Logistics outsourcing in grocery distribution: a European perspective

Gilles Pach

Introduction
In his Prcis de lart de la guerre (The Art of War), published in France in 1836, Baron Antoine Henri de Jomini created the word logistics and dened the concept according to which management of ows presented a problem to be solved at the same time as strategic and tactical decisions were taken (McGinnis, 1992). At the time, strategy was military strategy and ows concerned all goods, from food to weaponry, that needed to be transported to, or close to, the battleeld. Today, logistics not only remains a major concern in any military operation, but has also emerged as a major tool in company management. For many years, however, it was considered as administration, or more exactly as technical means used in marketing. Logistics then meant performing transport and warehousing operations depending on strategies of market penetration, positioning, segmentation, etc. Its importance was eventually recognised in the 1980s when manufacturers and, above all, retailers, began to exploit it to achieve a sustainable competitive advantage. The main transformation to occur during the last 20 years is undoubtedly the emergence of retail logistics which progressively replaced wholesaler and manufacturer logistics. Now, retailers no longer wait passively for the arrival of their supplies at branch stores, but try to partially or wholly control the marketing channel. The paper looks deeper into this theme, not seeking to sum up advantages and disadvantages of retailer-controlled channels, but rather trying to better understand the foundations and the implications of the radical change that they are experiencing, from ownership to logistics outsourcing. To analyse the process of logistics outsourcing correctly, one must rst understand why and how food retailers have taken over the control of the supply of their outlets rather than delegating it to contractors. A rapid historical survey shows that retail logistics have gone through two successive periods in all European countries (but at different times), an instrumental one and a strategic one. Outsourcing is a continuation of the strategic approach and results from a very progressive transformation of older managerial practices.
The author wishes to acknowledge Alan McKinnon, Tim White and the LIM reviewers for their helpful comments on previous versions of the manuscript.

The author Gilles Pach is Assistant Professor of Retailing and Logistics at the Universit de la Mditerran, Aix-en-Provence , France. Abstract Deals with food retailers logistics strategies and, more specically, with the nature of collaboration between retailers and contractors (or third party service providers). According to extensive previous research on the topic, own account distribution has been partly abandoned in favour of contract distribution with, in Europe, the implementation of interorganisational relationships based on partnership. The objective of the paper is to discuss this subject by trying to make a clear distinction between myth and reality. The chosen eld for investigation is the French grocery distribution sector, for which the non-cooperative approach remains the dominant model in the logistical channel. Presents some ndings of a research study conducted on purchasing and logistics managers from the main companies in this sector.

Logistics Information Management Volume 11 Number 5 1998 pp. 301308 MCB University Press ISSN 0957-6053

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The paper is divided into three parts. The rst part recalls the inuence now exerted by retailers in the management of ows from factories to store shelves. This does not necessarily mean that retailers have the resources needed to control the logistical channel. The second part, on the other hand, shows that the trend is to resort to specialised service providers with whom long-term relational contracts are sometimes signed (Stank and Daugherty, 1997). However, the third part tends to demonstrate that there is no sole model of logistics outsourcing, by referring to the case of French grocery distribution.

The control of the logistical channel by food retailers

It is now frequently stated, in many papers on distribution management (Bell et al., 1997; Fernie, 1993; McKinnon, 1996), that European food retailers have progressively taken over the marketing channel since the 1960s , and that their control is now almost complete in some countries (UK, France) or on its way to being so in others (Spain, Italy). The basic principle consists of preventing outlets from directly contracting with farmers, manufacturers or wholesalers. These tasks are delegated to specialised institutions (central purchasing ofces) concentrating the marketing competence to negotiate the best terms of sale for the whole product assortment. Nevertheless, food retailers have become interested in the logistical channel recently. With a few exceptions, the organisation of physical distribution remained the exclusive business of suppliers and wholesalers until the 1970s. Exceptions include the Swiss group, Migros, which developed an own account distribution policy before World War II, applying it progressively to its new markets. This was also the case in Turkey, with the opening of a regional warehouse in Istanbul in 1966, followed by four others in Ankara, Izmir, Adona and another in Istanbul. When the economic slump occured in the Seventies, a major change happened: movement of goods from factories to store shelves was taken over by retailers, but to varying degrees depending on the rms. This leadership of the logistical channel was accompanied by the setting up of regional distribution centres (RDCs) whose purpose was to rationalise transport, handling and warehousing operations. It is signicant to see that even

