Elevate Your Convenience Store Distribution Strategy:
5 Key Insights and Approaches
Traditionally, most convenience store retailers have relied on a grocery wholesale supply chain and distribution model as its convenience store distribution strategy because it maximizes efficiency and provides a one-stop shop for the majority of their tobacco and center store items. According to our independent research, 80% of the top 20 c-store retailers still rely on grocery wholesalers to some degree with 45% of them giving all their business to a single company. The remainder have elected self-distribution models or hybrids where they own the warehouses but operate them through management contracts with grocery wholesalers or use broadline food distributors to supply foodservice items to their stores.
The pace of change has picked up for convenience store retailers in the past few years. Pre-COVID, the mix for most retailers was already shifting from “Cokes and smokes” toward more fresh food, healthier options, local offerings, and proprietary or private label products, all of which are more challenging to distribute from a wholesaler perspective without adding significant costs. The pandemic merely accelerated these trends while layering on a slew of supply chain disruptions which complicated the distribution of products of all types even more.
Enter in inflation and rising costs. Many retailers are seeing their wholesale contract costs substantially increase after benefiting from years of minimal cost increases through long-term contracts and contract extensions offered throughout the pandemic. If they weren’t before, convenience retailers are now realizing that their current wholesale distribution model may not be as flexible or cost effective as it once was, especially as they consider how their organizations will continue to evolve over the next several years.
Revisiting distribution and supply strategy is key to sustaining competitiveness.
While it can be tempting to focus solely on negotiating better prices from manufacturers and wholesale partners, this approach misses opportunities to explore new and potentially more advantageous and profitable solutions that better meet the needs of the c-store industry today and in the future. Now is the ideal time for c-store retailers to think bigger picture about their overall strategies and the best ways to procure the products that will meet customers’ current and future needs.
To kickstart these conversations with your leadership team, here are a few approaches worth considering.
1. Diversify your Supply Chain partners. Volume discounts and simplicity are traditional drivers for a single wholesaler distribution model. Today, convenience store wholesalers are expanding their services to include foodservice and are getting creative with retailers on how best to meet their needs. The wholesaler acquisitions made by Performance Food Group (PFG) in 2019 and 2021 add PFG’s food and foodservice capabilities to its convenience store portfolio, it feels like this needs a few more words describing why this matters. Some retailers are already working with two or more wholesalers and/or giving part of their business to another regional player or broadline foodservice supplier.
While diversification can come with higher costs in the short-term, we’ve experienced that longer term, it can lead to savings and increased profitability. Diversification ensures a continuous supply of strategic items and allowing retailers to differentiate themselves from their competition. It helps safeguard against supply chain disruptions that one partner may be experiencing. Additionally, dual coverage for key items allows retailers to leverage and build on the strengths of each partner.
2. Understand how your business drives cost, or advantages, into your wholesaler’s operations. This knowledge can be very valuable and can even change how you connect with your supplier. For example, perhaps some delivery routes are unprofitable for one supplier but a good addition for another. The day of the week or the time of day for store deliveries might be more important than you realize, as well as knowing how many deliveries per week each store really needs. Sharing more information including overall strategy, POS data, promotional plans, and assortment changes with your wholesaler(s) can strengthen the partnerships and help drive costs out of the system. Proprietary and private label items can be costly to support. If they aren’t critical to your brand, that might be an area to drive costs out of your wholesaler’s operation and thereby out of your cost of goods.
Regardless of which or how many wholesalers you work with, being an attractive customer and having strong negotiating skills will make a difference. Consider doing your own inflation analysis. The more you know about where you can and can’t push for added services or cost reductions and the better you understand the profitability drivers for wholesale contracts, the better positioned you will be to secure the best possible supply arrangements for your business.
3. Consider doing some self-distribution. For some products, many c-store retailers work with food service distributors and suppliers in addition to their primary wholesaler partners. But it has only been the very largest c-store retailers that have been able to successfully pull off a self-distribution model. Indeed, only four of the top 20 organizations in the convenience channel are fully self-distributing today.
But with more companies moving toward fresh food, proprietary, or locally sourced products, introducing self-distribution for some items is becoming a more popular approach. Currently 45% of the top 20 retailers employ self-distribution to some extent, even if the majority of their products remain supplied by a grocery wholesaler or broadline food distributors.
