Counterfeit Apparel and Other Unauthorized Products in China Draws Added Actions: Welcome Taylor Swift
After years of what is described as unproductive conversations, The American Apparel & Footwear Association recently publically called for major changes to Alibaba Group’s anti-counterfeiting procedures. AAFA represents more than 1,000 clothing, shoe, and lifestyle brands, and over the last four years, has been engaged in on-going conversations with Alibaba representatives on the problem of counterfeits on Alibaba’s Taobao online shopping site. According to the trade association, counterfeits across China cost clothing and shoe brands millions in lost sales, cause damage to reputation, and incur legal costs and an immense toll on internal resources.
In an open letter to Alibaba Executive Chairman Jack Ma, AAFA President and CEO Juanita Duggan called for a plan to address counterfeits that is more transparent and driven by certified brand owners. The proposed AAFA plan outlines four elements:
- Easy brand certification
- Brand-controlled “take-downs”
- Brand approved sales
- A transparent verification process
To add even more emphasis and probably more attention to ongoing apparel counterfeiting, singer Taylor Swift has taken up the cause. Readers will likely recall that Ms. Swift recently successfully confronted Apple with the issue of proper royalties within Apple’s new music streaming service during a subscribers free three-month trial.
According to a published report by The Wall Street Journal, the American pop star’s popularity in China has exploded and so has the availability of unauthorized products of all dimensions. In an attempt to control this surge of counterfeits, Ms. Swift is launching her own branded clothing line in early August among China’s two largest online players, JD.com and Alibaba. According to the report, the strategy is to leverage Swift’s star status to stem the selling of products that do not have proper rights to utilize the Taylor Swift name.
The availability of unauthorized counterfeit goods across China obviously continues. While industry associations such as the AAFA, along with respective brand owners themselves provide due-diligence, continued visibility and calls for action, the efforts of Taylor Swift might prove to be more meaningful. Alibaba, with enormous online fulfillment influence, perhaps now has an added incentive to stem the availability of unauthorized products.
Industry supply chain teams should applaud and support Taylor Swift’s entrance and response to this challenge.
Last Wednesday, in a noteworthy effort to spur widespread additional interest and new subscribers within its Prime buying program, Amazon declared its inaugural Prime Day, offering its online Prime program customers Black Friday like pricing deals in the middle of July.
The date was chosen because it represented the 20th anniversary of Amazon. The significance of a compelling holiday like online buying event in July was more important. Amid a flurry of anticipation as well as competitor response, Prime Day ended up having a mixed online fulfillment response. From our Supply Chain Matters lens, in spite of large-scale marketing driven promotional efforts, the event looked to be more of an inventory clearance event than one that would add a new dimension to Christmas in July in online fulfillment.
Online consumers did respond but had mostly a mixed reaction with the #PrimeDay hashtag garnering mostly disappointment or cynical commentary regarding the lack of compelling product offerings and/or deals. Some noted slower web site response time. Bargains on high-profile items such as Amazon’s Fire TV stick or the Amazon Kindle HD sold-out rather quickly, reverting to an unspecified wait list. The hashtag of #HappyPrimeDay turned instead to #CrappyPrimeDay for some. Product selection turned out to be more generalized and included apparel, household and other every-day type items. That prompted our declaration that from our supply chain lens, the reality of Prime Day looked more to be one of a July inventory clearance event.
Online sales tracker ChannelAdvisor reported that by Noon, Amazon’s U.S. same-store sales were about 80 percent ahead of volumes the prior July 15th. During the day, Amazon’s marketing types were hyping numbers to business channel CNBC regarding one-day sales records. However, the network could not avoid overlooking the mixed reviews streaming across social media. We tested bargains and selection at around 10am Eastern and found few compelling bargains to be garnered but rather pointers to every-day selection categories and pricing.
An Amazon press release on Friday declared a headline that the online retailer sold more units on Prime Day than that of Black Friday 2014. Worldwide order growth increased 18 percent more than Black Friday of 2014. Customers reportedly ordered 34.4 million items among Prime eligible countries. Readers should recall, however, that 2014 Black Friday sales were reported by the National Retail Federation as 11 percent below that of 2013 with shoppers spending upwards of 6.4 percent less. In 2014, shoppers opted for last-minute deals.
