September 26, 2008
CPGmatters: Pepsi and Coke Urge CPGs To Consider DSD to Drive Growth
By Al Heller
Through a special arrangement, presented here for discussion is an excerpt of a current article from the monthly e-zine, CPGmatters.
PepsiCo and The Coca-Cola Company are urging other suppliers of consumer packaged goods to consider direct-store delivery of their products to drive and sustain growth by effectively delivering what shoppers want at the shelf.
“DSD drives product flow that is almost a just-in-time replenishment engine for stores,” said John Phillips, vice president, customer supply chain & logistics at PepsiCo. “Manufacturers can use it throughout the year to leverage promotional events, to ensure the right amounts of product are in stores, displayed as planned, to satisfy demand on a local basis.”
Ann Dozier, vice president, collaborative customer capabilities, The Coca-Cola Company, said, “CPG companies have an opportunity to focus on superior execution at the shelf. DSD is a key driver of flawless execution in stores.”
The executives made these comments as part of an exclusive interview with CPGmatters about a new study from the Grocery Manufacturers Association (GMA) that highlights the value of the DSD distribution model, even for some CPG products that currently go through retailer warehouses. The benefits of DSD are indisputable and appropriate for targeted new-product launches and seasonal promotions year-round and store-wide, according to Phillips and Dozier, who were key contributors to the research.
“DSD done right is a great demand-sensing mechanism,” said Mr. Phillips, a member of the GMA committee that spent more than a year developing ‘Powering Growth through Direct Store Delivery,’ the new report that quantifies DSD performance and predicts a strong outlook for its use.
The study, using Nielsen data, states that DSD products account for 24 percent of unit sales and 52 percent of retail profits in the grocery channel. Noting these figures have been consistent the past two years, Ms. Dozier portrayed DSD companies as among the most innovative suppliers and collaborators.
“We’re seeing the top new items and top sellers overall coming out of DSD,” she said. “That’s happening in an environment of rapid change where people seek more variety in the stores they shop, and retailers are placing a focus on understanding the shoppers they want to attract. The speed-to-shelf for DSD goods is unparalleled, a day or two versus 10 days through the warehouse. This gives CPG flexibility to try new products, get them to the shelf faster, and continually analyze the shelf to ensure the right assortment.”
Analytical-minded retailers that understand cash flow and the benefit of turning products three or four times before they pay the manufacturer are the biggest proponents of DSD, according to Mr. Phillips. He called “effective collaboration the key to unlocking the next generation of improvements in DSD productivity and in-store execution.”
Discussion Questions: What do you think of Coke and Pepsi’s push to convince other CPG suppliers to consider direct-store delivery? Does DSD have to be a supplier-driven initiative? Who benefits more from DSD: suppliers or retailers?
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CPGs should see this as an opportunity to get closer to the true point of consumer decision-making–the shelf. For years, many large research-and-analysis-oriented CPGs have scoffed at retailers’ lack of knowledge of consumers and their needs. However, the retailers have a key weapon that most CPGs don’t have. They control the shelf and the data around how the consumer really truly acts in the store (not just in focus groups, research studies, or “virtual store” environments).
By having more presence in the store (and especially through DSD), CPGs can gain access to and influence over that critical consumer interaction. For a great example of this, see Kraft’s Wall-to-Wall program.
The most controlling methodolgy for Coke and PepsiCo to get products placed on retail shelves in a timely manner is via DSD. Even if other methods for replacement might be less costly, Coke and Pepsi/Frito-Lay don’t want to go through a distributor’s warehouse with their daily purchased items.
To encourage the permanence and continued growth of the DSD methodology, which is sales effective for their high turnover items, they encourage DSD by other suppliers. But if that were to happen, particularly by all suppliers, could the retailer smoothly reconcile multi-agenda daily stocking activities and maintain smooth access to consumer purchasing patterns? While that might be accomplished efficiently, two words now rear their heads up: “Im Possible.”
To the question, “Who benefits most?” Both in different ways. The DSD suppliers get quick product replacement and on fast-moving items and are able to pass along the DSD costs to the consumer. The retailer’s stocking costs are eliminate on those fast moving items … and therein lies one revelation: DSD best fits fast moving items.
