Supermarket group says it is deterred by high capital outlay
Pick 'n Pay not sold on centralisation
April 24, 2006
By Tom Robbins
Cape Town - Pick 'n Pay Stores said last week that the high capital outlay deterred it from setting up its own centralised distribution system despite efficiency gains related to the system.
Pick 'n Pay chief executive Sean Summers estimated that it would cost more than R2 billion to set up a centralised distribution system and despite the benefits, he did not believe the return on this investment would be worthwhile.
Pick 'n Pay chairman Raymond Ackerman said ever since he had set up Pick 'n Pay in 1967 he had been tempted to centralise distribution because of the administrative efficiency gains associated with receiving one or two store deliveries a day, as opposed to a host of them.
He added that he believed he would have been able to secure buying discounts from suppliers through offering a few centralised delivery points but that none had been forthcoming.
However, both Summers and Ackerman made it clear that the company would continue to debate introducing centralised distribution.
In theory, centralised distribution centres offer efficiency and cost benefits to retailers, but the savings are not immediately dramatic but rather experienced over a long period of time.
In a growing retail market such as South Africa, a supermarket chain such as Pick 'n Pay is far more likely to get an immediate, as well as higher, return from spending R2 billion on opening new stores than on a distribution system that only pays for itself over years.
Despite this, the company now has experience of setting up an internal distribution system as it has just done at its Franklins Australia chain.
In Australia, manufacturers do not deliver, so the South African model was not an option. But all the same, Pick 'n Pay decided to jettison the outsourced distribution service offered by Metcash Australia, saying it was expensive.
Pick 'n Pay would have learnt many things from this exercise, including the fact that it found implementing the new system "more difficult" than it imagined.
Apart from that, Pick 'n Pay does operate a centralised system locally for fruit and vegetable produce because it believes this is a better way of keeping produce fresh.
And Pick 'n Pay's bottom market score chain has a distribution system, but Pick 'n Pay inherited that system when it bought Score.
Summers said the system suited Score because the stores were so widely dispersed across the country's rural areas.
At present, trucks from major food suppliers such as Tiger Brands deliver goods directly to individual Pick 'n Pay stores across the country, unlike Woolworths Holdings.
But Woolworths' small-format convenience food stores are often located on busy commuter roads that are less geared than supermarkets to receive numerous truck deliveries and receiving one truck a day containing all their supplies suits this type of business better.
Spar Group, on the other hand, is simply a centralised food distribution business, with all stores independently owned.
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