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A Guest Viewpoint- Procurement Impact of the Amazon-Whole Foods Acquisition

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The following Supply Chain Matters guest blog is contributed by  Jim Wetekamp, Chief Executive Officer of BravoSolution. This is part of a series of invited guest commentaries relative to the acquisition announcement from Amazon regarding intent to acquire Whole Foods.

 

The Amazon-Whole Foods acquisition is arguably the biggest, most ground-breaking deal of 2017. It will change the retail game as we know it today, and spark a tremendous shift for procurement and supply chain teams.

The reasons Amazon bought Whole Foods for $13.7B are clear: the vertical integration establishes a brick-and-mortar presence for the eCommerce giant, expands its distribution network, and finally breaks Amazon into the grocery market – a long-time pursuit for CEO Jeff Bezos. For Whole Foods, access to new technologies that will modernize the in-store grocery shopping experience and accelerate supply chain efficiencies will likely have measurable impact on the bottom-line. Think warehouse robots that can move inventory to where it needs to go much faster, and Amazon Go type checkouts that make the purchase process instant and digital for consumers. Whole Foods Austin A Guest Viewpoint  Procurement Impact of the Amazon Whole Foods Acquisition

Though the extent of the integration between the two entities is still very unclear, we can assert the acquisition will inevitably transform the first and last miles of the grocery supply chain.

Three areas of impact for procurement

 Backend technology will become much more sophisticated across the entire supply chain industry. The acquisition will likely be a trigger for additional investment into Amazon’s procurement technology. Between AI-enabled online ordering with Echo and Dot for industrial procurement, Dash goods ordering services with single item push-button replenishment, and improved inventory tracking with Internet of Things (IoT) enabled logistics — including smart-containers and drone technology — there is a long runway for Amazon to work with from a technology perspective. The procurement and supply chain space will benefit from the windfall of this innovation, getting a glimpse of what is possible and having a successful model to reference, which will propel the industry forward in digitization.

The health and organic food market will also change. Consumer demand for healthy, natural and organic food offerings has skyrocketed and many grocery stores have been giving Whole Foods a run for its money by offering healthy options at prices that won’t break the bank. The scale and efficiencies offered by Amazon’s ownership and technological expertise will likely help Whole Foods capture new cost savings and pass the benefit onto consumers in the form of lower prices. Grocery procurement teams need to be cognizant of this and identify strategies that will help them keep pace with these efficiency gains and lower costs structures so they can continue to compete on price. Amazon was already a big threat to both traditional retailers and online ordering platforms such as Instacart and Peapod, and this acquisition is poised to help it gain even more ground.

Amazon’s previous investments in aircraft and tractor trailer leasing coupled with  ocean freight booking also pave the way for a continued transformation of inventory management, logistics, and distribution. With leadership in the online shopping experience, proven capability for order fulfillment and an established home delivery network, many believe there’s no stopping Amazon from solidifying its position as an envied supply chain leader. This could have positive implications for the entire supply chain industry.

As Amazon expands its grocery delivery capabilities, it will face the same challenges the industry has been grappling with for a while now, such how to safely, affordably and reliably deliver perishables, and may end up finding a solution that others can adopt. This would open an entirely new realm of possibilities for all players – it’s an issue all grocery brands care about and a development everyone will be paying attention to in the fallout of the acquisition.

There’s also the obvious impact on suppliers. As the in-store and online experiences get better for shoppers, so do sales figures, which benefits both the buying organization and the suppliers that sell into them. More sales means more revenue, and more profit and business opportunities for both parties. Additionally, the acquisition may spark even more demand for organics and sustainable food items by opening up access to more consumers. For suppliers, this means more emphasis on sustainability, quality and transparency.

It’s tough to say for certain what the specific implications of this acquisition are for grocery and retail procurement teams at this point, but the residual impact will be game-changing. As Amazon vertically integrates and its supply chain gets even bigger, it will shake up even more industries and cause major shifts in how procurement teams act and innovate.

