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The Demise of Brick and Mortar Stores and of Traditional Retail Distribution

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For the past three years, Supply Chain Matters has been predicting a radically changed business environment across retail channels because of permanent shifts by consumers to favor online buying.

Last year, and updated for this year, our research report: The New phase of Online and Omni-Channel Fulfillment for B2C and Retail Supply Chains (Available for Complimentary Downloading in our Research Center) called for retail line-of-business and supply chain teams to unify organizational leadership and supply chain alignment among traditional store and online logistics and distribution strategies.

Last week. The Wall Street Journal provided more updated and quick frankly, sobering data indicating that:  Brick and Mortar Retail Stores as Shuttering at a Record Pace. (Paid subscription required)   Reported was that so far, this year, at least 10 retailers have filed for bankruptcy protection, which compares to 9 retailers that declared bankruptcy with a t least $50 million in liabilities, for all of 2016.

What we found to be more sobering was a cited prediction from Credit Suisse that retailers could close more than 8600 locations this year, which would eclipse the number of store closings that occurred during the 2008 recession.

The noted causes of the current wave of store closings are cited as decades of shopping center and retail store overbuilding along with the permanent shifts towards online shopping. Another cited cause was noted as the excessive debt burdens that retailers took on through leveraged buyouts or efforts to fund expensive share buybacks. The WSJ cites Moody’s Investor Service as indicating that the amount of debt coming due for 19 distressed retailers is set to more than double over the next two years.

There are obviously significant supply chain implications implied from this trending which we wanted to echo for our Supply Chain Matters readers, implications that may seem obvious, but need to be stated.

Traditional retail distribution strategies were predicated on purchasing high volume merchandise from lowest-cost and highest value suppliers, moving that merchandise into large owned or leased warehouses, and pushing that merchandise into individual stores based on selling forecasts, merchandise promotional plans, or store replenishment needs. The operations of the warehouses and the distribution to physical retail stores was for the most part, straight-forward.

Now, with so many brick and mortar stores subject to closing, coupled with the permanent moves toward online and Omni-channel merchandising and selling, the logistics and distribution model is significantly changed, and as retailers have now come to understand, can be far more expensive if not planned and executed properly.

Warehouses are now customer fulfillment centers that store inventory in volume and move that inventory to contiguous pick and pack operations within the same building, all responding to individual online orders.  Fulfillment center locations are now more predicated on a combination of population density and access to major transportation and logistics hubs, as Amazon and other online providers have artfully demonstrated. Inventory management requires far more sophistication and requires far more detail related to item-level demand across selling and customer pick-up channels. Overall management of transportation costs becomes more essential, since online consumers are now patterned to shop where free shipping is offered.

Remaining physical stores will increasingly serve as extension of the online business model, meaning stores can serve as customer pickup, merchandise return, or merchandise demonstration centers. In-store labor has shifted to customer fulfillment center labor, and in-essence, the fulfillment center becomes a key presence and capability of the retail brand in the minds of online consumers.

The closing of so many physical stores comes about because of the needs or existing retailers to dramatically reduce their cost structures to deliver required profitability goals. However, we again need to reiterate that the traditional notions of viewing transportation, warehousing and logistics as purely cost center, or outsourced expenses that can be adjusted at-will is not necessarily a wise decision when considering the changed distribution and logistics considerations of today’s online world.

Retail and B2C and B2B2C supply chain capabilities must be far more agile in the ability to support an integrated Omni-channel strategy. We caution that this is not solely investments in further distribution and fulfillment center automation, since that may well be one-dimensional.  Instead, it should include more sophisticated supply chain planning and inventory optimization supported by advanced analytics related to being more predictive and responsive to constantly changing online customer fulfillment needs manifested by multiple customer touch points.

The takeaway is that slashing distribution, logistics and customer fulfillment operations budgets without a context to an integrated online business model could prove to be short-sighted.

 

Bob Ferrari

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


Supply Chain Matters Q1-2017 Newsletter Has Published

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We alert our Ferrari Consulting and Research Group clients and our Supply Chain Matters readership that our Q1 2017 Newsletter published early this morning and should be in the email inboxes of those who have subscribed.  SCM 2 logo.jpeg 300x225 Supply Chain Matters Q1 2017 Newsletter Has Published

Our latest newsletter is jammed-packed with information and again reinforces important trends brought forward by developments in 2016 as well as many of our predictions for this year.

