The DSD Dilemma

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The DSD Dilemma

By Bob Gatty

Faced with continued soaring costs for fuel and ingredients, many companies that serve the convenience store channel are searching for ways to cope -- without jeopardizing their positions with retailer customers and their cherished shelf space in the more than 145,000 c-stores nationwide.

No easy trick, but many suppliers are determined not to move away from their direct-store delivery (DSD) method of distribution despite some pressure for change -- including a call by Joe DePinto, CEO of 7-Eleven, to replace DSD in convenience with a "consolidated" system of distribution. (See "Grocers Love Their DSD," page 127.)

Speaking at a beverage conference in May and later in an extensive interview for Convenience Store News' cover story in July, DePinto called DSD a "fragmented and inefficient" system that clogs c-stores with as many as 50 to 60 deliveries per week. His suggested solution: combining what are now DSD products, such as beer and soft drinks, in a distribution center and delivering them together on the same truck. 7-Eleven is planning to test such a system in southern California later this year.

As diesel fuel approaches $5 per gallon, and the cost of commodities keeps increasing, some DSD suppliers are searching for ways to preserve their profit margins -- often through overall price increases, fuel surcharges and distribution efficiencies, including making fewer deliveries.

"The frequency of deliveries of some DSD vendors has decreased," acknowledged Tim Tilford, vice president of marketing at Hucks Convenience Stores, a 108-store chain based in Carmi, Ill., which serves Illinois, Indiana, Missouri, Kentucky and Tennessee. "They try to justify it by saying they are being more efficient, but it's all a disguise for trying to cut their costs. We have been fighting this problem for years."

To improve efficiency with some of those DSD products, Hucks opened a centralized warehouse five years ago where it handles dairy, ice, bakery and other products, delivering to the company's stores as needed. Tilford said Interstate Brands, for example, delivers its Dolly Madison line to the company's warehouse for store distribution, although its Hostess products still are delivered via DSD.

Tilford was impressed with DePinto's call for DSD reform in the convenience channel. "He's trying to take costs out of the system. Too many times we have too many big egos in this industry. We need to be open to change."

Distributors See Opportunity

A number of c-store distributors report increasing business opportunities stemming from retailer concerns over reduced DSD service and/or higher costs.

"We have seen a reduction of services offered and territory covered by snack, sandwich and pastry distributors," said Justin Erickson, chief executive officer at Harbor Wholesale Grocery Inc., Tumwater, Wash. "The vendors that continue to provide quality DSD service are raising prices and increasing fuel surcharges. The broad line wholesale distributors can offer a more compelling savings opportunity to the retail community. In our case, retailers are already paying our fuel surcharge, [so] any incremental business comes without the extra cost."

Mark Davenport, president and chief operating officer at JT Davenport & Sons, a Sanford, N.C.-based convenience store distributor, said the trend has been building for the past several years, but is gaining momentum because of high delivery costs.

"You could really go back as far as the heath and beauty care (HBC) old rack jobber system where the HBC and general merchandise switched from the DSD channel and [now] primarily is serviced through the warehouse system," he said. "This was driven primarily due to the cost efficiencies in the two different systems. A few years ago smaller c-stores began to complain about service they were getting from bread and milk vendors. Again, we put in both a milk and bread delivery program to accommodate these accounts and help fill that void. Now, the novelty guys are struggling, and we are there with a warehouse novelty program that is effective, efficient and serves most c-store needs. As long as the cost of the delivery system continues to skyrocket, the warehouse delivery system remains the most efficient method to get product to market. What's next? Sandwiches. We are testing fresh sandwiches now. We are testing pallet deliveries of beverages now."

At Grocery Supply Co., a division of GSC Enterprises Inc., a c-store distributor based in Sulphur Springs, Texas, Steve Shing, corporate vice president of sales and marketing, gives these examples of new business opportunities resulting from customer unhappiness with DSD service and cost:

-- A chain group asked if GSC could develop a set that would compete with DSD snack products due to fuel charges.

-- A Dallas/Ft. Worth dairy increased minimums causing some retailers to consider moving their dairy business to GSC.

-- Another chain switched to GSC on foodservice primarily due to fuel surcharges by its current foodservice provider.

"We have not been forced to switch [from DSD to warehouse delivery] as of yet," said Sonja Hubbard, chief executive officer at E-Z Mart Stores Inc., Texarkana, Texas. "Most vendors have continued to support their deliveries and even those that cut back did not really impact our in-stock status."

What did "yet" mean?

"If things keep going up, we will have to look at it, but not yet," explained E-Z Mart category manager Ron Gillion.

But like many companies, E-Z Mart, which has more than 300 locations in Arkansas, Texas, Louisiana, Oklahoma and Missouri, is taking steps to cope with higher costs, and in some cases, reduced deliveries from some DSD suppliers.