The number of companies other than Coke and Pepsi who can efficiently and effectively deliver DSD is relatively small and the cost to change the supply chain in companies is enormous. Occasional DSD by large companies for large promotions across many categories (i.e. Kraft, P&G) and cross dock for promotions are being done and are good for both manufacturer and retailer.
The supermarket model is not designed anymore to receive a large percentage of their shipments through the back door of individual stores and the supply side is built to receive at chain’s warehouses and then distribute a truckload of mixed product. The most efficient model is a Walmart or Kroger where there are several full truckloads weekly to large high volume outlets.
CPGMatters continually comes up with the most bizarre stories in our business–a great reason to keep reading it. A DSD model works for Carb Bev because of the turns in that business relative to space allocated. Milk and bread have that same pattern, along with a shelf stability issue. I can’t think of many other categories that go out-of-stock that quickly even though the products are shelf stable. Hard to imagine it paying out when you consider the cost of people and vehicles (gas–and please send gas to Atlanta–we’re out).
The claim that it is more sensitive to consumer demand is also unfounded. What it does is give the delivery force control over what they feel like stocking, which may be tied to demand but is rarely tied to brand planning or category management initiatives. Pepsi knows this all too well–in the 80s it was not uncommon for the delivery teams to kill products they didn’t like, just by not stocking them on the shelves.
Direct Store Delivery is not for everyone. It simply costs more to execute for most suppliers. The reason it works for soda and beer suppliers is they have always had more than just supermarket delivery stops.
The retail landscape has changed. For some suppliers, a switch to DSD should be considered if their products are selling in more than supermarkets. On the other side, if DSD is so good, why does Walmart send soda through its distribution centers?
The problem with going all DSD is the huge traffic jam that will occur at the receiving door. In my observations, DSD lines had better service levels from an image perspective. The real issue is the minimum quantity and costing. While a DC can purchase pallets over pallets of product to achieve a discount, each individual store may not even come close to purchasing that amount. Will vendors create a blanket cost for the entire chain?
In DSD, I think the retailer has the advantage because of the just-in-time service fills they can get. DSD would probably increase transportation costs to the manufacturer. Obviously it’s cheaper to deliver 144 cases to 1 location as opposed to 1 case to 144 different locations. DSD works for Coke and Pepsi because of their regional bottling franchise structure. Most other manufactures may only have 1 or 2 plants to service North America.
Gas costs are rising, so DSD products experience constant inflation adjustments. Get real guys, every retailer in the USA has been pushing Pepsi and Coke to use their warehouse distribution system for years. It’s [not smart] to think about moving others out of a consolidated distribution system into a fractured one. It’s not responsible because it will increase consumer costs, increase traffic congestion, increase fuel consumption, increase pollution–where is the real benefit?
Why doesn’t everyone look at the tobacco company model? They use the consolidated distribution system but detail and merchandise product in store with sales reps who carry product that can be used for temporary inventory fills. All we need right now are forty million more Isuzu box trucks belching diesel exhaust all over the USA–not SMART–not Green!
We need to think through all of the implications of the costs–some hidden–with DSD vendors.
What makes sense is for DSD suppliers to cross-dock at the retailer’s distribution center. This in-turn would reduce: congestion at the backdoor, excessive DSD inventory in the backroom, and wasteful windshield time multiplied by all of the DSD suppliers (not to mention the fuel spent going to the same location.
When I was in Operations, I knew a retired gentleman who contracted with four non-competing DSD suppliers to work their backroom stock to the shelf, in one store, five nights a week! This person lived two blocks from the store and five days out of the week, it was grand opening for those DSD suppliers.
This issue is less (much less) about delivery than about shelf management. It’s definitely not about delivery trucks parked in front of the store. And, my gast is totally flabbered that Frito-Lay has not been mentioned in this discussion. They’re the masters of the shelf management part of DSD, which will become clearer later in these comments. Coke and Pepsi simply want to become multi-product delivery systems. They’ve got the trucks and drivers, so why not deliver more stuff? Theirs is a transparent initiative.
