August, 1999

From the Editor

Why Are DSD Benefits Ignored

There is substantial evidence that a Direct Store Delivery (DSD) method of distribution is the most profitable way to handle many items, including specialty foods. The National Food Distributors Association (NFDA) has sponsored extensive research on this subject in the specialty food arena. Recently, the Grocery Manufacturers of America (GMA) also released a study showing that DSD is an important profit contributor, across a wide range of DSD items going far beyond specialty foods.

All these studies have been legitimate and persuasive. Retailers ignore them only at the peril of their own bottom line. But the studies are usually empirical, not theoretical. These studies are based on averages, and it is so easy for a disbelieving retailer to assume that they don’t apply to his own operation. It is so easy to assume that one is smarter and more efficient than one’s peers are.

The theory behind self-distribution is simple: cut out the middleman’s profit. It seems to make sense. Why doesn’t it happen? The answer is really divided into three categories: privatization, competition, and specialization.

Privatization became a popular word during Margaret Thatcher’s term in office. It referred to the practice of Government selling off industries it owned. The analogy to a supermarket giving up self-distribution functions is apt. There is something about being independent that creates efficiency. Perhaps it is the ability to attract better management. Really brilliant managers who are running a subsidiary or a division of a corporation tend to be promoted right out of the operation. In an independent distributor, brilliant managers are made the CEO. This alone is all the difference in the world.

Competition, though, is probably the key reason why DSD distributors are able to operate more efficiently than a self-distribution system. It is this operating efficiency that allows DSD to give a profit to the distributor while still cutting costs for the retailer.

The basic problem with in-house distribution is that, once established, it becomes a fiefdom. There are people working there who lobby effectively for increased budgets and, in general, everyone loses their fear of being fired. Working directly for a supermarket chain, a division executive or a union leader can negotiate for higher wages without fear that one’s company will “lose the contract” to supply a given chain or lose one’s manufacturers because one’s prices are not competitive.

The psychology is totally different at an independent DSD distributor. There everyone in the company, from the CEO down is perfectly aware that they have lots of competition, including, incidentally, the option for a chain to self-distribute. As a result, flexibility on everything from wages to work rules is likely to be far more forthcoming at an independent DSD than at a supermarket self-distribution operation.

It is, practically speaking, virtually impossible to get rid of the in-house system once established. If an outside distributor does a poor job, the distributor can be excluded without anyone raising too much of a fuss. But after a warehouse is built or square footage set aside to handle specialty foods, buying staff is expanded and executives are brought on board to run the operation, the chain is basically trapped.

All over the country, retailers are buying products through their own warehouse at a higher price than they could purchase the same products through a DSD distributor. In many cases, they also are getting older product, older packaging, sometimes out-of-code product, and overall inferior product. Instead of the self-distribution option providing an in-house partner, helping the merchandiser move more products, the merchandiser finds himself scrambling to sell the overpriced, outdated product that his “partner” needs him to sell.

Specialization is the final key to DSD success. Supermarkets are wonderful at certain things. They are experts at procuring on a massive scale and shipping and distributing on the same scale. This is all very important, but it hardly has anything to do with selling specialty foods. Almost by definition, specialty food products are not amenable to this kind of mass procurement, distribution and display. If it makes sense to handle products this way, it means they have already crossed over into the mainstream product line.

Specialty foods require careful attention and sensitivity to flavor trends, regional differences and short-term fads. These are things supermarket chains are usually awful at. So, good DSD distributors complement not only a supermarket’s drayage system but also a supermarket’s marketing expertise.

DSD is sometimes thought of as being in trouble in the specialty food industry because there are fewer DSD distributors than before. This is true, but only because mergers have created much larger DSD distributors than ever existed. Total DSD volume continues to rise and, in fact, should increase faster as retailers, in their continuous efforts to reduce costs, recognize the efficiency in outsourcing specialty food handling as much as possible.     FDM