Distribution faces major change

The takeover of Quinnsworth/ Crazy Prices by UK giant Tesco sent more than a ripple of discontent through the Irish market. Backed by huge resources - Tesco's £16 billion turnover is four times larger than the total annual value of the Irish grocery trade - the British retailer's arrival represented serious competition for the established grocery trade.

It also heralds the start of significant change for the country's distributors, both the larger, 30-truck operations and the smaller companies with as few as five trucks. For the first time, a large retailer is arriving in the Irish market with a background in European and UK distribution techniques, a background considerably different to Ireland's.

Despite this country's reputation as an agricultural nation, the food manufacturing base is small. About 60-70 per cent of grocery products are imported, representing £2 billion to £3 billion worth of stock, giving the importer/supplier a crucial role in the distribution process, from the actual import procedure to the eventual supply of the goods to the local merchant. In recent years, this role has changed, with suppliers reducing their number of delivery points and leaving small businesses to obtain their supplies from a wholesaler. Even larger multiples in Ireland do not operate their own central distribution procedure. While Quinnsworth and Dunnes Stores both maintain small warehouses, mainly for non-food products, they have not initiated a similar large-scale warehousing policy for foodstuffs. Essentially, their Irish operations are too small to achieve the efficiencies of scale needed: Dunnes has about 50 stores in Ireland, Quinnsworth/Crazy Prices 70 and Superquinn, 16. Setting up a warehouse and the administration procedure would cost about £10 million and would also leave the Irish multiples to cover the extra costs involved in negotiating the poor road system and the large distances between stores.

With Tesco's arrival, that distribution arrangement may not survive for much longer. "It is now about to change and the catalyst for that change is Tesco and the impending arrival of Safeway," says Michael Campbell, director general of the Irish Association of Distributive Trades (IADT). "Tesco will cut out the middleman in distribution. In the UK, because of the vastly superior road system and the higher density of population, all of the major suppliers operate out of their own warehouses. The Cadburys, the Burtons Biscuits, all deliver to one or two warehouses and it then becomes Asda or Tesco product. They then have their own fleets deliver the product to the stores."

Tesco's UK operation does include an element of its own distribution, although it also uses a great deal of third-party distribution. It has now started an analysis of the Irish distribution sector and the likely result will be an "Irish solution to an Irish situation", possibly involving Irishbased warehouses combined with a form of streamlined third-party distribution.

Debenhams was one of the first of the new British arrivals to establish a central distribution warehouse in this country, a 23,000square-foot unit at the Western Parkway Business Centre in Ballymount, Dublin. Safeway is unlikely to open in Ireland for two years and, while the company is recruiting a development manager, no decision on distribution has yet been made.

"That whole area around Blanchardstown and the M50 will become a key distribution area," says Caleb Kyle of Lisney. "There is now so much up-to-date technology to do with distribution, and these companies are doing daily deliveries."

The consequences for both distributors and suppliers of changes in the long-established distribution process are likely to be considerable. "The distributors will come under severe pressure," says Mr Campbell. "If all the large players decide to do their own thing, the distributors will suffer."

It is not only the distributors who will feel the pinch. IBEC's Small Firms Association has predicted that smaller operators who are not allied to larger multiples or big distributors will find their choice of products restricted. Irish suppliers may also be required to reduce their prices to the multiples operating some of their own warehousing and distribution, since the multiples will now have to cover the costs of the operation. There are also fears that smaller suppliers may simply find themselves squeezed out by a combination of "own brand" products and economies of scale which may prevent them meeting the demands of large retailers.

The Irish Small and Medium Enterprises Association is already working on a monthly computerised monitoring system to determine the volume of Irish-made goods stocked by both UK supermarkets and Irish-owned stores.

The rise in large, centralised distribution operations is, nevertheless, good news for the Irish building industry. Apart from the potential offered by the construction of new warehousing systems for the British arrivals, some Irish distributors have already begun to act in this area.

Musgraves is developing a 70,000-square-foot warehouse in west Dublin and expanding its existing operation in Cork from 150,000 square feet to 200,000 square feet as part of a £22 million centralised distribution of chilled, fresh and frozen goods to almost 400 independently-owned Centra and Super Valu stores nationwide. Musgraves will run a 60-strong fleet of compartmentalised chill vans and trucks. "It's cost-effectiveness, basically," says a company spokeswoman. "It makes more sense for a retailer to take in one delivery of fresh and frozen products than to have 70 different suppliers queueing up at the back door." The consequence will be fewer van deliveries for the smaller distributors.

Yet, there are distribution difficulties peculiar to the Irish situation. Population density is a crucial factor in the Irish market. Ireland is an expensive country for distributors, with a population density of only 51 people per square mile. In the UK, the figure is 239 per square mile, in Belgium 330, in the Netherlands 372. There are significant distances to be covered on bad roads running through countryside untroubled by large supermarkets.

"We would submit that UK companies have misconceptions about the Irish market and we continually see them making mistakes with that," says Michael Campbell of IADT. "They are driven by the need to work the way they do in the UK. The only way large £16 billion companies like Tesco can operate is through established systems. Large organisations cannot cope with exceptions to the rule. Ireland is a different culture with different distribution problems and whoever builds these warehouses will face exactly the same problems with roads and densities."

Nevertheless, it is clear UK companies are not going to operate under the current distribution system and the market is likely to see an end to the system under which individual deliveries were made to stores in favour of single, large-scale deliveries to central or regional warehouses. Irish distributors, it seems, will have to adapt to survive.