On the other hand, there is much to be said for allowing vendors to manage shelves. Think about the rack jobbers and vendor rep “drop managers” (more on this in a minute) who buzz around the store making sure everything is perfect. Batteries, soda, bread, ice, magazines, cards, nearly the entire cookie & cracker aisle, a great deal of the frozen aisle, most snacks, and the gourmet food sections. These categories are serviced in one of two ways: 1.) The vendor shows up with a truck full of stuff, puts it on the shelf, and takes expired stuff away. Classic DSD. 2.) The vendor shows up and retrieves warehouse-delivered pallets from the store’s back room and works the product onto the shelf (these are the drop managers referenced earlier).
The major benefit of these two systems is shelf management. The master, Frito-Lay, is usually not even required to get approval for new products, new flavors, line extensions, or sizes. They make sure that the latest and greatest flavors accompany the tried-and-true items in ratios and displays that maximize sales. Would you trust one of your stockers with the snack aisle? Not likely. Cookies & Crackers, on the other hand, are mostly in the hands of drop managers. Someone from the back room dumps a pallet or two of cases in the cookie aisle and the Nabisco or Keebler rep shows up to integrate them onto the shelf while rotating the product. Would you trust a stocker in the Cookie & Cracker aisle?
Private label is the fly in the ointment of this superb system. Store brands are serviced by store personnel and are cheek-by-jowl on the shelf with slick, highly-successful national brands. Picture a Frito-Lay rep creating a picture-perfect masterpiece display in the snack aisle, and then the ham-handed, minimally-paid, under-trained night stocker showing up to integrate store brand snacks onto those shelves. While the term “night stocker” (night stalker) is a little scary, the mayhem they can create in stores is absolutely frightening. What’s a planagram? Shelf tags? They just get in the way and wind up on the floor. Hey, it’s time for turkey bowling!
“Ms. Dozier portrayed DSD companies as among the most innovative suppliers and collaborators.”
But of course, since they are in the store all the time, and that has to trickle back to brand management to an extent. The real issue here is not knowledge or awareness of what is going on in the store, but that the DSD supplier has a lot more opportunity to execute, the bottom-line missing factor that leads to lots of retail failure of what might be otherwise good ideas.
However, the brand suppliers relationship to, and perspective on, the shoppers in the store is radically different from the retailers perspective. The retailers concern is to maximize promotional funding from the supplier, and the suppliers concern is to maximize sales of their products, without getting squeezed out by the competition. Neither are especially focused on the real needs of the shopper, who obviously cares nothing about the promotional money the retailer is pocketing, nor particularly whether this or that brand survives and thrives.
The pretense that either the retailer or supplier is ultimately shopper focused is a delusion, for the most part. 80% of the shopper’s time in the store is a total waste to themselves and to the retailer and supplier. Retailers reducing that waste are generously rewarded with substantial sales increases. The shopper benefits from the recovery of their wasted time. The question is, who will benefit from the increased revenue? Simply turning that decision over to competitive DSD suppliers will NOT allow unfettered focus on the needs of the shopper, because of the competitive imperative.
As the private label engine moves forward (the retailer IS “DSD,” to supply themselves with their own brand,) some retailers–very large and very small–are taking control of the brand competition and making serious moves to recover the shopper’s wasted time. The industry WILL evolve in this direction. The question will be, which retailers and which brands will understand, and not be run over in the race for the shoppers’ custom.
DSD companies such as bread, dairy, and salty snack companies want to be able to control the freshness and merchandising of their products. Generally when they have tried experiments with distribution through a warehouse they lose total control of these factors with poor results for the consumer and the vendors. What value do lower costs have if you don’t have freshness and products in-stock? And the warehouse distribution only works for the largest volume customers and you still have to have a means of serving everyone else.
