Foodzone: Cost-cutting Benefits for Retail

We all know the purported cost savings generated by buying in bulk. The same theory is true of small retailers, when it comes to replenishing stocks. However with food prices on the rise, retail margins have taken a recurring hit in recent years. Foodzone has come up with a solution that is keeping many of the nation’s small retailers afloat, in the face of inflation and the domination of the giant supermarket chains.

foodzone logo without shadow

Leon Volschenk, Managing Director, founded Foodzone 14 years ago, having identified a market opportunity, as he recalls:

The company is a buying-in business, that purchases supplies for small retailers and provides a number of extra services including administration and marketing. We launched the business as The Buying Exchange Company (Pty) Ltd in 1999 and we operate two separate trading divisions: Tradezone, which caters for the wholesale market and Foodzone which handles the retail side.

We provide accounts with all the major suppliers in the country for independent retailers and we combine their buying power in to one.

At that time of launch, we had noticed in the Country Store areas that the smaller convenience and grocery stores and wholesalers were not being serviced by similar groups. We started out with five members wanting to join and we have grown the group from there.”

The group has its headquarters in Johannesburg, where the group’s marketing takes place. It also operates an administration centre out of Cape Town, and four regional offices in Bloemfontein, Cape Town, Durban and Johannesburg. Today the group has grown to 170 members and operates 100 Foodzone and 15 Tradezone stores, with a few additional buying partners who carry their own image but benefit from Foodzone’s collective buying process.

The Buying Exchange Company is privately owned by management and two external members and began to really gain momentum when it joined forces with an existing group called Verbruikers Groothandelaars. After a successful joint venture relationship in the first two and a half years of trading, the Verbruikers Group was taken over in August 2001 in exchange for a share of The Buying Exchange Group.

Today the business operates with 52 employees, with members annual turnover in the region of R1.7 billion; however Volschenk says that the Foodzone also make money from some direct turnover to stores, which is closer to R600 million.

Our main source of income is derived from a portion of the rebate we negotiate with the suppliers but we also have a small amount of revenue from a marketing fee charged on purchases channelled through our central accounts.

Volschenk says that Foodzone has focussed on high profile brands and offers retailers a choice of approximately 30,000 different products. The company introduced a distribution programme six months ago and currently uses five distribution contact centres.

Distribution is a vital component to Foodzone’s success – and the lifeblood for its members, as it is essential stocks do not run out.

Our distribution side operates a separate programme from our existing price book system. The price book system downloads updates on our 30,000 products into each store on a bi-weekly basis, so that store owners can keep up to date with the product range and new or discontinued items,” Volschenk explains.

We built an in-house system but we are currently working with Arch to build a new order and distribution programme that we hope will be launched in late January or early February. We started preparations two years ago and will be testing the new system in the New Year. All of our team have already received training and our plan is for Arch to train up all of our members over the next few weeks. The system promises to be one of the best of its kind anywhere in South Africa,” he continues.

The system will prove vital as Foodzone aims to keep its members’ costs down through collective bargaining, at a time when inflation threatens to push up prices.

During 2012 we have seen inflation rise by about 5 per cent and we are discussing price increases with a number of suppliers. Inflation for the retailer can at times be welcome, as long as the volumes stay the same – but this time around the increases have affected some of the volumes.

Retailers are cutting back on some product lines and of course inflation can affect sales volumes. Retailers are under stock pressure right now and inventories are cut as low as possible – so we have to be careful as we work on figures and volumes rather than specific products.”

One of the concerns Volschenk expresses is that the volumes of orders remain high enough to sustain a changing delivery environment:

Many of the stores are getting deliveries bi-weekly, although some in the outlying areas only receive stock on a monthly basis. Distribution in the future is going to play a huge part in this business; most suppliers are now using agents for delivery and their trucks need to be full to make it viable to deliver in outlying areas.

The other problem is that the major supermarkets, (along with opening many new stores that threaten the business of smaller independent retailers) have gone into distribution in a big way meaning that one agent’s truck now carries much less and there is an increase in delivery time as the agent waits for a full load.

For this reason we entered distribution for our own brand and we are now looking to add further strategic lines as we develop this further. In the next three years we aim to be able to deliver up to 5,000 put-ups to our stores.”

In the present economic climate, Volschenk feels that Foodzone offers many benefits to independent retailers: “Some (retailers) have benefitted from memberships within two months of joining as the margins they can achieve by buying stock at better prices and payment terms improves their cash flow very quickly.

We can assist retailers with both regional and national buying and also offer a wide range of promotional benefits. Our broadsheet advertising has been our most successful source of promotion but we have also embarked on television, radio and newspaper advertising.

We have also from time to time used cold canvassing as a means to talk to independent retailers and explain the benefits of joining Foodzone and we recently started to use SMS texting as a marketing tool to our current members on deep cut pricing deals, but not as a canvassing tool. Our next initiative is to launch a Facebook page which we hope will be ready during 2013.”

According to Volschenk membership rose by 6 per cent during 2012, which he says is indicative of the present economy: “When the cash flow constraints start if can be the best time to join a buying group but many retailers are cautious and put off joining for exactly that same reason. We find that most guys make their minds up either at the beginning or end of the year.”

His forecast for 2013 is that trading conditions are likely to remain similar to 2012, and Foodzone’s focus is to improve its service for its existing membership:

Our main concentration will be on distribution and negotiating better prices and a bigger range to improve both our own and our members’ margins,” affirms Volschenk.

There will be more of a focus on organic growth rather than new membership and we want to improve quality in areas such as greater provision of fresh meat and fruit and vegetables.”

PIC 14