Energy, fuel prices pinch food distributors

Energy, fuel prices pinch food distributors

By Sandy Clark
Springfield Business Journal Contributor
6/25/2007

Wholesale food distribution business in Springfield is facing new challenges in a tight energy market.

The broader issue, however, is maintaining margins and dealing with rising costs, according to Steve Potter, vice president of industry relations with the International Foodservice Distributors Association.

“On the distributor side, it is very significant,” Potter said. “For each penny that fuel goes up, it costs our industry a million dollars. Each time you see a penny of fuel rise, that’s a million dollars of operating cost being added to the industry.”

The problem is compounded, too, when fuel-price increases are coupled with other energy costs.

“If you couple that with the energy costs of refrigerating a distribution center, those costs have gone up 40 (percent) to 60 percent,” Potter said.

Mike Melton, sales manager at Springfield-based Packers Distributing, feels the effects of higher energy costs.

“We have never had a fuel charge until a couple of years ago,” Melton said. “We initiated a fuel charge to help offset some of the costs of increasing fuel costs.” Right now, the surcharge is $7.50 per stop, but it fluctuates depending on fuel costs and has been as low as $2.50.

According to Potter, distributors that handle frozen or refrigerated products – Packers Distributing among them – incur extra energy costs.

Melton said Packers has avoided the bulk of the increase there by running off the local electric grid, but the company has seen plenty of additional expenses on the fuel front.

“We’re one of the few distributors left in town that furnishes a company car for our salespeople,” Melton said. “Some of the benefits of the job are that car, the fuel and the insurance. The higher gas costs in just covering the territory in general has increased our cost of doing business as that salesperson drives their thousand miles or so a week.”

Packers now provides fuel for 10 salespeople.

“Right now, I think fuel is the biggest unknown, and it is having a major impact on consumers’ disposable income,” Potter said.

Changing eating habits

In Springfield, most food is consumed in one of three places: the home, a restaurant, or in an institutional setting, such as a school. To get there, it travels through two primary distribution channels.

Banta Foods and Springfield Grocers are the two largest institutional distributors in Springfield. They serve restaurants and large customers, such as hospitals or schools. The bulk of groceries heading to retail store shelves get there through either the two closed distribution channels serving Wal-Mart and Dillons or via Associated Wholesale Grocers. A few other specialized distributors like Packers and the exclusive direct-store distributors of products like chips, soda and beer make up the rest.

Higher fuel prices are changing where people are eating now, too.

Changing patterns differ depending on whether the consumer is in an urban or rural setting.

“In the rural areas, it is more about consolidating your miles,” Potter said. “The pattern that people are taking is that they are monitoring their miles more closely. They plan a stop on the way to or from work rather than going out of their way.”

That’s good news for grocers like Bill Smillie, owner of Smillie’s IGA in Springfield. Smillie’s primary distributor is AWG, from which he gets about 65 percent of his stock. The other 35 percent is made up of direct-store distribution of products such as chips and soda and deliveries from specialized distributors.

By consolidating his deliveries with AWG, Smillie said he cuts energy use and costs, which are incurred every time he opens the loading dock, saves on labor, and minimizes the risk of theft.

Fewer ‘trucks on the street’

Dealing with higher fuel costs isn’t the first challenge for food distribution. Smillie is still feeling the effects of the 2003 bankruptcy and closure of grocery distributor Fleming, after which Smillie lost local access to IGA-branded goods and took his business to AWG, with which he has been pleased.

“The only thing that we miss – and this is not anything against AWG – but we are all the same here in Springfield,” Smillie said. “Except for Dillons and Wal-Mart, everybody uses the same wholesaler, so the product selection is the same, the pricing is the same, the deals are the same. We all sometimes look alike. We miss that diversity. Again, that’s not a knock at AWG, but with Fleming, we were just different. We had different items that AWG didn’t carry.”

In addition to picking up customers from the Fleming bankruptcy, AWG also is picking up suppliers due to higher energy prices. AWG Vice President of Corporate Sales Steve Dillard said this growth is coming mostly from former direct-store distributors.

Energy, fuel prices pinch food distributors

“We are finding that companies who had their own trucks on the street are now coming to us to distribute their products, partially due to high fuel prices,” Dillard said. “For example, we are now starting to warehouse ice cream where we didn’t three years ago. We are more efficient than multiple manufacturers having their trucks on the street.”

About Bevinco

Bevinco, a $25 million corporation, has 305 franchises, 208 of them in the United States. The company is celebrating its 20th anniversary this year.

About a year ago, Bevinco created a separate franchise opportunity, Bevinco Food Controllers, a food inventory service.

Bob Bira, senior partner at Bevinco in St. Louis, has been fine-tuning the program for nine months.

“Food is typically a bigger proportion of the business, and the shrinkage we’re finding is less, but the monetary impact may be greater,” Bira said.