Direct store delivery has long been a mainstay of beverage distribution, but shifting dynamics in the retail world have rippled through to distributors, forcing many of them to rethink the way they serve their customers and whether today’s methods will work five or 10 years from now.

“Local store door delivery is very expensive,” says Jim Morehouse, vice president at A.T. Kearney, Chicago. “You start adding that up as part of the cost of doing things and you start to ask, ‘What incremental benefits am I getting?’” A.T. Kearney has asked that question and has been studying distribution and retail in a study that is expected to be complete later this year.

Early results indicate that many in the industry are considering ways to update distribution to meet the needs of today’s changing retail environment. The DSD system was created on the premise that a manufacturer’s distributor could give products more attention and care in the retail environment. But larger retailers believe they now have the tools to make shelf-mix decisions, ordering and merchandising choices on their own. Some of the largest, such as Wal-Mart, have insisted on taking products only through their own warehouses, and even retailers that don’t require warehouse delivery are looking at customizing their delivery options.

“The question that’s being asked is, ‘If local delivery is very expensive, and given the retailer’s changing needs and increasing capabilities, is there a way to reconfigure this process that is less costly and more effective?’” Morehouse says.

“[DSD] operating models were built years ago for pushing product into large-box grocers,” explains Steve Riordan, vice president, A.T. Kearney, Dallas. “Because so many things about the world have changed since then, that traditional DSD operating model does not necessarily fit a world where it’s more demand-driven and the growth is coming from non-grocery channels.

“Leading retailers have gotten much more sophisticated and capable on their own with things like forecasting and order management.”

Riordan has put together what he calls the DNA of DSD, decomposing the traditional elements of DSD into smaller parts. Historically, suppliers have been unwilling to provide any subset of this offering because it has been such a strong source of competitive advantage, he says.  However, more recently, under pressure from retailers, suppliers have begun to consider these retailers’ requests.  The DNA of DSD  includes:

Business insights —  generated from internal, customer and third-party data about consumer, customer, channel and other topics.

Merchandise management — Merchandising decisions and activities, including assortment planning, space planning, pricing, promotion and planning.

Forecasting and order management — Activities and information required to make optimal order decisions at the store level, including demand forecasting and order capture.

Inventory management — Managing the activities, facilities and inventory in downstream distribution to the forward-most distribution point.

In-store selling — Managing the outbound distribution fleet, including drivers, trucks and routing through to the back room of the retail store.

In-store merchandising — In-store merchandising activities, including managing the backroom, setting the shelf and setting promotions.

“DSD is based on the [premise] that the manufacturer knows better than the retailer what they should be carrying and how much they should be carrying,” Riordan says. “But the retailers are really flipping over to demand-based models where they not only have great point-of-sale information, but they also have loyalty card information about what consumers want. This DSD model that was based around push is now being challenged by so many retailers that want to pull.”

Riordan says these changes have been occurring outside of direct store delivery segments for years, but that DSD’s benefits prevented it from being affected until now. However, he says, the benefits are not always perceived the same way by both the retailer and distributor.

“We asked both parties: ‘Which of these do you value most?’” Riordan says. “The manufacturer places a high value on in-store selling. They believe the manufacturer in the store can make significant differences in their business by virtue of their relationship with the store manager. The retailers hate that because they feel their store manager is being manipulated out in the field and the guys running the categories think their field guys are being overridden by the drivers.

On the other hand... “The value of the fleet and the drivers showing up at the store — the last mile of distribution — the retailers and manufacturers place the same high level of value on having that because most retailers can’t duplicate the econo-mies of scale some of the manufacturers have in that last mile,” he continues.

Both Riordan and Morehouse say they don’t expect to see direct store delivery go away anytime soon. And some channels are better served by the system than others. But many distributors are considering hybrid distribution systems that allow them to serve several types of customers, some with more in-store needs than others.

“Up-and-down-the-street, mom-and-pop accounts would be the last thing that would be pulled out of DSD,” Riordan says. “But one of the things companies are looking at is rather than have a one-size-fits-all model, many manufacturers are contemplating going to at least two versions of a model that would be a big-box model and a small-box model.

In the end, that might look like a DSD-type model that serves convenience stores, drug stores and dollar stores in major metropolitan areas that would sit alongside a model for large grocery and mass merchandise retailers that puts more responsibility for delivery and in-store execution in the hands of the retailer. Either way, what happens during the next three to five years will be pivotal in determining what distribution will look like in the future. BI