Walmart keeps being placed on a pedestal and in many respects that is accurate, but Walmart also recognizes the value of DSD. Walmart does not do a better job with their warehouse delivered items than their DSD suppliers, in my opinion. The most frequent out-of-stocks in my area’s Walmarts are on warehouse delivered perishables. When I complain their normal answer is to blame the warehouse, their order taker, the consumer for buying more than usual, and etc. If they are short on a DSD item, they pick up the phone and threaten the DSD supplier to get a delivery out there ASAP or else. On a warehouse delivered item, refer to the excuses above and nothing is going to happen until the next truck arrives and on their normal schedule. Don’t expert Walmart to make an emergency delivery of a perishable item to a store just because it is out of something, but they expect and demand that a supplier drop everything and do just that.
DSD is an unrealistic model for most manufacturers since the cost of freight, small ship quantities and excessive logistic “touches” will increase freight and logistics costs as well as damages. For companies like Coke and Pepsi, which are in mature categories, and OOS is the greatest issue (and they are each shipping containers of water/soda), this makes sense. For the rest of the industry, the freight costs alone far outweigh any possible benefit. Add to this the incredible amounts of inventory that the manufacturer must now carry, and you have an incredibly inefficient model. Plus, this would require at least weekly (or more) fulfillment from the manufacturer, and this is simply not reasonable. Add to this the simple difference in freight between small orders and large truckloads, and the cost per pound alone is staggering. DSD is inefficient, expensive and unrealistic for most manufacturers.
DSD will continue its market share decline because the cost is higher than the alternative. And the cost will rise disproportionately more and more. DSD staff cost more than store and warehouse staff because (1) they spend 20%? 30%? 50%? of their time driving, which isn’t productive and (2) their compensation is higher (grocery clerks and warehouse workers aren’t paid on commission and don’t have to buy their “routes”).
If DSD was more profitable for the store, supermarket executives would’ve figured that out 40 years ago and DSD would be dominant instead of where it is today (a declining minor share). The #1 thing supermarkets know how to manage: their costs. They know their costs down to the smallest fraction.
DSD isn’t so profitable for Coke or Pepsi, either. Coke spun off many bottlers because local distribution isn’t very lucrative. Yes, Frito-Lay is very successful, but would they be more successful if they dumped DSD?
DSD is an anachronism left over from the days before POS computers.
First of all, I would suggest that the whole chain benefits from a process/system like DSD. However, to suggest it is the key is somewhat overstating. Suppliers, retailers and retail service providers need to look at the whole chain from consumer/shopper all the way back to the original source and examine all the potential points of differentiation.
From the points of differentiation all the elements need to be identified of which DSD would be one. What makes DSD a strong point of differentiation is that it really drives productivity at the shelf which ultimately makes it an element that makes a difference to the consumer.
The DSD model is great from a replenishment point of view – I think we are all in agreement here. However, apart from the cost increase that many have talked about, the big issue is the introduction of another stakeholder in the mix. From a strategic point of view it leads to more challenges.
A company’s ability to assimilate these new challenges along with the actual costs that the DSD model brings defines its ability to make it succeed. Once a DSD set-up is in place, there will be one more voice talking about how pricing should be set, how in-store merchandising should be executed. And the more powerful this component becomes, the more its voice will drown out the brand and sales teams.
This is a challenge that was faced and overcome by companies like Coke, Pepsi and A-B. Similar-sized companies, who have substantial brand equity can afford to go down this path. However, smaller players that might end up outsourcing DSD will have very limited bargaining power and might be better off sticking to their current distribution set-ups. The benefits from a well-stocked inventory in the stores may not be able to sustain the definitely higher costs of DSD.
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CPGs should see this as an opportunity to get closer to the true point of consumer decision-making–the shelf. For years, many large research-and-analysis-oriented CPGs have scoffed at retailers’ lack of knowledge of consumers and their needs. However, the retailers have a key weapon that most CPGs don’t have. They control the shelf and the data around how the consumer really truly acts in the store (not just in focus groups, research studies, or “virtual store” environments).
By having more presence in the store (and especially through DSD), CPGs can gain access to and influence over that critical consumer interaction. For a great example of this, see Kraft’s Wall-to-Wall program.