chains of hypermarkets and megastores, despite the large quantities of goods processed by each outlet, also abandoned direct deliveries to develop bulking activities via RDCs. The vast movement of concentration among European retailers, to reach sufcient critical mass in horizontal competition, will probably amplify the phenomenon of ow centralisation. From this point of view, the take-over of Docks de France and La Rinascente by Auchan (France), of Tuko by Kesko (Finland) and of Spar by Intermarch (France) in 1996 and 1997 were the harbingers of a process which is far from complete, particularly among retailer co-operatives. The emergence of such mega-corps, with the short term objective of attaining minimal consolidated turnover of US$40 billion, is likely to have signicant consequences on the supply management of branch stores, by rationalising depot networks. To sum up, a supply system controlled by manufacturers (or wholesalers) is progressively becoming a supply system controlled by retailers, with many UK companies at the forefront of logistics innovation (McKinnon, 1996). Such a radical transformation may seem linear and smooth a posteriori. A careful examination shows that in fact, it is split into two major periods: instrumental and strategic. Of course the dividing line between the two ages of retail logistics widely differs between countries and rms, according to cultural, economic or historical criteria. The rst period of retail logistics related to transport and warehousing facilities, but the functions of these were solely sales support. For instance, organising the rational storage of goods bought in large quantities or simplifying order processing. As for RDCs, for UK retailers of the 1970s, they were mainly a technical solution to avoid queues of vehicles in front of outlets by means of better scheduling of nal deliveries (Cooper et al., 1991). Even today, some observers continue to see logistical networks as strongly dominated by a constraint management. Food retailers became aware of the advantages of controlling the logistical channel from a corporate perspective only in the 1980s. Why? This second period of retail logistics was largely explained by increased vertical and horizontal competition and the consumer becoming both more volatile in choosing brands and outlets and more sensitive to prices. In fact, the existence of a depot network

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effectively increases the bargaining position (and the productivity of purchasing operations) through a centralisation of ows. Furthermore, logistical leadership reinforces the retailers power in the marketing channel insofar as it allows him to have an inuence on manufacturer strategies and can reduce the latter to a situation of dependence (Pach and des Garets, 1997). So, the transition from instrumental logistics to strategic logistics corresponds to a completely renewed vision of the management of marketing channels. By taking over the leadership of the logistical channel, retailers are able to dene the conditions of replenishment of the depot network more precisely. Through a more or less persuasive system of sanctions, they can also modify the behaviour of those suppliers who do not offer an adequate level of logistical service. In other words, retailers can impose strict discipline on suppliers in terms of quality control and delivery schedules (Fernie and McKinnon, 1991, p. 26). This improvement in the performance of the supply chain should, in the last resort, increase the value provided to endusers.

Developing third party services

For many years, food retailers exercised logistical leadership through continuous investment in transport, handling and warehousing facilities. This is no longer really the case today, particularly in the UK (see Table I), even if some retailers retain ownership of the assets and only contract the management of their logistics (McKinnon, 1996). The control of outlet supply instead depends on the ability to design the depot network pattern, the responsibility for which is given to contractors, also known as third party service providers.
Table I Third party penetration in UK food retailers