The Amazon release notes specific item level sales to include, among others:
- 41,000 Bose Headphones, compared to 8 the previous Wednesday
- 28,000 Rubbermaid 42-Piece Easy Find Lid Food Storage Sets, compared to 428 the previous Wednesday
- 24,000 Instant Pot 7-in-1 Programmable Pressure Cookers, compared to 182 the previous Wednesday
- 14,000 iRobot Roomba 595 Pet Vacuum Cleaning Robots, compared to 1 the previous Wednesday
Various sales and operations and supply chain planning teams will appreciate the impact and pain level of such one-day order volume spikes, especially when planning is based on past online order history likely had to scramble to fulfill such demand. It is literally a huge gamble to position such inventory for any single customer, albeit Amazon and Wal-Mart.
Other teams are more likely in the midst of assessing whether Amazon’s demand needs impacted other key customer needs, or whether such spiked July demand will have a substantial impact to the forthcoming three months of B2C channel fulfillment sales.
The build-up to Prime Day definitely caught the attention of other retailers, particularly Wal-Mart, which quickly marshalled a series of product promotions designed to both offer a lower-cost membership program as well as compelling deals on Wal-Mart.com. Reports indicated that Wal-Mart.com encountered greater interruptions and slower response times as online consumers checked for matching or better deals. None the less, Wal-Mart was quick to declare its counter-attack to be an online success, as well as the largest day for same-day pickup at a retail store.
Amazon declares that Prime Day will now be an ongoing annual event.
Like any new online fulfillment program, a lot can be garnered from results of the inaugural event. While Amazon’s line-of-business and marketing teams can declare victory, it is the online consumer that has the ultimate final vote as to the attraction and success of an online event.
In order to boost relatively flat revenue growth among its U.S. physical retail outlets, Wal-Mart recently raised salary levels for its respective U.S. retail associates to improve customer service and responsiveness. The retailer further continues to invest heavily in its online fulfillment channel. All of these actions provide adding pressure on margins.
In April, Supply Chain Matters echoed business media reports indicating that this global retailer was ratcheting up pressures on its suppliers to squeeze costs. Earlier this month, Reuters reported and somewhat validated a significant effort to offset increasing costs, namely imposing added charges among most all of Wal-Mart suppliers. Supply Chain Matters is of the belief that this effort will have added implications for both parties.
According to the report, added fees will relate to warehousing inventory along with amended payment terms, affecting upwards of 10,000 U.S. suppliers. In one cited example, Reuters indicates that a food supplier would supposedly be charged 10 percent of the value of inventory shipped to new stores or warehouses, along with one percent to hold inventory in existing Wal-Mart warehouses. It reportedly was not clear if the one-time charges apply only to the initial shipment or would cover a specific period of time. A Wal-Mart spokesperson indicated to Reuters that these fees were a means for sharing costs of growth and keeping consumer prices low.
In our April commentary, we observed that these appear to be signs of yet another wave of supplier squeeze tactics in order to improve a retailer or manufacturer’s overall margins. While these actions are not new for Wal-Mart, their application to a far broader population of suppliers is noteworthy. Such efforts that add to the cost burden of doing business with a retailer are bound to provide setbacks in efforts towards deeper collaboration and supplier product innovation. Consider that Wal-Mart continues with the construction and opening of new online fulfillment centers to support is WalMart.com fulfillment needs. The addition of supplier inventory fees to stock these new centers may cause some suppliers to consider alternative inventory stocking strategies of their own, that balance the needs of Wal-Mart with other retailers such as Amazon, Target or Costco. Indeed, unilateral efforts directed at transferring the cost burden among suppliers can often lead to counter-productive consequences, particularly during seasonal buying surge periods such as the holiday season.