The most controlling methodolgy for Coke and PepsiCo to get products placed on retail shelves in a timely manner is via DSD. Even if other methods for replacement might be less costly, Coke and Pepsi/Frito-Lay don’t want to go through a distributor’s warehouse with their daily purchased items.
To encourage the permanence and continued growth of the DSD methodology, which is sales effective for their high turnover items, they encourage DSD by other suppliers. But if that were to happen, particularly by all suppliers, could the retailer smoothly reconcile multi-agenda daily stocking activities and maintain smooth access to consumer purchasing patterns? While that might be accomplished efficiently, two words now rear their heads up: “Im Possible.”
To the question, “Who benefits most?” Both in different ways. The DSD suppliers get quick product replacement and on fast-moving items and are able to pass along the DSD costs to the consumer. The retailer’s stocking costs are eliminate on those fast moving items … and therein lies one revelation: DSD best fits fast moving items.
The number of companies other than Coke and Pepsi who can efficiently and effectively deliver DSD is relatively small and the cost to change the supply chain in companies is enormous. Occasional DSD by large companies for large promotions across many categories (i.e. Kraft, P&G) and cross dock for promotions are being done and are good for both manufacturer and retailer.
The supermarket model is not designed anymore to receive a large percentage of their shipments through the back door of individual stores and the supply side is built to receive at chain’s warehouses and then distribute a truckload of mixed product. The most efficient model is a Walmart or Kroger where there are several full truckloads weekly to large high volume outlets.
CPGMatters continually comes up with the most bizarre stories in our business–a great reason to keep reading it. A DSD model works for Carb Bev because of the turns in that business relative to space allocated. Milk and bread have that same pattern, along with a shelf stability issue. I can’t think of many other categories that go out-of-stock that quickly even though the products are shelf stable. Hard to imagine it paying out when you consider the cost of people and vehicles (gas–and please send gas to Atlanta–we’re out).
The claim that it is more sensitive to consumer demand is also unfounded. What it does is give the delivery force control over what they feel like stocking, which may be tied to demand but is rarely tied to brand planning or category management initiatives. Pepsi knows this all too well–in the 80s it was not uncommon for the delivery teams to kill products they didn’t like, just by not stocking them on the shelves.
Direct Store Delivery is not for everyone. It simply costs more to execute for most suppliers. The reason it works for soda and beer suppliers is they have always had more than just supermarket delivery stops.
The retail landscape has changed. For some suppliers, a switch to DSD should be considered if their products are selling in more than supermarkets. On the other side, if DSD is so good, why does Walmart send soda through its distribution centers?
The problem with going all DSD is the huge traffic jam that will occur at the receiving door. In my observations, DSD lines had better service levels from an image perspective. The real issue is the minimum quantity and costing. While a DC can purchase pallets over pallets of product to achieve a discount, each individual store may not even come close to purchasing that amount. Will vendors create a blanket cost for the entire chain?
In DSD, I think the retailer has the advantage because of the just-in-time service fills they can get. DSD would probably increase transportation costs to the manufacturer. Obviously it’s cheaper to deliver 144 cases to 1 location as opposed to 1 case to 144 different locations. DSD works for Coke and Pepsi because of their regional bottling franchise structure. Most other manufactures may only have 1 or 2 plants to service North America.
Gas costs are rising, so DSD products experience constant inflation adjustments. Get real guys, every retailer in the USA has been pushing Pepsi and Coke to use their warehouse distribution system for years. It’s [not smart] to think about moving others out of a consolidated distribution system into a fractured one. It’s not responsible because it will increase consumer costs, increase traffic congestion, increase fuel consumption, increase pollution–where is the real benefit?
Why doesn’t everyone look at the tobacco company model? They use the consolidated distribution system but detail and merchandise product in store with sales reps who carry product that can be used for temporary inventory fills. All we need right now are forty million more Isuzu box trucks belching diesel exhaust all over the USA–not SMART–not Green!
We need to think through all of the implications of the costs–some hidden–with DSD vendors.
What makes sense is for DSD suppliers to cross-dock at the retailer’s distribution center. This in-turn would reduce: congestion at the backdoor, excessive DSD inventory in the backroom, and wasteful windshield time multiplied by all of the DSD suppliers (not to mention the fuel spent going to the same location.