This idea of control without total ownership is not really original. Examining the growing number of publications in strategic management which identify the core skills that companies must imperatively retain (i.e. making products or providing specic services) and, on the other hand, the peripheral skills which must be abandoned is proof enough. Retail logistics, however, represents a particular situation insofar as it is often presented by the trade press as a major source of sustainable competitive advantage. If there is a tendancy to outsource, this can only be done very progressively, through successive stages and perhaps by acting slightly out of step with the prevailing models of management. Food retailers have quickly realised that logistics outsourcing requires the acquisition of organisational know-how to optimise cost conditions, service and reactivity. In fact, they must have criteria to objectively compare the performances of the various contractors and then monitor specialised service. But the bounded rationality of decision-makers and asymmetric information make it difcult for retailers to anticipate potentially opportunistic behaviour by contractors. In the terminology of agency theory, the existence of excessive monitoring expenditure paid by the principal (the retailer) when he delegates all or part of his logistics to an agent (the contractor) may justify vertical integration due to the lack of reliable service assessment data (Pach and des Garets, 1997). The contractors opportunistic behaviour obviously depends on a number of environmental characteristics. According to Stank and Daugherty (1997), the major ones are: environmental capacity; and environmental volatility. So, when the demand for logistical services is high compared to the supply, contractors can act opportunistically towards shippers since it is easy for them to nd new customers (manufacturers or retailers). Similarly, a diverse (volatile) supply environment makes it far more difcult to have access to information on various contractors, the selection process then becomes more complex and the decision-making risk is increased for the buyer. In order to limit this risk, European food retailers have reected for many years on the implementation of appropriate managerial procedures. Food retailers have gradually become more experienced in assessing

Operator

Warehousing (% volume)

Transport (% volume) 64 45 48 74 100 0 48

Asda 64 Iceland 45 Safeway 45 Sainsbury 64 Somereld 50 Tesco 38 Waitrose 48 Source: Institute of Grocery Distribution

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specialised service providers to the point of being easily able to draw up relational contracts, which, though incomplete, are detailed enough to limit opportunism. In brief, we can conclude that there is organisational learning in terms of outsourcing, but in the specic form of an intelligence of experimentation (Koenig, 1996). What does this mean? Logistics outsourcing amounts to permanently managing a series of contracts with specialised service providers whose service quality, reliability and reactivity are not known ex ante. As exchange relationships develop, retailers gradually obtain more and more detailed data on contractors (compliance with contract conditions, ability to innovate, etc.), resulting in a signicant reduction of opportunistic behaviour. Here, we encounter again the principle of enhancement of systems from an iterative learning process, which is well-known in neural networks analysis. This dynamic perspective of accumulated knowledge certainly explains the current success of relational contracting. In fact, retailers will no longer be reluctant to get involved with given contractors as soon as they really trust their managerial abilities. This atmosphere will facilitate mutual adjustments throughout the partnership. From this point of view, outsourcing seems to constitute competitive leverage for many European retailers:
Emerging from the concept of partnership is the idea of the extended supply chain. Whilst traditionally companies have tended to see their strengths in terms of their own capabilities and resources, this notion of extended supply chain looks beyond the legal boundaries of the company for new sources of competitive advantage (Christopher, 1997, p. 30).

Survey methodology Since 1994, the author has undertaken a research programme on the strategies of French food retailers. The investigation method chosen is based on regular semistructured interviews with logistics and/or purchasing managers in head ofces or in regional ofces. Each interview, lasting two to four hours, dealt in turn with the strategies employed by the company in the last ve years, the stages in installing logistical tools (RDCs, information technologies) and nally with the retail buying process in its wider sense. The semi-structured interviews are not coded and quantied, and only use thematic analysis. They are supplemented by a review of the French trade press. The data collected cover several elds, some of which do not directly involve logistics. This is the case of suppliers selection procedures of central purchasing ofces, the processing of which is dealt with in other publications. Concerning logistical management, the collected information is divided into two types: (1) a presentation of the main steps for setting up logistical tools and detailed description of their current state; and (2) a denition of logistical choices (ownership vs. outsourcing) and medium-term outlook for strategy development. As regards outsourcing strategies, managers were asked to give details about the factors concerning the nature of contracts in warehousing and transport activities, in order to assess their duration and frequency, and the types of products concerned by logistics outsourcing, to know whether the transaction management requires specic skills and investments. To sum up, qualitative information has been obtained on the structures and strategic behaviour of 11 rms: four multiple retailers: Casino, Comptoirs Modernes, Docks de France (until 1996) and Promods; three retailer co-operatives: Intermarch, Leclerc and Systme U; three chains of hypermarkets or megastores: Auchan, Carrefour and Cora; and one variety store: Prisunic. Our sample may be considered as representative of French grocery distribution insofar as it covers nearly 75 per cent of its consolidated turnover. It must also be noted that these are the major companies in the sector, and the