 

© 2017, The Ferrari Consulting and Research Group and the Supply Chain Matters® blog. All rights reserved.

 


Activist Shareholder Attempts to Influence Nestle

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A significant development occurred in the consumer product goods sector, as one of the largest and most admired industry leaders came under the looking glass of an activist investor. CPG firms being targeted by activist firms is not a new development, but taking on the European based industry leader is noteworthy.

Earlier this week, hedge fund firm Third Point, under the direction of activist investor Daniel Loeb, announced that it had accumulated about $3.5 billion of stock holdings in global consumer products producer Nestle. With this move, Third Point became the sixth-largest shareholder with a reported 1.25 percent stake in company shares. Nestle Skinny Cow 300x300 Activist Shareholder Attempts to Influence Nestle

Upon the announcement, the hedge fund manager immediately published a letter with a list of recommendations as to how the consumer goods giant can dramatically improve earnings and growth.

Nestle recently appointed a new CEO in January of this year after the company had missed multiple years of sales growth targets. CEO Mark Schneider was recruited from the healthcare industry to add a fresh perspective and to assist in identifying key areas of growth in healthier foods and health care related businesses. Thus, fresh perspectives and a call-to-action were already underway internally.

Nestle wasted little time in announcing plans to launch a $20.8 billion share buyback program as well as to scout out consumer health-care acquisitions. According to business media, plans were fast-tracked amid building shareholder pressures.

Activist investors surrounding CPG and food companies is not per-se, newsworthy, since the likes of Procter &Gamble, Kraft-Heinz, Mondelez International, among others, are situations that Supply Chain Matters has previously commented on.

The significance of a very high-profile and well-respected European CPG company, recognized for superior supply chain and food sustainability capabilities and commitment being influenced by an activist investor and hedge fund is indeed, noteworthy.

Consider for a moment, if just some of the billions of dollars being allocated to share-buybacks were additionally invested in helping farmers and growers to convert their fields and methods to support broader and healthier food choices. Consider if added investments in advanced technologies are applied to monitoring the safety, freshness and processing of food across the end-to-end supply chain.

That is the difference between a short-term emphasis vs. one of longer-term. An industry being challenged by rapidly changing food preferences demands healthier food choices along with brands committed to freshness and sustainability. Investors seek shorter-term value through profitability growth as well as merger and acquisition moves.

We trust Nestle will prevail is balancing both such needs.

Bob Ferrari

© Copyright 2017. The Ferrari Consulting and Research Group and the Supply Chain Matters® blog. All rights reserved.


Campbell Soup Elevates Role of Supply Chain Management

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From time to time, Supply Chain Matters will highlight supply chain management leadership appointments that provide our readers insights into specific supply chain challenges.

One we did want to highlight was a recent organizational announcement by Campbell Soup. Co., which last week promoted three internal executives into wider senior responsibilities that include membership for the corporate executive leadership team, reporting to the firm’s CEO.  campbells soup can 350 175x300 Campbell Soup Elevates Role of Supply Chain Management

In the Campbell announcement, CEO Denise Morrison states in part:

As the external operating environment continues to evolve at a rapid pace, it is critical that we adapt our organization along with it to realize the potential of our Purpose, ‘Real food that matters for life’s moments.’ We are elevating these roles in recognition of the strategic importance they play for our business and our growth plans.

Bob Furbee, a 32-year employee of Campbell’s was elevated to Senior Vice President of the Campbell Soup Company and Senior Vice President of Global Supply Chain. The announcement indicates that Furbee: “will lead efforts in creating an integrated supply chain organization designed to deliver new capabilities and efficiencies to drive growth.” Most recently, Mr. Furbee was Senior Vice President of Supply Chain for Campbell Soup America’s Simple Meals and Beverages business segment, where he held leadership responsibilities for manufacturing, distribution logistics, procurement, and customer service for the Americas division.  Furbee’s background At Campbell’s includes international experience as well having led European supply chain and operational activities.