Greater flexibility around product mix, service levels, and differentiators—including fresh food and propriety products delivered daily—is the major advantage of self-distribution. But flexibility comes at a cost. Companies will have to explore the tradeoffs between the two approaches and consider the infrastructure and process changes that will be part of the solution.
One mid-size retailer, for example, invested in building a commissary behind one of its stores and is using this new facility to ship food items to other stores in its chain. On a grander scale, Dollar General has constructed several new distribution centers to aid in its DG Fresh initiative and is actively building a supply chain network to enable self-distribution as part of its larger corporate strategy to improve service to customers.
These are not isolated decisions. It is smart to have a portfolio mindset when determining the mix of options and partners to use in flowing product to your stores. Viewing these decisions as a portfolio will ensure that the total mix is executable, scalable, and collectively drives a strong business case.
4. Be open to unique arrangements. Retailers of all shapes and sizes have suffered years of supply chain challenges and now some are stepping up to help their peers while also helping themselves. Gap, for example, recently announced that it will offer the Gap distribution network and capabilities to outside companies, which creates a new revenue generator for its own business.
For c-store retailers new to the self-distribution approach, it could make sense to work with other organizations that are navigating the same unchartered waters. This could involve partnering with retailers in other channels or markets, such as dollar stores, or even unique cross-docking opportunities with existing suppliers. Such partnerships can reduce costs and lead to significant benefits for the parties involved.
Alternatively, retailers that are further along in developing self-distribution capabilities may find opportunities, as Gap has, to create profit streams for their own businesses by inviting others to tap into their infrastructures or even by becoming wholesalers to other retailers.
According to Will O’Brien, Partner at True North Growth Partners, “For these types of arrangements to work, the partners have to have high levels of trust. That trust spans both partners’ ability to execute as well as how they will make decisions when operations or product is constrained or when disruptions occur.” True North Growth Partners supports clients across many channels, including convenience, on the supply chain, operations, and technology sides of their business.
A few areas that might be easier to execute in an arrangement like this include:
- Collaborating on seasonal or promotional buys – combining these volumes could drive better pricing from suppliers and be easy for the two partners to execute.
- Sourcing a strong, locally branded product from a noncompeting retailer – consider ice cream, bakery, or prepared foods in this type of opportunity.
- Sharing of transportation lanes – one partner’s outbound moves might fit nicely with the other partner’s ability to back-haul product from a supplier.
- MRO contracts – these “maintenance, repair, and operations” type items are necessary for a business to operate but not as sensitive to service levels or inventory levels as the items that are sold to customers.
5. Adopt a hybrid model of distribution. As c-store retailers work to figure out what the supply chain and distribution model looks like in the future, hybrid models are gaining popularity. Today more than 50% of the top retailers in the channel use a hybrid distribution approach.
In some cases, retailers build their own DCs and run them independently for their proprietary products and/or a certain percentage of the stores in their chain. They may work with wholesalers for other products like grocery and tobacco or to fully serve some stores. Other times, the retailer builds and owns the DC but assigns the operations and logistics to a wholesaler or other third party. Many other retailers are utilizing several different suppliers to accommodate their growing foodservice business.
Whatever the hybrid model looks like, it allows retailers to consolidate deliveries, reduce vendor touchpoints, and put more focus on key products, all of which promote efficiencies and increased competitiveness.
Building supply chain competency pays off—regardless of your convenience store distribution strategy.
C-store retailers who were once beholden to a single supply chain model now have many more viable options for cost-effectively stocking their shelves with products that customers want and that differentiate their stores. The right approach will vary by company. But all retailers have a stake in becoming more well-versed in distribution, whether they delve into self-distribution or just become more collaborative and engaged with their distribution partners. Recently, several companies in the convenience channel have introduced new supply chain departments into their business and sourced from outside the channel to find leaders to run them.
After all, there is value in being a more knowledgeable and skilled partner with your suppliers. Knowing the dynamics of how planning, product flow, and capacity management affect inventory levels, service levels, and profitability will pay dividends. While investing in people, processes, facilities, and partnerships that improve the supply chain takes time, retailers who do will provide better customer experiences, reduce disruptions and vulnerabilities at stores, and grow the business’ top and bottom-line performance.
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