When I was in Operations, I knew a retired gentleman who contracted with four non-competing DSD suppliers to work their backroom stock to the shelf, in one store, five nights a week! This person lived two blocks from the store and five days out of the week, it was grand opening for those DSD suppliers.
This issue is less (much less) about delivery than about shelf management. It’s definitely not about delivery trucks parked in front of the store. And, my gast is totally flabbered that Frito-Lay has not been mentioned in this discussion. They’re the masters of the shelf management part of DSD, which will become clearer later in these comments. Coke and Pepsi simply want to become multi-product delivery systems. They’ve got the trucks and drivers, so why not deliver more stuff? Theirs is a transparent initiative.
On the other hand, there is much to be said for allowing vendors to manage shelves. Think about the rack jobbers and vendor rep “drop managers” (more on this in a minute) who buzz around the store making sure everything is perfect. Batteries, soda, bread, ice, magazines, cards, nearly the entire cookie & cracker aisle, a great deal of the frozen aisle, most snacks, and the gourmet food sections. These categories are serviced in one of two ways: 1.) The vendor shows up with a truck full of stuff, puts it on the shelf, and takes expired stuff away. Classic DSD. 2.) The vendor shows up and retrieves warehouse-delivered pallets from the store’s back room and works the product onto the shelf (these are the drop managers referenced earlier).
The major benefit of these two systems is shelf management. The master, Frito-Lay, is usually not even required to get approval for new products, new flavors, line extensions, or sizes. They make sure that the latest and greatest flavors accompany the tried-and-true items in ratios and displays that maximize sales. Would you trust one of your stockers with the snack aisle? Not likely. Cookies & Crackers, on the other hand, are mostly in the hands of drop managers. Someone from the back room dumps a pallet or two of cases in the cookie aisle and the Nabisco or Keebler rep shows up to integrate them onto the shelf while rotating the product. Would you trust a stocker in the Cookie & Cracker aisle?
Private label is the fly in the ointment of this superb system. Store brands are serviced by store personnel and are cheek-by-jowl on the shelf with slick, highly-successful national brands. Picture a Frito-Lay rep creating a picture-perfect masterpiece display in the snack aisle, and then the ham-handed, minimally-paid, under-trained night stocker showing up to integrate store brand snacks onto those shelves. While the term “night stocker” (night stalker) is a little scary, the mayhem they can create in stores is absolutely frightening. What’s a planagram? Shelf tags? They just get in the way and wind up on the floor. Hey, it’s time for turkey bowling!
“Ms. Dozier portrayed DSD companies as among the most innovative suppliers and collaborators.”
But of course, since they are in the store all the time, and that has to trickle back to brand management to an extent. The real issue here is not knowledge or awareness of what is going on in the store, but that the DSD supplier has a lot more opportunity to execute, the bottom-line missing factor that leads to lots of retail failure of what might be otherwise good ideas.
However, the brand suppliers relationship to, and perspective on, the shoppers in the store is radically different from the retailers perspective. The retailers concern is to maximize promotional funding from the supplier, and the suppliers concern is to maximize sales of their products, without getting squeezed out by the competition. Neither are especially focused on the real needs of the shopper, who obviously cares nothing about the promotional money the retailer is pocketing, nor particularly whether this or that brand survives and thrives.
The pretense that either the retailer or supplier is ultimately shopper focused is a delusion, for the most part. 80% of the shopper’s time in the store is a total waste to themselves and to the retailer and supplier. Retailers reducing that waste are generously rewarded with substantial sales increases. The shopper benefits from the recovery of their wasted time. The question is, who will benefit from the increased revenue? Simply turning that decision over to competitive DSD suppliers will NOT allow unfettered focus on the needs of the shopper, because of the competitive imperative.
As the private label engine moves forward (the retailer IS “DSD,” to supply themselves with their own brand,) some retailers–very large and very small–are taking control of the brand competition and making serious moves to recover the shopper’s wasted time. The industry WILL evolve in this direction. The question will be, which retailers and which brands will understand, and not be run over in the race for the shoppers’ custom.