Global manufacturing and supply chain activity as recorded by the JP Morgan Global Manufacturing PMI index showed steady momentum in Q1- 2017, as was noted by the report authors as “the best outcome since the second quarter of 2011.” The question remains as to whether geopolitical forces of uncertainty will derail this momentum.

Among Developed Regions, there was once again, pronounced growth momentum with the Eurozone, United States, and Taiwan. All four of our tracked regions ended Q1 at levels 4-6 percentage points well above the 50 mark of growth.

Emerging Regions reflected slowing growth momentum in Q1, again brought on by currency headwinds.  The average of the five specific countries we track in this category lagged the developed regions by nearly 3.5 percentage points. Vietnam was the bright spot in the opening quarter, followed by India and Mexico. China’s supply chain activity remained relatively flat from the specific indices that we track.

Among other Newsletter articles for Q1-2017:

  • Dominant Theme in Q1-2017: More Implications for Online Customer Fulfillment in B2C Retail- The ramifications and fallout among traditional retailers after the results of the 2016 holiday fulfillment period were more sobering, with an outlook for thousands of brick and mortar store closings to come for the remainder of this year.
  • Dominant Theme in Q1-2017: The First 90 Days of the Trump Administration- a dizzying pace of news, speculation and editorial regarding changed corporate tax, consequent import tax, and global trade policies was enough to motivate supply chain team members to have a drink or two at the local pub. None the less, preparation and continual analysis continues to be the byword.
  • Dominant Theme in Q1-2017- Rapidly Changing Global Transportation Dynamics- Q1 provided more evidence of a faster pace of ocean container line pressures towards industry attrition leading up the implementation of three major industry alliance networks on April 1. Container rates and capacity constrictions also spiked towards the end of the quarter.
  • Top Ten Readership Blogs in 2016- we call for Newsletter readers attention to our posting of the Top Ten Blogs of Supply Chain Matters readership interest in 2016.
  • New Website Improvements Underway- We updated Newsletter readers that web site improvements are underway for both our consulting and research services web site as well as the Supply Chain Matters

Registered subscribers to this blog and existing clients automatically receive a copy of our quarterly newsletter.  If you are not signed-up and would like a copy of our latest newsletter, please send an email with the title Newsletter Request to:

newsletter <at> supply-chain-matters <dot> com.

Please remember to include your Name, Role and/or company with your email address and we will have a copy sent directly as well as automatically add your email to future distribution.  As a reminder, our policy is to not sell or disclose any individual subscriber data to any third parties.

Thanks again for your continued readership.

Bob Ferrari, Founder, and Executive Editor

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

 


A Reported Price War Among Amazon and Wal-Mart with High-Stakes for CPG Industry Supply Chains

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Last week, business and industry media was abuzz with reports indicating that retail giants Amazon and Wal-Mart were engaging in an all-out war for both price and online dominance involving offerings of consumer packaged goods (CPG) products.

Needless to state, the stakes surrounding such dynamics are high, and the implications to CPG supply chains rather significant.  Once more, such dynamics are by our Supply Chain Matters lens, rather ill-timed for this industry.

Global business network CNBC posted a recode report indicating that last month, Wal-Mart gathered some of America’s largest household brands at its corporate headquarters for some tough talk negotiations. According to this report, Wal-Mart’s intent was to reset expectations with key suppliers regarding pricing concessions, and in-essence, seeking a 15 percent decrease in prices charged to the global retailer.  This represents a significant pricing concession from branded CPG suppliers, most of whom have already been buffeted by ongoing industry pressures for reduced costs.

As Supply Chain Matters blog has amplified in our numerous CPG focused commentaries, the threat of 3G Capital, under the guise of Kraft-Heinz, along with other activist investor forces that continue to surround the industry and pressure for added near-term profitability and shareholder value results. They have led to a zero-based budgeting wave impacting many brands, and whiplashing respective supply chains. Fortune described the 3G Capital playbook as a “meritocracy” that is on-track to consume the food industry itself.

