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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.

 


Exploding Demand for Warehouse Space- Thorough Analysis is Wise

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Some concerning news crossed our Supply Chain Matters news desk that compelled a blog commentary. That news is that warehouse space acquisition across the United States has reached its highest level in over 16 years.

This data comes from CBRE, one of the largest global commercial real estate services and investment firms. CBRE reports that almost half of the 167 million square feet of new U.S. warehouse space currently under construction, the equivalent of over 70 million square feet is already pre-committed to new tenants. The tenants are described as primarily E-commerce, third-party logistics and retail industry users, no doubt responding to exploding needs for online fulfillment capabilities.  Warehouse 300x200 Exploding Demand for Warehouse Space  Thorough Analysis is Wise

Further noted is that current ratio of space under construction that is pre-leased stands at 43 percent, which exceeds the 17-year average of 38 percent. Obviously, the ratio signifies a healthy momentum and zeal on the part of online logistics and customer fulfillment teams for warehouse and fulfillment space acquisition.

We are of the view that such space trending and building momentum should be viewed with a cautionary lens. Here is why.

As a long-time industry supply chain analyst, my view of warehouse space has been admittedly as a skeptic. Warehouses, particularly very large ones, are monuments and reflections of inefficient supply chain inventory and customer fulfillment management. However, the boom in online B2C and B2B fulfillment has added a newer dimension for warehouse space, namely a tradeoff of overall physical retail space for that of warehouse space. A further market influencer is no doubt Amazon, which continues to consume new warehouse and distribution space. Adding to the challenge for some brick-and-mortar retailers is the need to simultaneously support both traditional store inventory replenishment and growing online fulfillment needs.

For the most part, prior warehousing and distribution strategies were predicated on supporting physical store or distributor inventory replenishment needs. Warehouses were maximized for vertical height vs. square footage, reflecting maximum inventory storage in a concentrated dimension.  Replenishment orders, for the most part, called for pallet-loads of inventory and merchandise shipped to individual retail stores or wholesale distributors. Inventory could thus be stacked higher in warehouse racks, with automated material handling cranes and equipment providing the bulk of warehouse pick automation.

Online fulfillment centers support a different strategy, namely far higher numbers of individual online orders that feature single cartons or packages. Thus, today’s specialized online customer fulfillment centers are now highly automated examples of end-to-end inventory flow-through, where bulk inventory is received and stored in building flow-through configuration, and where pickers or robots, perform pick and pack needs, while highly automated conveyors flow individual shipments to the other end of the building for actual shipment to online customers.

Online fulfillment is a trade-off of required real-estate square footage with the assumption that the customer fulfillment center assumes the real-estate burden of physical stores or distributors. Thus, the need for fewer overall physical stores, but new investments in customer fulfillment logistics and lower-density warehousing that focusses more on order volume productivity. The one continually changing variable will always be assumptions for inventory needs.

Where this tradeoff is tricky is in the cost and footprint of overall physical space, as well as the cost of such space.  Real estate market supply and demand dynamics can often inflate real-estate and subsequent leasing costs, especially when retailers like Amazon and Wal-Mart are leading the charge. As we all know, today, the cost of capital continues to be rather low. What if that changes over time, particularly in the costs of large footprint warehouse space vs. that of traditional shopping mall or retail space. The other looming challenge is the increasing costs included in online fulfillment, including added inventory, transportation, and logistics costs.

Such trends are complex and the takeaway for supply chain and online customer coordination and fulfillment professionals is that major decisions on real estate cannot be made in isolation.  They are not the context of a supply chain functional decision alone. Rather, thorough, rigorous business-wide analysis and review as to longer-term strategic business implications is very important. By our lens, the firm’s CFO and the head of supply chain are key stakeholders as well as stewards for such decisions.

The last thing that retailers need or desire is to tradeoff cheaper fixed or variable physical store real-estate and store operating costs for even more expensive online fulfillment costs. Likewise, supporting traditional stores and online needs with different or redundant footprints is no longer efficient nor cost affordable. Compounding the strategy are decisions to entirely outsource online customer fulfillment to an experienced 3PL, but here again, logistics providers are subject to the same market supply and demand dynamics.

At face value, exploding demand for warehouse space is not surprising. Such dynamics are the elation of warehouse design, construction, automated systems and real-estate providers.

Thorough analysis of the cost and service tradeoffs for implementing a widescale online customer fulfillment model is a business-wide joint responsibility involving multiple stakeholder inputs.

 

Bob Ferrari


Wal-Mart Conducts an Optimistic Annual Meeting but Industry Realities Remain

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Global retailer Wal-Mart held its annual meeting of stockholders last week and declared that the world’s largest retailer has  “started to invent the future of shopping again.” CEO Doug McMillon declared: “we are going to make shopping with us faster, easier and more enjoyable.”  Wal Mart 300x199 Wal Mart Conducts an Optimistic Annual Meeting but Industry Realities Remain

We would quickly add that this is a tall and expensive order in today’s turbulent retail industry environment.

