Cooking With Gas

January 23, 2006
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GRAND RAPIDS — Despite today's global economy, buying groceries is still a local business. Providing grocery products to those local stores, on the other hand, is a logistical challenge of international proportions. People expect to pay a certain price for a bunch of grapes, regardless of how much jet fuel and diesel was burned to get those grapes from California to Caledonia. For grocery distributors, satisfying customer demands while dealing with dramatic fuel cost increases can be a bit of a challenge.

Every year, Meijer Inc.'s fleet of more than 100 tractor trailers drives more than 12 million miles between the company's retail stores and distribution centers. The diesel-powered tractors pulling those grocery-laden trailers burn through fuel at an average rate of five miles per gallon. According to the U.S. Department of Energy, the average retail price of diesel fuel in the Midwest in 2005 was $2.36 per gallon. In 2004, it was $1.77. Had it paid retail, Meijer would have used $5.66 million worth of fuel last year. That's well over $1 million more than the previous year's $4.25 million. Obviously, Meijer is a company that pays close attention to fuel prices. So is Spartan Stores Inc. Its fleet and mileage numbers are nearly identical to Meijer's.

Gordon Food Service Inc., another major player in the food distribution business, has a fleet of more than 500 vehicles. Unlike Meijer, which distributes products solely to its own retail stores, GFS has the opportunity to pass along increased fuel costs to its wholesale customers. However, according to spokesman Bob Eichinger, that is not a realistic solution to the problem. Because of competitive market forces, GFS has largely been forced to absorb the increased costs of fuel.

"Although I don't have accurate information on last year's fuel cost increases, it was significant," Eichinger said in an e-mail. "It typically is very difficult for us to pass this cost on to our customers, as the prices we sell our products at are really driven by market price and what our competition is doing from a price strategy."

As fuel costs have escalated in recent years, many transportation-heavy businesses have managed to tack surcharges on to their normal fees. The airline industry, parcel delivery systems, and even Grand Rapids city taxicabs have effectively added premiums to their service fees to cover the increased cost of gasoline and diesel fuel. Other industries that operate on competitive, thin margins have not been so fortunate.

That has led to conservation efforts in the food wholesale business. Eichinger said that GFS has seen substantial savings by reducing the amount of time its trucks spend at idle. Spokesperson Judith Clark said that Meijer has found similar solutions.

"We increased trailer fullness, reduced empty miles, and reviewed all operating efficiencies. That's even more important now — to make sure that a trailer's not coming back empty," she said.

Dale Witczak, director of transportation for Spartan Stores, said that he has tried to focus on similar efforts. Although Spartan does assess fuel surcharges to its distribution clients, Witczak said it is difficult to pass along the "significant increases" that have occurred in the last year. Through labor management strategies and reduction in vehicle idle time, Spartan has been able to keep its fuel expenditure increases to around 35 percent, despite a 48 percent increase in fuel pricing.

Witczak's department has taken a forward-looking stance on dealing with fuel cost issues. Spartan is currently working with a local firm to develop a fuel additive that may increase fuel efficiency and lower maintenance costs. Spartan is in the process of paring down the number of fuel suppliers it deals with. In that process, it is asking its vendors to provide information about the feasibility of soy-based biodiesel. The company is also investing more than $11 million in new vehicles, some of which are equipped with automatic transmissions — a rarity in the heavy trucking world. If these transmissions provide the increased fuel efficiency their manufacturer claims, Spartan may invest in more of them.

The companies also are paying closer attention to their volume purchasing of fuel. Meijer, Spartan and GFS trucks don't simply pull up to the pump at the local gas station and fill up. The companies buy diesel fuel in tremendous quantities and run their own fueling stations at their distribution warehouses. Meijer, which has dozens of retail fuel stations at its superstores, has the ability to buy in even greater volume. Spartan recently entered the retail fuel business, but does not have nearly the volume that Meijer does.

"One thing we've done is get some other businesses to partner with us to increase our volumes. And by doing that, that puts us into a different pricing bracket," Witczak said. Buying in volume allows these companies to consider fuel as less of a necessity and more of an investment.

"Fuel in the past has predominantly been a budget line item that fell into the responsibilities exclusively of the transportation department. But we think, moving forward, that as a commodity, it's something that maybe we'll look at from an energy-buyer or a commodities standpoint. We'll be using the expertise of some of the people that are close to it in transportation, but also using some of our market knowledge and other things," he said. "It is an area that has significant dollars budgeted to it, bottom line. So we're not taking it lightly."    

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