Article by Brian Antonellis, CTP, is Senior Vice President Fleet Operations at Fleet Advantage
For grocers and their food distribution divisions, food shrink is a continued issue that keeps cutting into profits and also contributing to food waste. Consumers today are also more concerned about sustainability efforts, placing additional pressure on grocers and distributors to make improvements in their overall operational strategies.
Here in the U.S., food spoilage and waste is estimated at between 30-40% of the overall food supply1. For their part, grocers have traditionally relied primarily on inventory management solutions to reduce fresh food waste. However, new solutions are needed because in addition to a greater focus on sustainability by consumers, the continued problem of food shrink is costing billions.
According to industry research, food shrink is costing retailers more than $52 billion annually2. Industry players are frustrated in that they are having a difficult time reducing this cost. Reducing shrink can reduce operating costs by 15 to 20%, or more, said Martin Gooch, Ph.D., chief executive of VCM (Value Chain Management) International3. In retail, a 1% reduction in shrink helps improve the financial bottom line equivalent to a 4-plus percent increase in revenue simply because organizations reduce the subsidies of ineffective operations.
Food shrink also places financial pressure to restock the shelves. More than 60% of grocers2 say they have had to significantly increase fresh inventory to keep up with demand.
Improving On-Time Deliveries To Reduce Spoilage
Grocers and distributors are realizing there may be other ways to reduce food shrink, such as a closer focus on improving on-time deliveries among food distributors may help reduce this number. Many grocers leverage private fleets for their grocery delivery, and according to the National Private Truck Council’s Benchmarking Survey Report, 68% of fleets measured on-time performance for 2021 versus 82% in the previous year4.
Simply improving the on-time delivery rate alone could have a profound impact on saving food from spoilage. In many cases, trucks are late arriving to the store because of weather or traffic delays. However, when older trucks remain in a distributor’s fleet, maintenance and repair (M&R) problems and other mechanical breakdowns can cause more serious delays, further damaging delicate produce that needs to arrive on time to the store.
When isolated down to an aging truck fleet, organizations aren’t just losing billions because of food shrink. These older trucks can further erode a grocer’s or food distributor’s bottom line when M&R costs and lease structures are factored in.
Older Trucks Mean More Spoilage & Additional Expenses
Distributors and transportation fleets have had their eye on improving truck M&R in their operations for years, especially since operational expenditures can significantly add up over time on aging and older trucks. These companies believe it’s such a big problem that M&R was the largest reason why fleets renew, replace or upgrade their trucks according to the most recent industry benchmark report5.
M&R costs on a 2016 sleeper model-year for grocer distributors total $25,392, compared with $2,244on a new, 2023 model-year truck, which provides a savings of $23,148. Across a fleet of 100 tractors, this amounts to $2.3 million.
These cost savings become even more significant when you look beyond the typical M&R expenses including tires, tubes, liners and valves, and include preventative maintenance measures, brakes, expendable items, exhaust systems, fuel systems, and more. The older the truck, the costlier the repairs become. What’s more, technician time becomes more expensive, too, because fleets end up requiring more technician time for service.
Certain Truck Lease Agreements Can Escalate Costs
Besides the specific costs involved with M&R on older trucks, distributors are also paying closer attention to the type of lease agreement they have (full-service vs. unbundled) which can also dramatically impact the expenses involved with maintaining their fleet of trucks.
Distributors must realize that in long-term lease or ownership of the vehicles, they are locked into a higher “fixed” cost for M&R. In contrast, a shorter lease life cycle of two trucks utilizing an Unbundled Lease agreement equates to a sliding scale of M&R costs. At about 48 months, the costs reset to newer truck CPMs. This means your M&R costs are much lower over time and can help improve margins toward the bottom line.
Furthermore, M&R is “Front Loaded” in an FSL agreement. As an example, companies will pay a minimum of .07 per mile in year one versus .02 per mile when unbundling (national average for year one). All trucks come with a bumper-to-bumper two-year warranty that can be extended to four years. Expenses for year one include wearable items (tires, brakes) plus Preventive Maintenance. A shorter truck life cycle produces long-term savings beyond the first year. In a UBL, the CPM average equals 5.675 cents over five years. However, in an FSL, fleets pay up to 9 cents per mile.
Innovative Programs Deliver Cash Infusions
Strategic fleet partners today can help offset financial losses from food shrink in other ways. Innovative programs are now available to help distributors with an infusion of cash while also upgrading trucks for future growth. These “Sale-Leaseback programs” allow distributors to select the assets from their fleet that are older models so that flexible lease partners can purchase those assets and lease them back to the distributor for an interim period until they place an order and transition to new equipment when available. Utilizing a Sale-Leaseback can help provide a cash infusion to offset food shrink losses and position for future growth.
Food shrink is an industry issue that has been around for years, and will continue to be a challenge going forward. However, grocers and food distributors should expand solutions beyond inventory control and re-think their truck fleet life cycle strategies to improve on-time deliveries and reduce other operating expenses that can add up to billions.
Brian Antonellis, CTP, is Senior Vice President Fleet Operations at Fleet Advantage, a leading innovator in truck fleet business analytics, equipment financing and lifecycle cost management. For more information visit their website.
2: “Slipping Through The Cracks; The Hidden Shrink Problem Ruining Grocer Profits”; Shelf Engine
4: “2021 Industry Benchmark Report”; National Private Truck Council