Montgomery, Nevin B.

English

Research Papers in Economics

Economics of the Frozen Food Distribution System
by
Nevin B. Montgomery
President
National Frozen Food Associa
Hershey, Pennsylvania
It’s a pleasure to talk to you this morn-
ing about frozen food distribution. The Na-
tional Frozen Food Association was founded.
just 40 years ago as a frozen food distributors
organization. Although. we have grown to
include every segment of the frozen food
industry, I have long had an interest--and an
admiration--for the frozen food distribution
side of our industry.
We’ve come a long way since 1945. Some
of you may remember the way things were
then. There weren’t many food distributors
who had freezer space. That was because
few retailers and even fewer consumers had
freezers.
The foodservice side was somewhat bet-
ter. Some restaurant operators owned small
freezers. In fact, most frozen food products
were oriented toward foodservice. Restaurants
found their customers liked to eat strawberries
in January.
It was not until the 1950s that frozen
food distribution began to change. Post-World
War II affluence enabled homeowners to buy
refrigerators with freezing compartments.
This opened the door for frozen foods.
Progress continued to be slow, however,
as the industry’s ability to manufacture frozen
foods clearly outpaced the food distribution
system’s ability to store it, It was not until
the late 1960s that distribution began catching
up with the market.
And
ion
t wasn’t until the 1970s that froz-
en foods started to take their rightful place
in food retailing.
Homemakers learned to freeze foods on
their own with their home freezer units,
Home canning to preserve food became less
important. By doing it themselves, consumers
learned the advantages of freezing . . , and
they liked it.
The American population has also been
changing. There are more single-adult and
two-adult family units. Continued affluence
has enabled these families to do things their
parents could never afford to do. They’ve
taken greater interest in new experiences,
travel, good food, and making the most of
every waking moment.
Frozen food packers recognized this
trend in the late 1970s and began introduc-
ing up-scale frozen products that have truly
revolutionized America’s eating habits.
- Frozen dinner and entree sales have nearly
doubled since 1980.
- Frozen ethnic and regional foods--like
Mexican, Oriental, and country foods--
have shown substantial growth.
- And frozen pizza sales have quadrupled in
ten years.
I was talking to one convenience store
chain CEO a few weeks ago, and he said his
Journal of Food Distribution Research February 86/page 11stores had recently gone from four-door freez-
ers to six doors . . . and were looking toward
eight doors in the near future. That’s double
the freezer space for that chain in about
three years!
It’s a growing industry. In 1984 frozen
food dollar volume grew 10.2 percent over the
previous year. That’s double the growth of
any other food category. While frozen food
tonnage increased 1.5 percent, dry tonnage
actually dropped “1.5 percent for the same
period.
At the same time, the general U.S. popu-
lation increased only 0.9 percent. This is
significant in that it indicates growth in per
capita consumption of frozen food and re-
affirms that the consumer increasingly per-
ceives frozen foods as a quality and conven-
ience value.
Frozen food warehousing is keeping pace.
According to the U.S. Department of Agricul-
ture, total warehouse freezer capacity in 1973
was 889 million cubic feet. In 1983 it was
nearly 1.2 billion cubic feet.
Technically, we’re seeing the benefits of
cheaper computer processing with thousands
of times more capacity that enables the indus-
try to collect, manipulate, and evaluate infor-
mation that was only dreamed of a few short
years ago.
This same development has made sophis-
ticated automatic storage and retrieval systems
and individual case selection systems a reality.
Computer-to-computer communications between
customers, brokers, manufacturers, and ware-
houses is also here. So is practical operations
analyses of difficult-to-manage warehouse
layouts and operations.
Legislatively, we now enjoy an environ-
ment that is driven by the marketplace and
not by antiquated regulations. The railroads
are now truly interested in the food business,
and in particular the frozen segment. The
trucking industry isn’t truly deregulated but
rather re-regulated in the correct way.
It’s easier and better now. There is
more carrier competition . . . and the result
is better service at equitable pricing. Truck-
ing companies, as well as private carriers,
now have the opportunity to run efficient
operations through expanded operating
authorities and routes.
Our association recently updated a sup-
ermarket profitability study that shows frozen
foods to be most profitable. Here are a few
things we learned:
- Frozen food profits contributed from 5.9
percent to 14.2 percent of all store prof-
its.
- Average net profitability as a percent of
sales was 10.9 percent.
- The average gross profit margin was 29.9
percent.
- The weekly gross return on investment
averaged 24.1 percent.
- The average frozen food department prod-
uct turnover rate was 29.6 times per year.
- A sales increase of 10 percent represents
a 21.1 percent net profit increase.
- A sales increase of 25 percent results in
a 54.5 percent net profit increase.
These conclusions are generally sup-
ported by reports from retailers across the
country: But we are now looking at the
new way of studying retail profitability --
Direct Product Profitability, or D.P.P.
Our study dealt mainly with gross mar-
gins to determine profitability. D.P.P. will
give us a way of determining the total cost
of handling a particular product through the
entire system.
Research like this can be particularly
valuable to everyone because it tells us all
where to place our emphasis and attention.
The National Frozen Food Association