The compounding and contrasting event stems from Amazon, who has invited similar major CPG brands to visit Seattle headquarters in May to convince them to join to offer more products directly online, in-essence, bypassing major chains such as Wal-Mart, Target, and Costco. According to a published report by Bloomberg, CPG brand attendees will hear from Amazon’s Worldwide Consumer chief Jeff Wilke, a direct report to Jeff Bezos.  Amazon wants to convince CPG brands to re-think their traditional supply chain distribution model, where popular products are designed, packaged, and shipped in the context of a physical retail store as the prime buying outlet. Key products would instead be designed and packaged for online merchandising, packaging, and customer fulfillment for personal consumption, as-needed vs. bulk consumption.

Major CPG are not only caught in the middle of two retail giants battling for supplier loyalty, but also in the middle of two distinct business distribution models that can dramatically impact future business performance. On the one hand, no major CPG brand wants to be on the outs with Wal-Mart, given the amount of unit volumes that are represented. A continuous zeal to feature the lowest prices for all major brands forces razor-thin margins with resultant consequences of taking cost out of all forms of packaging, distribution, and transportation of products to Wal-Mart distribution centers. In the case of this latest push-back, the global retailer reportedly could cause some brands to experience negative margins on specific products. Of course, Wal-Mart has its own strategic efforts to expand its online presence as manifested by the retailer’s recent $3 billion acquisition of Jet.com, whose online model is focused on individual item price competitiveness.

The CPG supply chain community is acutely aware of what drives costs.  That includes multiple SKU’s for major customers, a proliferation of packaging sizes or product offerings customized for individual retailers or order volumes that do not meet business margin requirements for key customers. Many prior cost-reduction initiatives hone-in on these cost-drivers. Yet, the online model of individual consumption could present added margin opportunities if priced appropriately.

Amazon and Wal-Mart are in-essence seeking to influence major brands to each major retailer’s different strategic business model. As Bloomberg points out:

Amazon has been struggling to crack the food and packaged goods market—an $800 billion category still dominated by Wal-Mart and other traditional chains. Persuading brands to design their packaging and operations for the online world would make it easier for Amazon to ship common household goods to urban dwellers in less than an hour, potentially making last-minute dashes to the store obsolete. Amazon must convince brands that even though online purchases represent a small part of their sales, e-commerce is the future.”

Wal-Mart’s strategic business model has the physical store as the prime focus for every-day essentials, whether a Wal-Mart Super Center or neighborhood store, while online will serve as the buying focus for occasional purchases, or for 1-2-hour pickup of food or consumer staple items picked-up in the nearest store.

Both retailers will demand the lowest prices available to any retailer, despite differing strategies, and as Recode observed from cited sources, both have ignited intense wargaming inside the largest CPG companies such as Kimberly Clark, Mondelez, P&G and Unilever. Other brands, large and small, will surely be impacted as-well.

In our 2017 industry-specific prediction, and in our numerous CPG supply chain focused blog commentaries, we have challenged what the end-state really implies, short-term rewards or industry supply chains with the capability to support both new online business and physical store merchandising and fulfillment models supported by continuous product innovation.

The decisions made in the coming weeks and months will be the determinants for not only the business and the supply chain, but for the negotiating and management skills of brand leaders themselves.

Bob Ferrari

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


Another Sobering Warning for Retail Industry- This Time from a Major Industry Supply Chain Influencer

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In a 2013 article, the New York Times had described Li & Fung as follows:

Li& Fung– the most important company that most American shoppers have never heard of- has long been on the forefront of globalization, chasing cheap labor to garment factories first in China, then elsewhere in Asia including Bangladesh.”

A lot has changed in four years but indeed, Supply Chain Matters has often referenced Li & Fung as the most influential player among global-based apparel supply chains and in supporting many major branded retailers in their apparel and other goods sourcing, merchandise selection and inventory procurement needs.

This week, the Asian based company reported a 47 percent decline in 2016 net profits, coupled with an 11 percent decline in annual total revenues. Further communicated was an indication that ongoing challenging conditions across the global retail industry would place additional challenges on its own business operations.

What caught our eye was these statements from the firm’s CEO as reported by Reuters:

I expect an unprecedented number of bankruptcies and store closures in the years to come. I remain cautious as (the) operating environment is deteriorating.

Li & Fung, being the largest influencer of apparel sourcing offering retailers access to tens of thousands of global suppliers in over 60 countries implies a large purview of business intelligence as to retailer buying practices, supplier payments and order volumes.

