Report: Poor GCC logistics are pushing up food costs

By Eliot Beer

- Last updated on GMT

Weak infrastructure is  key driver of food inflation in GCC, the report says
Weak infrastructure is key driver of food inflation in GCC, the report says

Related tags: Supply chain, Food supply chain, Supply chain management, Logistics

The GCC’s food supply chain and logistics industry is driving up food costs and stifling growth due to a lack of development and innovation, according to a new report.

The report, published last month by Irish consultancy Farrelly & Mitchell, claims the region’s logistics industry is lagging behind the rest of the world, and with few exceptions is becoming more, not less, fragmented. It compares the region’s industry to 1980s Europe, with hundreds of small firms serving individual niches in the market, but missing out on efficiencies from being part of larger networks.

Logistical de-evolution

The global food supply chain has evolved and become ever more efficient in developed markets such as North America, Europe, and the UK. Generally the opposite is the case in GCC. The UAE is the sole exception, with food logistics forming a core component of the logistics industry and some well-established large distributors catering to the food retail sector​,” said the report.

Weak supply chain infrastructure is one of the key drivers of food inflation in GCC, resulting in wastage due to lack of storage facilities and transportation, which in turn adversely affects efficiency and leads to higher costs. The GCC requires a robust logistics and supply chain management network to ensure quality and timely supply of both local and imported products​,” it added.

With its high penetration of Western-style super- and hyper-markets and generally integrated logistics network, the UAE was the only GCC country which currently has an adequately efficient food supply chain, according to the report. It said Saudi Arabia, while seeing significant growth in new hypermarkets, still lags behind in terms of supply chain evolution, partly because of the high percentage of food sold in smaller stores – 54% of retail food sales in 2013, compared to 18% for hyper-markets.

Consolidate to survive

Both the logistics and retail sectors are ripe for consolidation across the GCC, said the report, with consolidation being the fastest way to see improvements in supply chain efficiency. It also said family businesses may be among those hardest-hit, unless they are able to bring in outside expertise.

Family-owned businesses need to immediately understand and address food supply chain dynamics. For many family- owned food businesses in GCC, an alliance with an international strategic investor/partner can lead to enhanced knowledge, expertise and technology sharing to help reposition these businesses for growth (and survival)​,” the report said.

We believe family- owned businesses must adjust their strategy to remain competitive in the current dynamic and changing business environment. In our opinion, many established family-owned businesses require restructuring to compete and grow, and should identify opportunities for collaboration​,” it added.

As well as improvements to the food supply chain, the report also suggested retailers are missing out on the potential of private label products. It claims regional retailers could see double-digit growth by introducing new private label products, as seen in other markets.

Use of private labels is a key strategy of all major matured retail markets such as the US, UK, and Germany. The GCC region has been lagging behind major matured retail markets in the use of private labels. However, this situation is gradually changing amid the ever evolving landscape of the retail sector, with modern retail replacing traditional independent retail trade. To achieve 15–25% share in overall sales, retailers will need to modify their approach, making private labels an integral part of their growth strategy, thereby boosting their revenues and bottom line​,” said the report.

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