The French case: research and ndings

French mass distribution is obviously concerned by the process of logistics outsourcing. However, in contrast to some of their European competitors, food retailers question the methods and hesitate to adopt a cooperative approach with third party service providers (Pach, 1998). This hesitancy seems to be due to the existence of a competitive culture, deeply rooted in the organisational structure, and by a short-term vision of exchange relationships. In any case, this is what appears from eld studies on the main companies of the sector.

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only ones to be present nationwide. The companies which are not part of the sample are present regionally only and/or have relatively low annual sales (less than US$4 billion). Current status French food retailers are distinguished by the extreme diversity of their outlet and depot networks. Some rms have a majority of outlets with large sales areas. These are chains of hypermarkets (Carrefour, Cora) or groups promoting the development of hypermarkets (Auchan, Leclerc, Promods Logidis). For other food retailers, outlets have mostly 1,500 square metres of oor space or less (see Table II). This fragmentation is also present in depot networks. The number of RDCs remains rather high, on account of a policy of specialisation by product category (groceries, frozen food, etc.), and their storage capacity is rarely very important. Thus, eight companies of the sample use a logistical system composed of at least ten RDCs and 75 per cent of the total number of the recorded RDCs have a storage capacity inferior to 30,000 square metres. Thematic analysis makes it possible to classify French food retailers into four strategic groups depending on the relative importance of own account distribution and outsourcing as far as warehousing is concerned: (1) the rst group is made up of companies who have chosen own account distribution quasi-exclusively: Comptoirs Modernes, Intermarch, Leclerc and Systme U;
Table II Prole of outlet and depot characteristics (1997)

(2) the second group consists of companies which have opted for own account distribution, but progressively resort to third party services: Casino, Docks de France (until 1996) and Prisunic; (3) the third group includes companies in an intermediate situation, looking for a balance between own account distribution and third party services: Auchan and Promods Logidis; and (4) the fourth group comprises companies which have opted to use only third party services: Carrefour and Cora. In brief, French food retailers undoubtedly remain largely integrated in terms of warehousing, but much less so in transport (see Table III). The most signicant exception is that of Intermarch. The retailer co-operative, which uses road haulage only, is an own account operator owning and renting about 2,000 articulated vehicles. Of course, some RDCs resort to chartering occasionally, but this remains a marginal phenomenon. In fact, Intermarch wants to completely control transport insofar as the volume of delivered products is large and stable enough to amortise the capital cost in good conditions. The predominance of ownership is not very surprising for those who are familiar with the history of French grocery distribution, insofar as most companies invested massively in logistics during the 1950s and the 1960s. They seem to be reluctant to let them go for obvious social reasons, but also because many managers are still quite against outsourcing: for some logisticians, their power in the

Operator

Type of outlets*

No. of outlets

Selling space of outlets in 000sq.m 1,710 1,100 1,730 640 440 2,900 1,830 180 1,300 1,100

Storage capacity of depots in 000sq.m 390 500 680 175 50 940 620 55 400 420

Auchan H/S 630 Carrefour H 117 Casino H/S/CS 2,800 Comptoirs Modernes H/S/CS 715 Cora H 57 Intermarch H/S/CS 3,050 Leclerc H/S 600 Prisunic S 190 Promods Logidis H/S 1,370 Systme U H/S 805 Notes: *hypermarket (H); supermarket (S); convenience store (CS) Source: original survey 305

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Table III Third party penetration in French food retailers (1997)

Operator Auchan Carrefour Casino Comptoirs Modernes Cora Intermarch Leclerc Prisunic Promods Logidis Systme U Source: original survey