The company now sells its own soft drink brand, "YIKE'S," which Gillion says is available in all stores at a lower retail price "to off-set sticker shock of DSD brands." YIKE'S, bottled in Paragould, Ariz., is distributed through Grocery Supply Co. There are five flavors with two more on the way, and it retails at 99 cents per 20-ounce, compared to the major brands at $1.49 to $1.69.

Challenge for DSD
For many snack manufacturers that rely on DSD to serve c-store customers and maintain their shelf positions, increasing production and fuel costs is a significant challenge, but they appear determined to maintain service and remain price competitive.

Tom Dempsey, president of Utz Quality Foods, based in Hanover, Pa., said his company operates 900 DSD routes, of which 700 are company-owned and -operated with the remaining handled by independent operators. Utz has "absolutely not" reduced deliveries to c-store customers, nor has it imposed fuel surcharges despite steadily increasing costs, he said.

"We're trying to battle as best we can by buying efficiently on the commodity markets and being as efficient as possible in our operations," Dempsey said. "We have taken some price increases and some weight adjustments, but they don't come close to covering our increased costs."

For his product category, Dempsey does not believe using warehouse distribution is the best alternative. "Not for our product lines," he said. "We have a delicate product, and it's an expensive quality control issue, but maintaining quality is extremely important and we can do that best with our own employees."

Further, Dempsey and others in the DSD snack category care strongly about preserving their ability to manage shelf space within the store and protect their turf. "If some people in the category are DSD and others go through the warehouse, it can be a situation where space is compromised," he said.

At Shearer's Foods Inc., which produces its own brand of chips and other snacks in Brewster, Ohio, as well as private label brands, Bill McCabe, senior vice president, sales and marketing, said, "even in these tough times we've increased service levels, depending on sales movement. The last thing you want is to have an out-of-stock. You need to have a nice variety and great looking displays. To do that, you have to provide service."

Mike Schena, general manager at Better Made Snack Foods Inc., Detroit, said his company operates 180 DSD routes, with 22 "house" routes and the remainder apportioned among a group of distributors. Better Made likes to combine smaller c-store stops with large customers like Meijer, Kroger, Sam's Club or Wal-Mart.

"Increasingly, we want to get fewer stops and higher volume per stop," he explained.

As industry consultant David Bishop, managing partner of Balvor, Barrington, Ill., pointed out, "Smaller drop sizes per delivery eat into profit margins, motivating these changes, and that motivates some retailers to search for alternative sources."

Higher costs for potatoes, film for snack bags and other commodities are biting into profits, Schena acknowledged. "Cooking oil last year was 35 to 36 cents per pound. This year it's 92 cents. I use 125,000 pounds a week -- that's about a $2 million up-charge this year over last, just for cooking oil."

How is his company responding? Very carefully.

"It's a matter of survival. We can only absorb so many of these increases. But reducing the service level should be the last thing you do," Schena said. "It directly reduces your ability to control shelf space. If you are not making the turns, they are going to give the space to somebody else. With good service, a good product and good quality, you always win."

Snack producer Herr Foods Inc., Nottingham, Pa., operates a DSD route system and also uses independent distributors to reach its c-store customers, said Daryl Thomas, senior vice president of sales and marketing. Like Utz and Shearer's, neither fuel surcharges nor wholesale delivery reductions have been imposed -- although frequency of delivery is being examined in some instances.

But any such action must be taken with great care and not at the expense of maintaining product on the shelves, Thomas emphasized. "You don't want to walk away from your customer. They will remember who didn't service their needs when the going got tough. You're cutting off your nose to spite your face if your shelves are sitting empty," he said, noting some of his competitors have established minimums for delivery to any single account. "They say, 'If you can't do better, buy it at the club stores.'"

The NSD (No Store Delivery) Alternative

That's exactly the route of Sam Odeh, owner of the new $3 million Power Mart store in the Chicago suburb of Palos Heights. In fact, he buys virtually all of the products carried by the 2,150-square-foot store at a Sam's Club just a couple miles away.

"We do not deal with DSD vendors," he said. "We have one source: Sam's Club. We get a better price, meaning a better margin and more turns, and we don't have to put up with any of the DSD issues." Every week, the store faxes an order to Sam's and then sends a van to pick it up. Coke, Pepsi, milk, cigarettes -- almost everything, Odeh said, is bought that way.

Odeh is working on two more convenience stores and plans to follow the same approach.

"We'll just buy a bigger van," he said.

For perishable foodservice items, Odeh buys from Restaurant Depot, located about two miles away from the store. "We go pick it up ourselves and save the $20 delivery fee. It's about a two-hour experience." For snacks, the company buys from Sam's and then repackages products in its own kitchen under its American Wood Grill brand.

"Because of the pricing at the club stores, it becomes very appealing for the smaller operators to buy those products there," Bishop observed. "It helps to make them competitive."

Of course, that's a huge problem for convenience distributors who often cannot purchase their products for resale as cheaply as they are sold at the wholesale clubs, and still, they said, must provide the service that is expected by their customers.