Editor's Blog - Tesco goes for centralised distribution to support China expansion

By Turloch Mooney
Editor-in-Chief
Supply Chain Asia Magazine

“We will continue to expand in locations where we already have a presence and into other parts of the country. From Shanghai, we are pushing out west to Nanjing and managed to settle in Anhui last year,” a senior Tesco executive told Supply Chain Asia Magazine.

The retailer – which has a 30 percent share of the UK grocery market -- currently has 81 hypermarkets and three lifespace malls in China, as well as eight convenience stores in Shanghai. Lifespace malls are multi-storey outlets of Tesco stores and other stores and services.

Tesco has said it will spend US$3.9bn over the coming five years on its expansion in China.

Finding the right sites for store expansion was a difficult task, the executive said. “One of the biggest challenges is finding the right sites to build stores, in terms of getting the real estate required at the right price and making sure the demographics in the area are right for us.”

New supply chain model

In parallel with the expansion, Tesco is adjusting its market distribution model away from small quantity orders from many suppliers going direct to stores, to larger quantities going in through central distribution points.

Securing the quality of temperature-controlled and other fresh food produce as the chain expands is one of the key motivations behind the change, the executive said. “This is a particular challenge as investment in cold chain facilities and services is not coming quickly enough. More centralised distribution will allow for rigorous temperature and quality control measures.”

Tesco currently has a 5000sq m fresh food centre (FFC) in Minhang, Shanghai, and 3000sq m facilities in Shenyang and Guangzhou. In November it will open a 54,000sq m non-food distribution centre in Jiashan, 80km to the southwest of Shanghai, and shut down two existing distribution centres at Waigaoqiao and Taopu. The move will increase the percentage of goods going to stores through central distribution rather than direct from suppliers.

As well as delivering economies of scale in purchasing, centralised distribution will also simplify administration processes; allow for better standardisation of quality and supplier compliance, and improve logistics efficiency, the executive said.

“The goal is to get the order to stock in store cycle down to 48 hours and the processes are being created with that in mind.”

Critical mass of stores

Central distribution centres will be added in second and third-tier cities as a critical mass of stores is opened in those areas. “We need localised supply chains to meet local tastes and we can’t service everywhere from one or two centres.”

Tesco is bringing environmental objectives and standards developed in the UK to the development of its business in China. Commitments and targets include halving total carbon release of its buildings worldwide by 2020, and ensuring that all new stores built from now until then emit at least 50 percent less carbon than an equivalent store built in 2006.