Warehousing (% volume) 40 100 20 5 100 0 5 25 40 10

Transport (% volume) n.a. 100 95 80 100 5 75 100 80 60

organisation is directly related to the number of employees who report to them! Only the Carrefour and Cora groups use contractors exclusively, perhaps because they were late in deciding to control the logistical channel (at the end of the 1980s), by which time there was already a structured market of third party services. Nevertheless, it must be recognised that the idea of outsourcing and vertical disintegration is gradually moving into the mainstream (Pach, 1998), even in historically integrated rms like Promods or Casino, but with the notable exception of retailer cooperatives whose members are opposed to sharing logistical tools with other rms. In most cases, as Garreau (1994) already noticed, logistics outsourcing involves only a few types of products: either those whose required investment is too high (frozen food), or those which require a specialised knowhow that retailers are not very familiar with (household appliances, imported goods, etc.) In fact, the use of contractors is simply an addition to internal logistical tools, not a potential substitute for them. In other words, according to our semi-structured interviews, outsourcing never appears to be a deliberate strategy accompanying a re-engineering approach. Of course, there is a selective transfer of old activities to new managers, but without using them as vectors of change. So, French food retailers see third party services as a technical extension of their own capacities rather than a new solution for solving their own deciencies. The nature of the contracts binding food retailers to third party service providers conrms this state of mind. Most frequently, the

contractual relationship is effectively and strictly limited in time and task performance. The thematic analysis describing French food retailers shows a clear majority of contracts renegotiated at the end of each year. Some are even signed for much shorter periods. For instance, in transport and handling, we commonly nd spot contracts as described by Rey and Salani (1996). An ultra standardised service is offered by the contractor to a number of rms, each of these resorting to it on a daily basis. The structurally unstable characteristics of logistics outsourcing contracts seem, to say the least, to be indicative of a lack of partnership. It is true that a new reality seems to be emerging with the implementation of dedicated contracts distribution which customise commercial contacts by associating a principal and a sole agent for several years (Pach and des Garets, 1997). Apparently, relationships become closer, and a few capital investments are even shared between partners to improve customer service and performance. From this context promoting relationalism the degree to which relationships are governed by relational norms springs an essential question: is the French system going to align itself on a model of cooperative logistics relationships, after a phase of organisational learning of outsourcing? Toward cooperative logistics relationships? From a eld study done in the USA on the logistical supply industry, with data from 189 logistical supply relationships, Dahlstrom et al. (1996) were able to show that marketplace uncertainty and the nature of the investments required to conclude transactions directly condition the forms of governance between users and service providers. So, when investments tend to become more and more idiosyncratic, and the climate is unstable, relationalism makes it possible to secure logistical performance. In other words, spot contracts are abandoned at the expense of relational contracts distinguished by the scheduled recurrence of transactions. For some analysts, the model can without doubt be extended to all exchange relationships in the marketing channel. For some years now, outlet managers have been deprived of the power to negotiate directly with manufacturers, at the expense of the central purchasing ofces. According to Green 306

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et al. (1997), the major concern of this reorganisation is to reduce transaction costs through new forms of governance. The process of supplier selection by central purchasing ofces is in effect based on bilateral contracts dening (over several years) the rights and duties of each party. In a more general way, they formalise expected behaviour, particularly the delivery of the right quantity of products at the right time at a previously negotiated price. Compared to conventional contracts, instantaneous and without interaction between the partners, bilateral contracts thus avoid an ongoing reassessment of suppliers by outlets. This reasoning can be extended to the purchase of logistical services in France, if one believes the trade press which has become overenthusiastic about a few experiments. An excellent example is the Casino group. At the end of 1994, the rms logistics faced many problems concerning the management of the RDC specialised in clothing products. To solve them, Casino decided to outsource, but by adopting a three-year contract. A regional carrier, Transports Daniel Robert, was nally chosen to ensure warehousing, order picking and delivery to all hypermarkets in France. The partnership resulted in the implementation of a common data processing system and an exchange of employees between Casino and its specialised service provider. Is this example really representative of a coming revolution, the development of closer relationships resulting in greater willingness to pool information and knowledge? This is not at all certain according to thematic analysis. The development of a partnership through an extended supply chain, including EDI and ECR techniques, is founded on trust between retailer and contractor, and this trust must lead to the quasi-certainty that none of the parties will sacrice future relationships to personal interests (Smeltzer, 1996). So, relationalism depends on transparency and long-term vision which are foreign to the culture of French food retailers for many reasons (urgency of operational issues to settle, price competition where anything goes, etc.). Table IV provides a survey of the relative prospects for cooperative logistics relationships. And the natural trend towards a non-cooperative approach quickly re-asserts itself: in spite of efforts and investments made by Transports Daniel Robert to answer Casinos needs, the three-year contract was not renewed in 1997.