What Supply Chain Matters found significant was the emphasis on driving top-line revenue growth as well as ongoing efficiencies. That takes on special significance for an industry faced with significant forces of external change brought about by changed consumer consumption and buying preferences as well as game-changing shifts occurring at the retail grocery level. Frankly, we would expect other CPG producers to elevate the role of supply chain management beyond that of a cost line related to operations and more toward a key enabler of needed business changes and desired business outcomes.

In addition to supply chain, other executive leadership elevation included an expanded vide-presidential role for corporate strategy with the appointment of Emily Waldorf, and the leadership of a single, integrated U.S. sales organization under the direction of Jim Sterbenz.


Breaking: Amazon to Acquire Whole Foods- An Obvious Industry Inflection Point

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In the history of any industry, along with its associated supporting supply chains, there comes a seminal series of events that ultimately point to a major inflection point, one that clearly indicates that business-as-usual is no longer an option. For the food and grocery industry, and all of its supply chain stakeholders, the year 2017, in the second week of June, two thunderbolt events ignited a seminal industry change.

As we pen this Supply Chain Matters posting, business and general media are broadcasting the headline announcement that Amazon intends to acquire Whole Foods Market for $42 per share, or more than $13 billion, a clear and obvious effort to directly penetrate the retail grocery landscape. This is Amazon’s largest acquisition to-date, and no doubt, there were likely multiple choices. In the press release announcing the acquisition, Amazon CEO Jeff Bezos indicated that the attraction to Whole Foods was the wide offering of natural organic foods.   FBA sized Breaking: Amazon to Acquire Whole Foods  An Obvious Industry Inflection Point

By our lens, healthy margins, a loyal brand, and future methods to leverage online and in-store shopping were an obvious consideration, Whole Foods has also been under intense pressure from private-equity firm Jana Partners. Whole Foods CEO John Mackey has been quoted as characterizing Jana as greedy. (Actually, he utilized a more direct term)

According to the release, Whole Foods will continue to operate under its current branding, and CEO Jim Mackey will stay-on as CEO.

News and social media reports further indicate that if the grocer receives a better acquisition offer, Whole Foods would be obligated to pay a $400 million termination fee to Amazon.

The other industry shockwave this week came from Kroger Company, one of the largest retail supermarket chains in the U.S., who issued unexpected lowered earnings forecast for the year. The aftermath of this news caused the chain’s stock to drop by 19 percent, the steepest one-day drop for the company’s stock in more than 17 years.

Kroger CEO Rodney McMullen is noted as sting the following in an interview:

The change right now in what the customer wants has never been faster.”

Business and general media reports are citing Nielsen and other retail sales data all indicating that consumers are both more price conscious in their food shopping, continue to seek out healthier food and beverage choices, and are increasingly turning to online channels for food and grocery needs. Nielsen data indicates that online grocery orders have risen 6.8 percent while visits to deep-discount chains are up 2.9 percent.

Other grocery retail chains are also feeling the effects of quickly changing  grocery shopping trends and the words, industry consolidation, are now coming to the forefront.

At the same time, discount grocery chains Aldi and Lidl are making a major expansion within the U.S. to take advantage of the current shopping trends, which will add to increased industry competition at the retail level.

What is now occurring in the retail channel will continue to cascade across consumer product goods, food and beverage supply chains in the form of tougher price negotiations and demands for increased product innovation addressing healthier food choices. The industry has already experienced the pressures from both Amazon and Wal-Mart as to which will receive the most attractive supply pricing deals.

As noted in our Supply Chain Matters industry commentary published in May, the industry winners are supply chain leaders who educate senior management on the differences of supply chain as a cost center vs. a business innovation enabler. They will also be those that can keep a laser focus on the end-goal, meeting and accommodating far different consumer preferences with changed thinking and distribution methods. By our lens, industry supply chains that invest in talent that can bring forward new creativity, collaboration and thinking for a supply chain model that leverages both online and in-store buying needs will likely benefit.