DSD companies such as bread, dairy, and salty snack companies want to be able to control the freshness and merchandising of their products. Generally when they have tried experiments with distribution through a warehouse they lose total control of these factors with poor results for the consumer and the vendors. What value do lower costs have if you don’t have freshness and products in-stock? And the warehouse distribution only works for the largest volume customers and you still have to have a means of serving everyone else.
Walmart keeps being placed on a pedestal and in many respects that is accurate, but Walmart also recognizes the value of DSD. Walmart does not do a better job with their warehouse delivered items than their DSD suppliers, in my opinion. The most frequent out-of-stocks in my area’s Walmarts are on warehouse delivered perishables. When I complain their normal answer is to blame the warehouse, their order taker, the consumer for buying more than usual, and etc. If they are short on a DSD item, they pick up the phone and threaten the DSD supplier to get a delivery out there ASAP or else. On a warehouse delivered item, refer to the excuses above and nothing is going to happen until the next truck arrives and on their normal schedule. Don’t expert Walmart to make an emergency delivery of a perishable item to a store just because it is out of something, but they expect and demand that a supplier drop everything and do just that.
DSD is an unrealistic model for most manufacturers since the cost of freight, small ship quantities and excessive logistic “touches” will increase freight and logistics costs as well as damages. For companies like Coke and Pepsi, which are in mature categories, and OOS is the greatest issue (and they are each shipping containers of water/soda), this makes sense. For the rest of the industry, the freight costs alone far outweigh any possible benefit. Add to this the incredible amounts of inventory that the manufacturer must now carry, and you have an incredibly inefficient model. Plus, this would require at least weekly (or more) fulfillment from the manufacturer, and this is simply not reasonable. Add to this the simple difference in freight between small orders and large truckloads, and the cost per pound alone is staggering. DSD is inefficient, expensive and unrealistic for most manufacturers.
DSD will continue its market share decline because the cost is higher than the alternative. And the cost will rise disproportionately more and more. DSD staff cost more than store and warehouse staff because (1) they spend 20%? 30%? 50%? of their time driving, which isn’t productive and (2) their compensation is higher (grocery clerks and warehouse workers aren’t paid on commission and don’t have to buy their “routes”).
If DSD was more profitable for the store, supermarket executives would’ve figured that out 40 years ago and DSD would be dominant instead of where it is today (a declining minor share). The #1 thing supermarkets know how to manage: their costs. They know their costs down to the smallest fraction.
DSD isn’t so profitable for Coke or Pepsi, either. Coke spun off many bottlers because local distribution isn’t very lucrative. Yes, Frito-Lay is very successful, but would they be more successful if they dumped DSD?
DSD is an anachronism left over from the days before POS computers.
First of all, I would suggest that the whole chain benefits from a process/system like DSD. However, to suggest it is the key is somewhat overstating. Suppliers, retailers and retail service providers need to look at the whole chain from consumer/shopper all the way back to the original source and examine all the potential points of differentiation.
From the points of differentiation all the elements need to be identified of which DSD would be one. What makes DSD a strong point of differentiation is that it really drives productivity at the shelf which ultimately makes it an element that makes a difference to the consumer.
The DSD model is great from a replenishment point of view – I think we are all in agreement here. However, apart from the cost increase that many have talked about, the big issue is the introduction of another stakeholder in the mix. From a strategic point of view it leads to more challenges.
A company’s ability to assimilate these new challenges along with the actual costs that the DSD model brings defines its ability to make it succeed. Once a DSD set-up is in place, there will be one more voice talking about how pricing should be set, how in-store merchandising should be executed. And the more powerful this component becomes, the more its voice will drown out the brand and sales teams.
This is a challenge that was faced and overcome by companies like Coke, Pepsi and A-B. Similar-sized companies, who have substantial brand equity can afford to go down this path. However, smaller players that might end up outsourcing DSD will have very limited bargaining power and might be better off sticking to their current distribution set-ups. The benefits from a well-stocked inventory in the stores may not be able to sustain the definitely higher costs of DSD.