Table IV Relative prospects for cooperative logistics relationships

Operator Auchan Carrefour Casino Cora Comptoirs Modernes Leclerc Prisunic Promods Logidis Systme U Source: original survey

Warehousing Moderate High Moderate High Low Very low Moderate High Very low

Transport n.a. Moderate Low Moderate Low Very low Very low Moderate Very low

Other experiments at Carrefour, Cora and Promods will have to be closely observed, but it is to be feared that relational instability is deeply rooted in the decision-making processes of French grocery distribution. To break this corporate culture, much perseverance and a general awareness of advantages brought about by relationalism in matters of logistical performance will be needed. But after all, the non-cooperative approach may only be a transitional phase, before logisticians in the retailing industry discover the virtues of true partnerships. In any case, the thematic analysis conrms the appearance of organisational learning phenomena mentioned in the second part of the paper. Numerous logisticians state that they now know much better how to dene contractual conditions and above all, that they are better able to assess contractors performances. It remains to be seen whether this organisational learning will be used to keep the pressure on contractors or, on the contrary, to establish long-term relational contracts in a convivial atmosphere.

Conclusions
The article examined a major theme in logistics research: developments in exchange relationships between retailers and contractors. A lot has already been written on the subject, particularly on the conditions for the emergence, then the stabilisation of partnerships in the logistical channel. This is a normative approach which sometimes suggests that partnership is the one best way, or even a kind of ideal to achieve (Backler, 1991). From this point of view, the French experience is in danger of being perceived as the extension of a now obsolete model dominated

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by a logic of confrontation between economic agents. But the adversarial approach to logistics relationships may offer some advantages that partnership may never attain. For instance, it is possible that cooperation may slow down contractors improvements in productivity. This is only conjecture, but it might deserve some further research. More generally, is the French model generalisable to other countries in Europe? In our opinion, the answer is no, for a simple reason. The adversarial approach to logistics relationships is the direct result of the nancial structure of grocery distribution. The existence of large margins allows Northern European food retailers, particularly in the UK, to put the emphasis on service quality and reliability when selecting a contractor. Logistical costs are not neglected, but lose some of their importance due to the high protability produced by the retail activity through high prices in shops. Moreover, some observers do not hesitate to accuse UK retailers of becoming richer at the expense of consumers (Parient, 1994). In contrast, since the 1980s, French food retailers have been caught among themselves in a price war which leads to recurrent low margins. This competition forces them to reduce warehousing, handling and transport costs to improve their protability. This results in tough negotiations with third party service providers when contracts end, usually every year. So, the European grocery distribution seems to be clearly divided into two models, incompatible for the moment, even if current developments at Carrefour and Promods indicate that a convergence may be possible. This shows that there is still much to be done to obtain a better understanding of the externalise vs. internalise decision in retail logistics. The key issue is to get the essential elements to signicantly improve the outsourcing process. At least, two methods should be prioritised in the next few years: (1) the identication of economic and managerial criteria to assess a priori the effectiveness of each strategic option; and (2) the systematic analysis, from case studies, of the reasons which led to potential questioning of partnerships within retailer/contractor dyads.

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