Suppliers can take advantage of the same fulfillment decision-support technology as retailers, namely to determine the profitability potential for each major customer, and providing preferential service for customers that financially support needs for added responsiveness and fulfillment collaboration.
Too often, it seems that these mandates are handed down by the most senior management responding to investor pressures for more short-term profitability and margin growth. These efforts cascade from retailers and manufacturers, to first tier suppliers, and throughout other tiers of the supply chain. It’s unfortunate that there supply chain teams are rewarded more for enforcement of such actions as opposed to efforts directed at joint supplier process and product innovation.
As thought leaders in supply chain management, we often point out the critical importance for firms to more quickly sense geographic or regional changes in product demand and respond to such changes with integrated supply and fulfillment capabilities. This week, The Wall Street Journal highlights (paid subscription) how certain high-profile consumer product goods companies were hampered in China by not having such capabilities.
The report notes that a sudden change among China’s consumer buying trends suddenly occurred as millions of consumers elected to shift their buying practices away from larger retail outlets in favor of online marketplaces. The WSJ indicates that an estimated 461 million Chinese consumers, nearly a third of the population, are now shopping online. Further cited is Nielsen data indicating that nearly half of Chinese consumers are buying groceries online, compared to a quarter of consumers on a worldwide basis. Global CPG firms such as Beiersdorf, Colgate-Palmolive, Nestle and Unilever were reportedly laggard in the sensing of this channel buying shift.
For Unilever alone, the shift toward online buying accounted for a 2.7 percent drop in global revenues. The CFO of Unilever is quoted as indicating that CPG firms in China were “too slow to react to the changes in the marketplace.” Another Unilever executive is quoted as indicating: “It’s very, very difficult for us to be absolutely sure (of inventory levels) because the visibility across the extended supply chain in China is not that great.”
Many CPG firms distributing products in China had targeted their merchandising and inventory strategies towards large retailers and thus were not able to sense the changed buying patterns until inventories grew.
Many of these firms are likely to have acquired important learning and are re-focusing supply chain strategies more towards online fulfillment channels including more direct presence. There will obviously be further learnings in the months to come.
Suffice to state that in today’s complex supply chain universe, generalized market support and distribution strategies will not suffice. Each major market requires its own set of product demand planning, sensing and supply chain response strategies.
Lumber Liquidators, one of the largest and fastest growing retailers of hardwood and laminate flooring in North America, announced this week that it is suspending all of its China sourced laminate flooring products. The announcement comes after the 60 Minutes investigative news television program turned a public light on suspected high levels of formaldehyde from certain China based flooring offered by this retailer. In our prior Supply Chain Matters commentary related to this incident, we expressed little doubt that the situation would continue to reverberate among business headlines, and so it has.
In its latest announcement, the retailer indicates:
“Based on the review to date, it appears that the Company’s Chinese laminate flooring suppliers have sold product to the Company that the suppliers have certified and labeled as compliant with California formaldehyde standards. However, the Company is further reviewing the underlying certification and labeling processes and practices of its suppliers.”
The retailer further indicates that a Special Committee composed of independent directors, with the assistance of third party advisors, has been conducting an ongoing review of allegations regarding laminate flooring sourced from China. That body has now engaged a former FBI director and his firm to review the retailer’s product sourcing practices and to serve as an independent compliance advisor.
Since the March disclosure by the 60 Minutes program, Lumber Liquidators began voluntarily offering free indoor air quality screening to certain of its flooring customers, predominately those who had purchased laminate flooring sourced from China. Home air test kits were selected as a quick means to measure the total level of formaldehyde in indoor air from all sources, not just from the flooring. This week’s release further indicates:
“From early March through May 1, 2015, BHC sent approximately 26,000 testing kits to nearly 15,000 Lumber Liquidators customers and approximately 11,000 of those testing kits were returned. As of May 1, 2015, over 3,400 testing kits from approximately 2,600 households with laminate flooring sourced from China had been reviewed and analyzed. Of those households, over 97% had indicated indoor air concentrations of formaldehyde that were within the guidelines set by the World Health Organization as protective against sensory irritation and long-term health effects.”
