Managing the Distribution Network

There are endless perks and possibilities for convenience store chains of all sizes that embrace self delivery.

By Pat Pape, Contributing Editor.

In the highly competitive convenience store industry, retailers must constantly search out new ways to control expenses, boost profits and improve margins. For chains of a certain size, self-distribution has the potential to deliver.

Self-distribution lets retailers cut out the middleman and take advantage of any discounts, such as preseason incentive purchases, offered by manufacturers. It also enables them to better control transportation schedules, allowing trucks to deliver products during low-traffic periods, and it gives them more influence over store inventory management, helping avoid out-of-stocks.

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Competitive Advantage
Wesco, the Muskegon, Mich., convenience operator with 51 stores, opened its distribution center 18 years ago when management “wanted to streamline the product lines into our stores,” said Russ Bolitho, distribution director.

The distribution center makes 1-2 deliveries to each store every week, while Wesco Donuts, another in-house division, distributes fresh pastries daily. “We do not deliver the beer or pop,” Bolitho said. “For the most part, we deliver about 50-60% of products, depending on the stores.”

Having a proprietary distribution facility provides Wesco with cost-saving opportunities. “You can take advantage of buy-ins and get a lot of deals,” Bolitho said. “And we pass those savings along to customers. We think we provide a super price to our end user.”

Several years ago, Kwik Trip built a 120,000-square-foot distribution center at its La Crosse, Wis., headquarters. Due to steady growth—the company opens about a dozen new stores every year—the center has been expanded several times. Kwik Trip’s own commissary, bakery, dairy and ice plant are located close by.

“We have two types of delivery,” said John McHugh, manager of corporate communications for Kwik Trip. “Fresh foods are delivered daily. Dry goods are delivered every other day.”

The distribution center cuts out the middleman to provide stores with a lower cost of goods, and the chain’s 400-plus outlets pass that savings along to customers. “Your basic commodities—milk, bread, butter, eggs and bananas—are available at a price cheaper than at a big box store because there’s no middleman,” McHugh said. “There is nobody in our market that will beat us on those prices.”

Store managers applaud the do-it-yourself delivery system, which has helped slice shrink to almost zilch. “All of our drivers are part of the Kwik Trip family, and 40% of the profits come back to us,” he said. “So our drivers have a vested interest in making sure that product is delivered safely and in good condition. Store managers don’t have to worry about what shape the buns are in or if the milk got a little warm. We have shrink of less than .3% across the board, and that’s a huge factor.”

Fresh and Local
With stores in Wisconsin, Minnesota and Iowa, Kwik Trip tries to purchase as many local products as possible, such as Wisconsin-grown onions and potatoes, in order to reduce transportation costs, but management also is in tune with the growing trend toward eating locally. Thanks to operating its own dairy processing facility, the company can buy milk from nearby dairy cooperatives and process and deliver it to the stores within a few hours.

“Milk processed this morning can be in the store this evening,” McHugh said. “And we can deliver a salad that is made from lettuce that was literally cut and washed this morning. We can provide that kind of freshness because we have our own distribution.”

While beer, soft drinks and some chip products aren’t self-delivered, McHugh believes the chain has built an efficient, cost-effective logistics system. “Ideally, we’d like to distribute everything from our center,” he said.  

Boosting the Bottom Line
In Valparaiso, Ind., a proprietary distribution system is one feature of the Family Express business model that has made the past three years the best period in the chain’s 40-year history, despite the nation’s ailing economy.

According to Gus Olympidis, president and CEO of the 54-store operation, the Family Express logistics model is organized along two separate tracks. “The first has to do with dry goods—candy, canned goods and things of that nature,” he explained. Working with a traditional convenience store distributor, those shelf-stable products are delivered to stores once a week.

“Track two, the most revolutionary component of our logistical model, has to do with our daily delivery of perishables,” he said. “That delivery comes out of our own distribution center, which takes 25-30 deliveries that the typical convenience store would receive in a given week and compresses them into to just one a day. Can you imagine a store manager wanting multiple deliveries per day instead of one?”

The once-a-day delivery includes fresh sandwiches, chips, frozen pizza, milk, bread and pastries. Many of the fresh items, including the company’s popular square doughnut, are created in a central bakery that adjoins the 150,000-square-foot distribution facility, an arrangement that ensures additional productivity and freshness. As a result of this system, only 30% of Family Express deliveries arrive via direct store delivery (DSD).

Not For Everyone
“Some traditional DSD practices in the c-store channel are remarkably inefficient,” Olympidis said. “I call them the Achilles heel for the convenience store industry.”

While not opposed to DSD, Family Express works hard to avoid inefficient DSD. The chain sells many private and controlled-label products, including soft drinks and energy products. “If a national vendor is not capable of delivering to our stores at a price that makes economic sense, we will hunt down their products wherever we can find them and deliver them ourselves,” Olympidis said.

While many convenience chains would thrive with a similar self-distribution arrangement, most are not prepared to do so.

“A lot of companies have developed in a way that is incompatible for efficient distribution, meaning their level of density along transportation corridors is not there,” Olympidis said. “Density is a wonderful thing when you do what we’re doing. In the final analysis, logistical inefficiency has to be absorbed by the retailer whether they are responsible for deliveries or the DSD vendor is.”

Bolitho agrees that store real estate must be carefully considered when planning or operating a self-distribution system. “Geographically, we only have stores in the state of Michigan,” he said. “We don’t have to get out-of-state licenses for our trucks and it makes it a lot easier to stamp our cigarettes.”

Currently, Family Express is going through an ambitious growth period with new stores scheduled to openthroughout the year. The distribution system has contributed to this success, along with other elements of the business. “There are a lot of components to our overall model,” Olympidis said. “It’s about the living brand and the kind of person we put behind the counter. But logistics is an important component.”

While the benefits are many, there is one major obstacle that prevents most retails from doing self-distribution: the major financial investment required to construct a warehouse and purchase a fleet of delivery trucks. “Logistical management is not for the lighthearted,” Olympidis said.