In prior commentaries, Supply Chain Matters has praised Wal-Mart’s emphasis on leveraging the retailer’s vast brick and mortar presence as a more effective extension of an overall omni—channel business strategy. What seems clear from the strategy that continues to unfold is that Wal-Mart will indeed leverage its significant physical presence as an extension of an online shopping experience. In that vein, the retailer is currently testing the deployment of automated online order pickup stations in stores, actual pick-up stations in select store parking lots, and what the retailer’s terms as “Jet Fresh” delivery, which provides deliveries of household groceries one 1-2 days. Regarding the latter, company management indicated that the service is currently available to about half of U.S. households.

Stockholders were updated on the retailer’s continued commitment to source $250 billion in products within the United States along with meeting a goal to source $20 billion of products from women-owned businesses. Further mentioned were initiatives to source more local and sustainable products and to reduce greenhouse gas emissions across the supply chain by 1 giga ton by 2030.

CEO McMillon boldly declared: “We will compete with technology, but win with people”, adding that workers should not fear increasing automation that will change the work involved in retail.  He added: “We will be people-led and tech-empowered” indicating: “I don’t think we should be afraid of changes.  Instead, I think we should recognize that we’ll be able to learn, grow and change together.”  He went on to state that associates need to be lifelong learners and: “The secret of our success will always be our people.”

Uplifting and motivating statements indeed, but from our Supply Chain Matters lens, there are still brute realities to the current Wal-Mart strategies.

The first and obvious was a realization that prior attempts to build a competitive online presence met with very mixed results. That ultimately led to the bombshell acquisition of Jet.com for a sum of over $3 billion. Since that time, Jet.com founder Marc Lore has been given total license to revamp and improve the retailer’s online presence and associated capabilities. That includes more widespread utilization of Jet.com’s price optimization algorithms, as well as lower prices for merchandise that is ordered online and picked-up at a local Wal-mart store.

As many retailers are now fully aware, investing in online fulfillment capabilities is not a cheap proposition, and many of the touted online initiatives already deployed and talked about are examples of these efforts.

And then there are realities of a changed, people and technology-driven business model that CEO McMillon touched upon. He acknowledged the needs to create new jobs in data science, machine-learning, systems engineering and mobile app development. At the store Associates level, being tech-driven brings new realities as well in terms of added training and personal skills development to be able to be an extension of an extensive omni-channel customer fulfillment environment.

Other open questions come to mind.

The first is a building compensation gap from top to bottom. Business media has disclosed that online czar Marc Lore was compensated in $237 million last year, nearly ten times more than CEO McMillon’s $22 million in compensation. Thus the compensation gap from CEO to store associate grows significantly wider and profound.

It remains widely believed that Wal-Mart has staffed its retail stores with a predominance of part-time vs. full-time staffing.  While starting salaries were recently boosted to a minimum of $10 per hour for retail associates, that level does not provide the financial means to invest in more individual technical skills.  Those possessing such skills will likely be able to find jobs that provide far higher compensation levels. Part-timers need to find other jobs to financially make ends meet, again leaving little time for personal skills development.

Another reality is that the online world remains highly competitive, especially when it comes to Amazon. We have previously highlighted that Amazon and Wal-Mart have been in head-to-head negotiations with major suppliers for lowest priced supply of inventory.

On the very week of Wal-Mart Annual Meeting, Amazon announced a lower Prime membership fee for low-income shoppers which are Wal-Mart core customer group. Lowest income shoppers, those currently obtaining government assistance will likely be eligible for $5.99 monthly Prime membership that includes free shipping. Likewise, Amazon announced an Amazon Cash program earlier this year that allows customers to add cash to their account balances at more than 10,000 locations across the U.S. The online giant continues to step-up its merchandise offerings in lower-cost apparel and in a wider variety of household groceries and local food and grocery outlets.

 

The good news is that at least one large retailer, Wal-Mart, can portray an optimistic strategy of future omni-channel capabilities. On the other hand, there remains an ongoing learning that former methods, practices, and corporate culture are all subject to change in the new world of retail and in retail supply chains.

 

Bob Ferrari

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


Marked Increase in Supply Chain Technology M&A Activity

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Within the past few days, there has been a marked uptick in merger and acquisition activity involving business process and decision-making support surrounding the broad umbrella of what is today supply chain management. Three different announcements, each involving OpenText, Descartes Systems and JAGGAER demonstrate various strategies being played out for augmenting technology, business services and vertical industry depth.