CPG suppliers are also subject to the influences of private equity, specifically 3G Capital, and no doubt, there will likely continue to be influences for additional M&A among major suppliers and food producers.

Consumer packed foods and associated industry supply chain teams need to pay very close attention to industry developments and associated implications. The notions of single-channel product demand forecasting or other business-as-usual supply chain planning and distribution methods no longer apply during now permanent industry shift. Agility, resilience, and a predictive understanding of consumer needs in food and food buying preferences are table stakes.

Be it noted that in June 2017, two industry shockwave developments became the catalyst for structural packaged and fresh food industry change.

Supply Chain Matters will continue to monitor industry supply chain developments and share insights. We predicted significant industry changes at the start of the year, and the clock speed has accelerated.

Bob Ferrari

© Copyright 2017. The Ferrari Consulting and Research Group and the Supply Chain Matters® blog. All rights reserved.

 


Another Example of SKU Proliferation Leading to Cost Complexity

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Yesterday in one of our news feeds, we came across a report on FoodBusinessNews regarding snacks producer Snyder-Lance, and it efforts to address an ongoing challenge to increase profitability. We view this report as a typical current day example of how the C-Suite turns to the supply chain as a prime barometer and facilitator of needed cost savings.

The report outlines a “comprehensive and aggressive performance improvement plan” that a result of recent first-quarter financial results falling behind management expectations., according to the interim CEO. A number of factors were attributed to the sub-standard performance that were described as category softness, lower net price realization, unfavorable mix, cost headwinds and certain execution lapses. Some or most of these phrases should be familiar to our readers in consumer packaged goods, food, and beverage companies since most of the industry has been whiplashed by many of these same forces.

What is rather interesting and noteworthy are statements that overall business complexity drive increases in costs. Snyder-Lance has identified five priorities to attack the complexity problem which include manufacturing and supply chain streamlining efforts. That includes a realization that a proliferation of SKU’s (stock-keeping units), half of which only contribute a reported 5 percent of revenues, the other-half, the majority of revenues.

SKU proliferation is a familiar challenge in supply chain business planning, one that dates back quite a few years in CPG and consumer brand-oriented product areas.

There are many causes.

Companies that undergo periods of active merger and acquisition cycles will often inherit both added distribution channels as well as associated SKU’s. Likewise, companies with inherit multiple channels of distribution are often subjected to such risks.

The snack food area is particularly vulnerable because snacks are often subject to impulse buying within multiple outlets including neighborhood convenience stores, dispensing machines, convenience restaurants, food purveyors catering to service firms such as airlines, passenger trains, ferries and the like, and the typical member warehouse and retail grocery chains. A new market twist is that of online grocery basket shopping which online providers such as Amazon, Wal-Mart, Target, and other online retailers have introduced.

In fact, this analyst is of the belief that SKU proliferation is again becoming a more widespread problem because of the new realities of online retail. Retailers themselves are finding themselves bloated with SKU’s to address different sales channels, be that physical store where snacks are purchased in bulk or online on an induvial basis.

Another challenge that Sales and Operations (S&OP) teams are quite familiar with is the relationship dynamics of sales and marketing, who advocate for creating separate SKU’s for what they believe will be new and upcoming customers. After all, a separate SKU allows the new customer to gain personalized product and at the same time, more definitive tracking of a channel’s sales volume.

There is little doubt that SKU Proliferation indeed can drive complexity and supply chain inventory and distribution costs. Advanced inventory management or inventory optimization tools help in identifying and addressing problem areas. The resolution, however, involves a lot of internal supply chain cross-functional and external sales and marketing collaboration. It is also a condition and a watch out that should be factored in the analysis of the increased costs related to supporting today’s more focused online business models.

Bob Ferrari

© Copyright 2017. The Ferrari Consulting and Research Group and the Supply Chain Matters® blog. All rights reserved.

 


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