Lumber Liquidator’s swift actions and response are laudable, but as a supply chain and procurement community we all know, consumers will undoubtedly have their own impressions regarding the safety of flooring sourced from China. Thus, the action to temporarily suspend all sourcing of China based supply, pending a total independent review, makes practical and timely business sense.
To reiterate, beyond the Wall Street, shareholder and legal messiness, this incident is yet another example of the needs for transparency across the global supply chain, particularly when an individual country’s or state’s product safety standards are cited. As business media such as The Wall Street Journal is now reporting, there is no recognized national U.S. standard for indoor formaldehyde concentrations and global wide standards vary among agencies. Interpretation of standards can tend to take on a different lens from different suppliers and thus the need for vigilant and consistent supplier monitoring and risk awareness.
Earlier this week, global package delivery provider UPS reported its first quarter operating results and provided a succinct message to online e-commerce customer fulfillment providers that the provider will protect its profitability in servicing this segment. The results were far different than the disappointing news delivered for the end-of-year quarter and an indication that last-mile delivery strategies associated with online commerce are subject to increased cost changes and implications. These results are a further indication of the revenue and profitability boost brought about by the change to dimensional pricing of shipments, along with other operational changes.
For the March ending quarter, UPS reported an overall 1.4 percent increase revenues and an 11 percent increase in operating profit to $1.7 billion, demonstrating profitability increases across all operating segments. Results for U.S. based operations reflected a 5.3 percent increase in revenues while profits rose over 10 percent to $1.02 billion. U.S. Domestic Package revenues, where dimensional pricing went into effect, experienced a 3.8 percent increase in revenues.
Total shipments increased 2.8 percent to 1.1 billion packages reportedly led by European export growth of 9.4 percent. No doubt, that was an indication of a positive impact from the increasing value of the U.S. dollar, allowing European goods to be more price-attractive in export markets such as the United States. For the quarter, UPS generated $2.4 billion in free cash flow. UPS raised rates and increased fuel surcharges across the board at the beginning of the year.
Brown further announced that it has declined to renew contracts with “a couple of substantial customers” whose business was not profitable enough, especially concerning e-commerce shipments. While UPS executives declined to name any specific customers, in its reporting, The Wall Street Journal indicated that children’s toys retailer Toys “R” Us was one of those customers. Reportedly, UPS raised it rates, prompting this retailer to move to FedEx in February. We would surmise that other customers were well-known e-tailors as well.
Further announced was an increase in the number of Access Point locations where online customers can pick up their purchases themselves, thus decreasing the number of overall package trips for UPS’s last-mile delivery efforts. UPS executives were quick to point out that the carrier’s business goal was not to just increase costs for its customers but rather to facilitate improved efficiencies in shipping methods and packaging of shipments. Obviously, industry supply chain teams accountable for transportation costs and delivering cost reduction goals will likely have a far different perspective.
As Supply Chain Matters observed in our June 2014 commentary, dimensional pricing implied a major revisit of packaging and transportation practices for bulky items as well as policies related to free shipping. With recent operating results from both FedEx and UPS now indicating a renewed focus on carrier profitability, the implications are indeed broader from both shipper and carrier perspectives, especially in the light of online consumer preferences for same-day or Sunday delivery. Shippers and especially e-tailors will be responding with revised practices to protect their operating costs and margins. The overall effect can either be a different, more efficient delivery fulfillment process that emphasizes customer pick-up or the development of more innovative delivery strategies. The U.S. Postal Service as well as up and coming logistics disruptors may well benefit.
Supply Chain Matters continues to anticipate that major online retailers will initiate a different form of planning for the 2015 holiday fulfillment surge later this year, and that will be how to balance continuing consumer preferences for free shipping with the new realities of higher parcel shipping and logistics costs. New or different business models and strategies will continue to emerge in the coming months as this dynamic unfolds and both B2B as well as B2C shippers need to be prepared for such industry changes.
© 2015 The Ferrari Consulting and Research Group LLC and the supply Chain Matters© blog. All rights reserved.