As 2017 began, one of our ten annual predictions called for a renaissance in supply chain focused business services and technology investments supporting augmented and ever-changing business process and decision-making needs. We anticipated that investment areas would include digital supply chain transformation, data visualization and more predictive analytics and broader end-to-end supply chain visibility.  Boardroom 300x200 Marked Increase in Supply Chain Technology M&A Activity

We anticipated that with a continued robust investment cycle, merger and acquisition activity would accelerate among technology and services providers, particularly in the notions of blending technology, software, and managed services.

OpenText to Acquire Covisint Corporation

Enterprise Information Management and Supply Chain Business Network provider OpenText announced this week that the provider has entered into a definitive agreement to acquire Covisint Corporation, an automotive industry focused Cloud platform providing digital connectivity of business processes and Internet of Things (IoT) enabled processes. The reported transaction purchase price is approximately $103 million of market value or $75 million on enterprise value.

According to the announcement, the acquisition is expected to deepen Open Text’s EIM offerings with the addition of a cloud-based IoT platform, as well as expand the Canadian firm’s presence within Automotive industry supplier relationships and supply chain business process collaboration. The announcement indicates that Covisint will be integrated into the OpenText Business Network, a portfolio of cloud technology and software applications that facilitates B2B network messaging and compliant information flows.

Our automotive readers may well have knowledge of Covisint’s legacy dating back to the late nineteen-nineties as one of the first industry-specific B2B marketplaces. Of late, this provider has been messaging capabilities for building a portfolio of capabilities to support digital transformation that includes B2B messaging and process orchestration, identity, and verification, and IoT enablement.

The OpenText Business Network has provided a special emphasis on Automotive industry B2B business network needs and in May of this year, closed on the $100 million acquisition ANXeBusiness Corp. (ANX), a provider of cloud-based information exchange services to US Automotive and Healthcare industries. That acquisition was focused on simplifying relationships among the global automotive trading community, and now with the addition of Covisint, should strengthen such capabilities. This latest acquisition is expected to close in the third quarter, subject to customary closing conditions.

 

Descartes Systems Acquires PCSTrac Business

Descartes Systems Group and its associated Global Logistics Network (GLN), announced this week that it has acquired substantially all the assets of the business of PCSTrac, Inc. including certain related assets of Progressive Computer Services Inc. dba PCS Technologies (collectively referred to as “PCSTrac”). The reported acquisition price is $11.25 million.

US-based PCSTrac helps specialty retailers and their logistics service providers collaborate to improve carton-level visibility for shipments from distribution centers (DCs) to stores. PCSTrac’s technology provides visibility and insight into the store replenishment supply chain, helping increase sales, enhance loss prevention, and improve inventory control. Like Descartes’ Bearware platform, PCSTrac also supports pool distribution, which helps retailers reduce logistics costs and minimize store disruptions by eliminating unconsolidated direct shipments from suppliers and retailer distribution centers.

According to the announcement, pool distribution has become an increasingly important strategy in leveraging a growing community of retailers and pool carriers to lower distribution costs, increase delivery frequency, and improve overall replenishment performance. Effective pool distribution requires a common technology system for participants that helps standardize the process and provides carton level visibility across the entire store replenishment lifecycle.

Similarlyarly, Descartes had previously acquired BearWare to augment capabilities to manage the increasingly complex omni-channel retail supply chain environment. Both acquisitions plan to augment the Descartes Global Logistics Network with carton-level tracking and pool distribution support.

 

JAGGAER And POOL4TOOL Merger

U.S. based procurement Source to Pay (S2P) provider JAGGAER, (formerly known as SciQuest), has merged with European-based POOL4TOOL, a specialized direct procurement technology provider. According to this specific announcement, this merger is designed to provide a global footprint of support for both indirect and direct procurement spend processes, and allow the combined entity to execute on a vision of a complete Cloud-based digital procurement platform.

JAGGAER had previously announced its intention to provide deeper vertical industry support. With this newly announced merger, JAGGAER’s footprint in Europe, Asia and the Middle East can expand as well as deliver a global presence for its data centers and customer support. It also adds direct material capability in the North American market. The merger further enables JAGGAER to extend its leading position in higher education procurement process support to expand within Europe.

POOL4TOOL, an admittedly different name for a direct procurement tech provider, brings over 300 customers to the merged entity. The direct procurement provider has further built bidirectional data and information integration capabilities with SAP. Both providers have footprints in automotive, manufacturing, chemical, pharmaceutical and sciences, along with retail industry processing a reported $65 billion in annual indirect or direct procurement spending.

As is often the case, mergers of this type are highly dependent on the timing and integration of two different technology platforms.

Thus, within a period of week, evidence, and demonstrations of individual technology vendor’s strategic positioning points to increased strategic activity. In addition, private equity and other investment firms continue to invest hundreds of millions of dollars in start-ups focused on hot emerging areas including digitalization of end-to-end supply chain capabilities.

However, at mid-year, still missing is the consummation of our prediction of a blockbuster M&A announcement.

Bob Ferrari

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


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.


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