This is what makes the above Li & Fung statement so significant and rather sobering.

Our specific 2017 predictions and other research advisories specifically focused on the global retail industry continues to echo the unprecedented business challenges confronting retailers, driven from the implications of permanent consumer shifts to online shopping practices. These permanent forces will continue to present ongoing challenges, and retailers, and their respective supply chains, must adapt or suffer the consequences.

The casualties of retailers that have succumbed is building and so are the reports of bankruptcies and significant reorganizations in this year alone. Wal-Mart, one of the largest global retailers recently enacted job cuts and executive realignment directed at integrated online and physical store customer fulfillment. Last week, a sobering warning from Sears Holdings evoked added concerns and actions among retail suppliers and partners.

Now, one of the most influential players in merchandise and supply chain sourcing is communicating a similar sobering message.

The industry is already experiencing higher turnover and shorter tenures of CEO’s and C-suite executives, all trying to sort out different strategies to compete in an online and Omni-channel driven retail industry environment. The changes impacting retail continue to be described as unprecedented.

Supply chain leaders must get on board with fostering integrated online and physical store planning and customer fulfillment. Once again, the retail supply chain is not a collection of cost center activities to essentially support inventory procurement, warehousing and store replenishment. In today’s online fulfillment-driven retail model, the supply chain is a collection of capabilities directed at Omni-channel customer fulfillment and customer services capabilities. In 2017 and beyond, the alternatives are in-house, outsourced or hybrid supply chains.

Bob Ferrari

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


Zara Unveils a Strategy to Embrace and Integrate Physical and Online Presence

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Many analysts and academics in our supply chain world often point to Inditex SA and its fashion and apparel retail brand Zara as the iconic benchmark in retail supply chain agility. It seems that despite the many iteration of retail apparel industry challenges, this fast fashion focused retailer continues to demonstrate a resiliency to changing economic conditions or online buying trends.  Today, Zara is cited as the world’s largest fashion retailer.  Zara London Zara Unveils a Strategy to Embrace and Integrate Physical and Online Presence

It should therefore be no surprise that Zara continues to provide the content basis for many business case studies related to demonstrating a and industry-leading systemic integration of fashion retail business strategy with consistently admired agile supply chain response practices.

Thus, retail supply chain industry focused readers should take note to last week’s unveiling of Zara’s newest flagship store in the retailer’s hometown of La Coruna Spain. The store, sized at 54,000-square-feet and spanning over five stories, will replace five other existing smaller footprint stores, and will reportedly serve as the model for Zara flagships around the globe. The apparel retailer is now transitioning to a new strategy to meet the challenge of the Omni-channel focused online fashion consumer.

In a press conference held last week, Inditex Chairman Pablo Isla declared that Inditex seeks “full integration of the brick-and-mortar stores and online businesses, with store openings that are increasingly more relevant.” According to a published report by The Wall Street Journal, the 2017 strategy calls for the opening of between 450-500 new larger retail stores that will merchandise a full range of apparel, while consolidating 150-200 existing smaller sized stores.

The larger stores are being designed to allow consumers the opportunity to browse broader fashion and apparel offerings while also embracing online capabilities, allowing the ability for shoppers to either buy in-store or order online with the assistance of sales clerks. Online order pickup or return of purchases can be exercised at the retail store as-well.

Despite a rather difficult year in retail, this retailer’s latest report of financial performance established a new record of nearly $25 billion in revenues with a 10 increase in profitability.

As noted in our 2017 industry-specific predictions for the retail industry, we observed that the implications of permanent reductions in physical foot traffic have taken a toll on traditional mall-based retailers and department stores. While well-known broad-line retailers such as Macys are undertaking additional store closings, Zara once again has a different strategy emphasizing larger, more integrated stores to appeal to the Omni-channel consumer, supported by one of the retail industry’s most responsive supply chain response capabilities.  As noted in our prediction, the physical retail store is now the virtual online store, and that brick and mortar stores are the one advantage that differentiates retailers in their ability to offer more timely fashion from that of Amazon and Alibaba.

Obviously, consumers will be the ultimate determinant for the success of Zara’s new strategy.  A successful record of accomplishment up to now provides evidence leaning toward success.

Bob Ferrari

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


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