Opportunity knocks

THE COMPETITION and Markets Authority (CMA) recently cleared the merger between contract logistics service providers, GXO and Wincanton – subject to the sale of Wincanton’s dedicated grocery warehousing business to a CMA-approved buyer.

The UK grocery market is sizeable and notable for its highly competitive nature, so this condition is certainly no trifling matter. The concern was the loss of competition would likely lead to higher costs for grocers which, in turn, could be passed onto shoppers across the UK and lead to more expensive products at the checkout.

BearingPoint senior manager Gareth Jenkins, says: “We need to distinguish between the acquisitions impact on grocery transport and warehousing – the forced sale only applies to the grocery warehousing business.

“On the transport side, where Wincanton has a significant presence, the acquisition can go ahead – removing one major supplier. However, we do not see this as having a major impact as there remains a ready supply of very credible suppliers, so prices and choice shouldn’t be materially affected. On the warehousing side, the situation is more complicated.”

Many of the grocery majors already provide and / or manage their own warehouses. 

Gareth continues: “For the others who need credible logistics providers, there is only a small number of providers who have good track records running high-volume grocery sheds. So the key question is who is likely to buy Wincanton’s grocery warehouse business. The most likely buyers are already in this same list of providers, so we do expect to see slightly lower competition. But we do not see this as being a critical issue given the remaining levels of competition and the levels of sophistication the grocery majors have in buying logistics services.”

Dave Howorth, executive director at SCALA agrees the CMA’s decision reflects the highly concentrated nature of the UK grocery logistics sector.

“At present, there are only a select few major players in this space, and the proposed merger between GXO and Wincanton could have reduced that number further, which is why the CMA has insisted on the divestment of Wincanton’s dedicated grocery warehousing business to maintain competition.”

An interesting question is – what happens next?

Dave explains: “Either we see a new entrant into grocery logistics – potentially a player without deep experience in this very specialist, time-sensitive sector – or operations are taken back in-house by major retailers such as the Co-op.

“Both options present both challenges and opportunities. A new entrant without the expertise required for grocery could introduce risk in terms of service levels and resilience, but would also help to level the playing field. On the flip side, a move to in-house operations could signal a major strategic shift for retailers.”

The opportunity lies in gaining greater control over service levels, resilience, and cost visibility, which is critical in a competitive grocery market. The challenge is that operating complex, temperature-controlled supply chains is resource-intensive and requires significant investment in infrastructure, systems, and skilled labour.

“Whichever way the decision goes, it will have significant implications for competitiveness and resilience in the grocery supply chain,” says Dave.

Broader challenges

The grocery logistics sector faces many challenges at present, perhaps none more important than the conundrum that while competition has been very good for consumers, for suppliers to the big grocers, this ‘cut-throat’ climate means healthy profits are hard to come by.

Dave Howorth explains: “The grocery logistics sector is a fundamentally low-margin environment, which can make it less attractive for most third-party logistics providers compared to other markets. For example, the complexity and cost of handling temperature-controlled products, ensuring high service levels, and coping with seasonal fluctuations all contribute to the operational challenge. Meanwhile, labour shortages and cost inflation have further squeezed margins. This creates a structural challenge for the industry: maintaining competitive pressure and driving innovation in a market that doesn’t always offer ‘big’ rewards.”

Gareth Jenkins adds warehouse automation and fleet de-carbonisation to these challenges.

“Warehouse automation in grocery is accelerating, with a number of the grocery retailers pushing forward with highly automated storage and picking solutions. This is a response to higher labour costs and challenging labour availability, but the investment levels are high.

Equally, the grocery majors have ambitious fleet decarbonisation  targets

That said, Gareth continues: “The majority of the grocery deliveries we all see day-to-day on the roads are still conventional ICE diesel-powered deliveries. The low-carbon alternatives (biofuels, LNG, electric, etc) are all at different stages of maturity and a truck’s life will be 5-10 years in a grocery fleet, so choosing the right technologies at the right time and deploying them on the most appropriate routes is a major challenge for the grocers. On a wider point logistics operators have an opportunity to drive their value proposition with their grocery customers by providing insight into their Co2e emissions and discussing joint mitigation strategies.”

In-house moves?

So, what does the future hold for the grocery logistics market? Dave Howorth anticipates that more retailers will consider moving certain elements of their logistics back in-house.

“Own-account operations could well give them greater control over service, cost, and flexibility, particularly in a market where brand reputation is tied so closely to product availability and delivery reliability.

“At the same time, we’ll likely see continued consolidation among third-party providers, as scale is essential to achieving efficiency in such a low-margin sector. The next few years will be about balancing cost efficiency with resilience, and the question of who carries the operational risk (the retailer or the logistics provider) will be at the heart of that debate.”

Home deliveries

The future can very quickly become the past however. During Covid, Q-commerce and grocery deliveries to home saw a huge boom, which fell away quickly in the years following the pandemic.

Do UK grocers still need to get to grips with grocery delivery to homes?

Gareth Jenkins says: “Yes and no! The fundamentals of costs vs fees paid by customers are still unattractive – as a rule, the grocery majors do not make money on these services and often lose money, but they have to provide them to protect market share.

“But while this is true, many of the grocery majors have made significant progress. They’ve segmented the market between weekly shops (requiring van / larger vehicle delivery) and the smaller, impulse, convenience orders. For the latter, many of them now have services delivered through UberEats or Deliveroo style solutions at a fraction of the cost of other delivery options. 

“The other progress they’ve made is that most of them have, outside of areas like London, settled on a solution of picking from stores and leveraging existing infrastructure – moving away from expensive dark store style solutions. To be clear, serving from the stores does have downsides, but the grocery majors have experimented with alternatives and seem to be coalescing around a favoured solution outside of London and the South East.”

Dave Howorth adds: “It’s important to separate the rapid-delivery boom-and-bust of companies like Getir from the established grocery home delivery operations that have been part of UK retail for many years. The super quick-commerce model, which relied on dark stores and ultra-fast fulfilment, simply wasn’t sustainable at scale.

“The challenge with store-based fulfilment, however, is maintaining product availability – especially when customers can buy the last item on the shelf in person. Solving that tension, and doing so profitably, will remain a key focus for grocers.”