also sponsors two other continuing projects.
The first project is our annual National
Frozen Food Month promotion. It’s unlike
February 86/page 12 Journal of Food Distribution Researchany other promotional campaign in the food
industry, Instead of collecting a big war
chest and developing a massive advertising
campaign to sell more frozen foods, our pro-
motion uses people,
Nationally we have some 35 leaders from
every segment of the industry to give us their
best thinking on how we can promote frozen
foods better. We’ve divided up the country
into six regions--each region has one or two
regional coordinators who’re principal frozen
food sales executives for major manufacturers.
These coordinators work directly with more
than 50 local frozen food committees and
associations in most of the major retail mar-
kets.
All these people work as volunteers to
encourage every segment of the frozen food
industry to give a little extra promotional
push to frozen food products for March. We
can’t ask anyone to do any more than they
can afford . . . and we don’t tell them what
to do or how to do it. But we do stand by
to give them all the help a trade association
is able to provide.
In 1984--the first year we ran the pro-
motion--industry sales increased 6,7 percent.
That was the highest monthly increase SAMI
ever recorded for any food category!
In March 1985, our tonnage sales re-
mained at about the same record level of the
previous year . . . but dollar sales jumped
another 6 percent over 1984. This reflects
the consumer’s growing interest in up-scale
products.
We’re already at work for 1986, and
expect our Third Annual National Frozen Food
Month observance to be bigger and better
than ever.
The second project I’d like to tell you
about is our Certificate of Excellence program
for frozen food warehousemen and distributors.
The program is operated in conjunction with
the American Sanitation Institute.
Under the program, a distributor Qr
warehouse firm may voluntarily request an
inspection of its facilities. The American
Sanitation Institute does the actual inspec-
tion. When we receive a favorable report
from A.S.I., we issue a Certificate of Excel-
lence to the company’s facility . . . and pro-
vide them with truck decals and logos they
can use in their advertising.
We also publicize certificate holders in
our association publications . . . and in news
releases to the trade press and to the local
news media.
Now let’s talk a little about the future.
The total frozen food distribution chain
is becoming more efficient. With a growing
market that has limited facilities--for now at
least--the industry must develop and foster
the sophistication of which it’s capable,
There are three” main areas I’d like to
briefly review--Electronic Data Interchange
. . . Direct Product Profitability . . , and
modularization.
EDI communications in general should
allow for better buying and service decisions.
Wasteful and error-prone phone and
Telex/WTX orders are a burden on every-
one’s part. Whether the actual lead times
can be shortened or not remains to be seen.
Either way, better decisions are possible.
As you heard earlier, the concept of
Direct Product Profitability is not only a
natural process or progression, it’s essential
for the retailer to maximize his profitability
and--at the same time--meet consumer desires
at the lowest shelf price possible,
Gross margins alone are just not the
most effective way to evaluate the profit-
ability of a product, especially in frozen
foods. The total cost of handling a parti-
cular product through the entire system must
be evaluated. I think the progress in D.P.P.
in the next few years will be very interest-
ing.
D.P.P. and the dynamics now taking
place in the transportation and warehousing
of frozen foods leads us straight into prob-
ably the most significant opportunity area in
frozen food from a distribution standpoint--
Journal of Food Distribution Research February 86/page 13modularization.
Modularization has been receiving a great
deal of attention in recent months and will
get even more over the next few years.
Granted, everyone doesn’t sing its praises.
Modularization geometrically relates ship-
ping case sizes to one another and to a cam-
mon unit size. Or, to put it another way, it
allows the industry to handle cases of product
in unit load quantities where the unit load
“module” is standardized, and achieves the
maximum utilization of the space required to
accommodate it. This means getting the best
surface utilization of the storage/transport
medium used whether it be a pallet, slave
board, or slip sheet. This “module” should
also achieve the maximum utilization of the
rack space used to store it, and the. same for
the transportation vehicle used to transport it,
The key element in this whole thing is
establishing the “standard” module. Virtually
every warehouse layout and rack configuration
is different. Even manufacturers have diffi-
culty standardizing case sizes and pallet pat-
terns for a single product produced at several
locations,
February 86/page 14
In summary, we think frozen foods are
coming of age. We’re finding growing con-
sumer acceptance . . . that’s changing to
positive interest . . . that’s trending toward
outright demand.
At the retail level, this translates into
increasing shelf space, more and better prod-
ucts, faster turnover, and greater profits.
On the foodservice side, it means cut-
ting kitchen preparation and personnel costs
while providing a varied menu of consistent
quality.
For distributors, the growing interest in
frozen foods requires investment in either
more efficient handling of existing freezer
space . . . or construction of new frozen
storage facilities, In some cases, it means
both.
Again, thank you for the opportunity of
being with you today.
Journal of Food Distribution Research

ECONOMICS OF THE FROZEN FOOD DISTRIBUTION SYSTEM

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