WASHINGTON, DC — March 16, 2005 — New technologies, elevated food safety concerns and the growth of mass merchandisers are all factoring into a rapidly changing environment for the logistics function of food distributors and retailers, according to the 2004 Food Industry Distribution Center Benchmarking Report, released today by the Food Marketing Institute (FMI).   The annual report identifies trends, developments and challenges that financially impact the distribution segment of the food industry.

Key developments affecting distribution include economies of scale, which are allowing substantial reductions in administrative and fixed costs; reduced inventories and deals, with some distributors reporting declines of as much as 15 percent over the past several years; new-item growth in the marketplace, which negatively affects productivity; implementation of new technology and information systems, such as radio frequency identification and mechanizations such as automatic storage and retrieval systems; and food safety in the public eye, which is encouraging distributors to implement new handling methods throughout the supply chain.

Significant findings relating to distribution center costs and productivity include:

Operating Costs

This year’s results show that total distribution expenses comprise 3.03 percent of sales. There is a significant difference in cost as a percentage of sales between the traditional food distributor and the self-distributing chains: 3.64 vs. 2.67, respectively. The food retailers show a much lower cost for direct labor and for management/supervision, due to the efficiencies gained through larger customer orders combined with a more balanced workweek. Retailers operate distribution centers with similar lower costs for building- and equipment-maintenance activities.

Labor Costs

Labor costs are the biggest expense in operating a modern food distribution center. More than 68 percent of these costs are attributable to labor expenses, both direct (warehouse labor) and indirect (supervision and administration).

Item Count

One of the major cost drivers in a food distribution center is the number of items carried. Today’s full-line distributors manage almost 25,000 SKUs, with increases every year. Many operators have incorporated a policy of one-for-one, i.e., for every new item accepted, a like product must to be discontinued. The results for this year show an increase in item count in all product categories except grocery.

Sales by Product Group

The primary growth opportunity today is found in fresh and frozen products, as retailers seek to differentiate themselves through more upscale products and services. This year, sales increases also are reported in the meat categories, as prices for beef rose significantly throughout the year. Many food distributors now offer organic products, specialty high-end products, ethnic lines and health-oriented merchandise, along with fresh fish and flowers. Both retailers and distributors are expanding their offerings of general merchandise and health and beauty care (HBC) products, in order to capture more “center store” sales.

The distribution center’s mix of products is a major factor in determining overall productivity. More fresh and frozen product suggests higher costs because of the additional procedures necessary to ensure product integrity. On the other hand, specialty products move more slowly and may require different picking procedures, while general merchandise and HBC products require significantly more handling activities.

Sales per Item

The meat category experienced the most sales for the number of items on hand, which reflects the high case value. Grocery product sales are much lower, because this category has the highest number of slow-movers. (More than 60 per cent of the items move less than 10 cases per week.)

To purchase the 2004 Food Industry Distribution Center Benchmarking Survey ($95 members, $145 associate members, $170 nonmembers), please visit the FMI Store at www.fmi.org/pub/.