EACH quarter, Stocks & Securities Ltd (SSL) visits the operations of a Company listed on the Jamaica Stock Exchange (JSE). For the first quarter of 2010, it seemed timely to visit GraceKennedy Ltd’s (GK) distribution centre that was launched in January, and has been in the media consistently over the past several months. The $1.8-billion distribution centre, which is located in Spanish Town, is poised to deliver a number of benefits to the Conglomerate’s operations, flowing especially where it matters most — its bottom line. GK has already established itself as a leader in the area of distribution and this new initiative will give it a further edge over the competition.

SSL’s trip commenced with a tour, guided by GK Foods senior general manager, Ryan Mack and project manager and chief risk officer, GK Foods, Philip Alexander. After the tour, SSL met with the group deputy CEO and CEO of GK Foods, Erwin Burton.

The building sits on 50 acres of land, of which 29 acres are used for the distribution centre. However, it was not until entering that the technological synergies to be gained were revealed. It boasts 235 sq ft of warehouse space, 50 ft high with six racks of storage, significantly more than the three to four racks seen in many warehouses. All of GK Foods’ domestic business will go through the distribution centre, and approximately half of exports. The facility, which houses the largest food warehouse in the Caribbean, will allow GK Foods to consolidate operations from seven warehouses, creating a “one-stop-shop”.

When SSL visited last Wednesday, the warehouse stocked only approximately one third of GK Foods’ total inventory, specifically inventory relating to the subsidiary, World Brands Services Ltd. However, GK will begin to transport the remainder of goods this week and expects to move all operations to the Spanish Town distribution centre during April. Therefore, we can expect to see the impact of these efficiencies to a greater extent starting with GK’s fiscal second-quarter results.

It is clear that all eyes were focused on maximising efficiency with the creation of the distribution centre. The warehouse, which is completely wireless, utilises the SAP Warehouse Management Software System, which is quite rigid, and leaves little room for human error. Of note, workers wear computers on their wrists which tell them exactly which item should be removed from or placed on racks. The modern system allows for more effective inventory management and is forecast to cut the time required to empty a container in half.

GK estimates that the new warehouse management system will generate further efficiencies through speedier delivery and improved service levels. Service levels, or the ability of the Company to fulfil orders within a given time period, currently stand between 89 — 90 per cent — but GK forecasts that this figure will improve to 97 per cent by the end of the year, contributing significantly to the food division’s inflows. Another source of improved efficiency will be on shipping costs. Previously, the company incurred substantial fees relating to demurrage and detention. The distribution centre, which allows for quicker unloading of containers, is projected to reduce these costs dramatically.

Also within the facility lies a large cold-storage area, which is expected to open doors for GK Foods, especially in terms of product expansion. According to Burton, GK will now be able to expand its product line to include more produce, meats and fish.

The space will also allow GK to expand its distribution business by attracting more overseas agencies. Such contracts could include distribution not only within Jamaica, but also to the wider Caribbean region. Foreign agencies have already expressed interest, but no new deals have been finalised at this time as the facilities are not yet ready. However, GK expects deals to materialise by Q03 2010.

Further cost savings will be created via the warehouse’s lighting system, which uses “light-emitting diode” or “LED” lights. These lights use only 20 per cent of the energy of fluorescent lighting, produce very little heat (which fares well for cooling costs) and only need to be replaced every ten years. Some of the lights in the warehouse also run on motion detectors, facilitating further energy savings.

However, there is one factor which should not be ignored, and is probably the most immediately identified benefit the group will receive from the construction of this new facility. That is, the tax credit it will be eligible for under the Urban Renewal Act, which was designed to “encourage and facilitate development in areas plagued by dilapidation, blight or urban decay” according to Minister of Information and Telecommunications Daryl Vaz. The Urban Renewal Act allows qualifying Companies “a tax credit equivalent to [thirty-three-and-one-third] per cent or other rate as the minister may by order prescribe, of the capital expenditure made…during the year of assessment in respect of the improvement works.” However the credit is applied in such a way that it does not reduce the company’s taxation by more than 50 per cent in each relevant year. Under the outlined terms of the act, GK is positioned to enjoy significant cost savings through the subsidiary GK Foods and Services Ltd, which owns the building.

Investors have already demonstrated their confidence in the Conglomerate, sending the shares up 64.82 per cent since the start of the year. With the addition of the distribution centre, and the promise it holds for GK, the company is set to continue to be a force to be reckoned with in Jamaica and, even more so, the broader Caribbean.

Shari DaCosta is a Research Analyst at Stocks & Securities Ltd. You can contact her at sdacosta@sslinvest.com.