKS
Companies need to re-assess their physical networks: they need to know how responsive their networks may be to changes in costs, velocities, volumes and in the suppler base, in total and across the different lanes and channels. Is there flexibility for the future? Post-Brexit, our understanding of ports, hubs, nodes, carriers across the EU has become more rather than less important. Data analytics is key – we help companies overlay the idealised model of their network with real world constraints, such as labour availability, inbound supply routes, lead times and delivery restrictions.
2. OPERATIONAL EFFICIENCY AND CAPACITY
Secondly, businesses have to optimise operational efficiency and capacity. That includes creating greater capacity in an environment where the option of adding extra warehousing space is very limited. The same applies to transport utilisation as the trucks may be there but the drivers aren’t, so empty and LFL (Less than Full Load) running has to be addressed. Could multimodal work this time?
In the warehouse, labour constraints, the need to maximise space usage, and the need to fulfil growing order volumes cheaply, speedily and accurately, suggest that appropriate automation of warehouse operations and business processes is essential. We bring our expertise across all types of automation and mechanisation to identify the solutions for particular operations that truly add value and can be built on going forward.
We also help firms tender, retender and benchmark their 3PL contracts to ensure they are optimising cost, service and flexibility.
The whole approach to operational efficiency and capacity gains has to be grounded on controlling the cost to service, and thus supporting price competitiveness to the customer.
3. ECOMMERCE OPERATIONS
Thirdly, our clients are also looking for advice in developing and refining their eCommerce operations. The eCommerce challenge starts with defining the customer offer – consumers want speed and freshness, yes, but just how fast and what are they prepared, directly or indirectly, to pay? From that we can help work out how to fulfil. This might involve current networks and shops, or even dark stores or micro-fulfilment centres. And again, we have to keep the client focused on cost to serve – which can easily get lost beneath gross margins and market shares.
A current assignment of ours that illustrates many of these factors is our work for Instacart. The name may be unfamiliar, so far, in Europe, but in the US they are the largest grocery fulfilment operation after Walmart.
Instacart is a rapidly growing US-based grocery fulfilment company with significant market investment which is seeking to sustain its expansion through the adoption of a range of automated warehouses. These operations will range in scale from a micro-fulfilment facility adjacent to an existing store to a stand-alone dark store capable of processing over 750k items per week, the majority of which are same day.
They are currently commissioning two trial facilities in the USA for 2021, with a potential roll-out of multiple facilities to follow.
We have been with them since day one and are central to the overall solution design process, providing expertise and insight in several areas including RFQ management for the automation providers and creating the overall resource and facility design, and determining outline capex and operating costs and systems architecture recommendations.
Back in the UK, we are looking at the network of one of the large multiples. With explosive growth in eCommerce capacity in their ageing and historic network is under huge pressure. We have been working with them for two years optimising network configurations and warehouse efficiencies as far as can be. We are helping them translate their business requirements into new space and to consider how automation can contribute to a step change in their operations.
In food manufacturing, our work with a large dairy manufacturer is helping another historic pan-European network cope with rapidly changing cost and service pressures. A review of the physical network and a drive to simplify operations has revealed opportunities for a step change in transport efficiencies with a new approach to carrier contracts, while improving warehouse operations, flows and layouts and getting more out of existing automation.
There is no ‘silver bullet’ for the logistics challenges facing the food industry, and with ever evolving consumer demands that is probably as it should be. Competition is rebasing on combinations of price, quality, assortment, availability, service, and values, to which businesses attach differing weights. We can help find logistics and fulfilment solutions that unlock value, now and for the future.