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Additional Perspective on Amazon-Whole Foods Acquisition Implications

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Regarding the announcement from Amazon on the online retailer’s intent to acquire Whole Foods, Supply Chain Matters committed to feature a number of follow-up opinion commentaries, both from this blog as well as external sources.  Whole Foods Austin Additional Perspective on Amazon Whole Foods Acquisition Implications

We would like to call reader attention to the report: Amazon may face limits in cutting Whole Foods prices, published in Supermarket News this week. The reporter, Mark Hamstra, does a great job of uncovering potential impacts to branded natural foods and organic suppliers that may or may not benefit from Amazon’s subsequent integration strategies.

This author had the opportunity to provide added perspectives from a supply chain cost and distribution perspective. Namely, that both companies will need to focus at first on integration of practices, decision-making, technologies and other matters before they tackle the distribution piece.

Enjoy.


FedEx Elects Not to Match UPS in Holiday Peak Period Parcel Surcharges

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In a published Supply Chain Matters commentary last month, we raised the specter that UPS’s announced added surcharge efforts relative to peak holiday package shipments, if successful, would lead to added structural shifts in online business practices. The question is whether this would benefit UPS at the expense of shippers and the broader retail industry.  FedExGround 300x200 FedEx Elects Not to Match UPS in Holiday Peak Period Parcel Surcharges

Up to this point, rival FedEx had not weighed in with a similar structural surcharge, until this week.

Rival FedEx has now elected not to add additional package surcharges for parcels during specific pre-holiday surge weeks that span Black Friday through the Christmas holiday. The carrier instead plans to hike fees for any larger dimensional packages shipped during the peak holiday period later this year.

The motivation for the announced UPS pricing actions were obvious, namely to protect or boost the carrier’s own profit margins by compensating the carrier for needs to add surge personnel and logistics capacity. The UPS surcharges would add 27 cents for residential deliveries for the weeks spanning November 19 thru December 2 and December 17 thru 23. The carrier further indicated an added surcharge of between 81 and 97 cents to overnight, second- or third-day deliveries for residential deliveries between December 17 thru 23. There were other announced charges for oversized packages.

UPS communicated that such added charges will motivate retailers to plan merchandise promotions earlier in November and thus lower the need for peak staffing and augmented capacity costs. However, the open question remains whether holiday consumers will change their shopping habits, especially those procrastinators who always wait until the just before the holiday to execute holiday buying decisions.

FedEx is undercutting its rival to possibly gain added customers, leaving UPS to standalone in its ability to convince retailers to go along with the added blanket surcharges tied to specific pre-holiday weeks.  That is obviously significant.

A spokesperson for FedEx indicated to The Wall Street Journal that the decision to not match UPS should not be viewed as a competitive response, but rather ensuring that the carrier prices effectively.

In our prior commentary, we opined that the U.S. Postal Service will likely see added package volumes during the busiest holiday periods, with the added risk that the service will not be equipped to handle such a surge or be able to recover added costs. Retailers and other shippers can now add FedEx to that dimension, and now, the combined alternative of the USPS and FedEx provides added options for peak residential shipment decisions.  Third-party logistics services firms, who are already marshaling resources and services to handle the need to support online purchases of larger-sized goods such as appliances, furniture and like will also benefit with increased holiday volumes, as well as opportunities to negotiate added services to online retailers.

The open question remains as to whether UPS’s announced efforts can alter peak holiday shipping norms among retailers. With this week’s actions by FedEx, that candidly looks less effective. At this point the question is how married UPS will be to its added surcharge actions, with the willingness to risk reduced holiday volumes for added margins.

Regardless, retailers can rest somewhat easier now knowing that there are now other options to support peak holiday shipment volumes.

 

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


Retail Suppliers Pitted Against Private Equity Investors

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From time-to-time, we will call Supply Chain Matters reader attention to noteworthy industry editorials, particularly when they have supply chain implications. This particular blog applies to the retail industry and its associated supply chains and how private equity financing practices are pitting suppliers against investors.

Yesterday’s edition of The Wall Street Journal included a report, Private Equity Takes Fire As Some Retailers Struggle. (Paid subscription required) The essence of the report was that the recent wave of bankruptcies involving retailers has revived the debate about the role of private-equity investors in perhaps accelerating the problems of retailers in distress.  Zara London 300x196 Retail Suppliers Pitted Against Private Equity Investors

The WSJ notes that between the period of 2011 to 2013, many private equity takeovers occurred when money was cheap. The report cites $90 billion in leveraged loans and high-yield bonds raised for private-equity owned retail borrowers to make dividend payouts. Recent bankruptcy proceedings involving Payless ShoeSource, Gymboree, rue21 and True Religion reportedly have a similar theme of private equity firms eventually loading added debt on balance sheets while insuring dividend payouts to investment firms. The mountain of debt, coupled with reduced revenues and profits, accelerates the process towards bankruptcy. When such proceedings reach the bankruptcy courts, unsecured creditors, often suppliers and real-estate landlords, then discover that there is little remaining to settle outstanding invoice claims within the bankruptcy settlement process. Typically, in bankruptcy, lenders expect to be paid before equity owners.

Creditors are now becoming more active in filing actions against private-equity investors to provide additional monies for outstanding creditor settlements.

As our industry supply chain readers are well-aware, consignment inventory or vendor managed inventory (VMI) practices are fairly common practice in retail and consumer goods focused and other select industry supply chains.  They were designed as a response by suppliers to assist key customers in their inventory and cost-of-goods sold (COGS) financial objectives. Suppliers holding inventory ownership until goods are sold is a means of lower cost inventory financing for the buyer.

To amplify the extent of this ongoing problem, in March of last year, Supply Chain Matters called reader attention to retailer Sports Authority’s disturbing twist to consignment inventory management practices.  Characterized as one of the largest sporting-goods retailers, the chain was weighted down with debt from a prior leveraged buyout a decade ago. In its bankruptcy filing, Sports Authority indicated $1.1 billion in debt that included $717 million in bank loans and over $200 million in trade debt owed to suppliers. As is a common practice in retail supply chains, suppliers had consigned inventory to this retailer, expecting payment when the goods were sold to consumers. The retail chain then filed lawsuits with more than 160 of these suppliers challenging supplier claims to consigned inventories. The supplier lawsuits were apparently a means to challenge who gets the bulk of compensation when consigned goods are sold in store closings or in discounted sales. According to published reports, Sports Authority’s private equity owners as well as a consortium of banks were apparently seeking to test defects in inventory consignment agreements. The courts eventually rejected such arguments. In our March 2017 commentary, we characterized that development as a new low by private equity firms in challenging successful established business practices for singular gain. It literally challenges the notions of win-win supplier collaboration practices.

Over a year later, the situation continues, pitting suppliers against equity owners as to whom gains an equitable financial consideration when retailers are forced to go bankrupt. With each occurrence, more cynicism enters the process and efforts toward broader industry supply chain collaboration and information-sharing suffer the consequences.

An industry that continues to undergo unprecedented industry challenges, unfortunately must also deal with the effects of private-equity investors with a zeal for short-term benefits at the expense of longer-term successes.

We offer no definitive prescriptions for resolving such a problem, other than to raise broader awareness and appeal to industry participants to respect the importance of the supply chain ecosystem. Shortchanging suppliers for near-term gain may be viewed as finally innovative but it comes at a steeper longer-term cost.

Bob Ferrari

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


UPS’s Continued Pitch for Added Holiday Parcel Surcharges

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A sidebar to our previous Supply Chain Matters commentary related to Amazon’s Q2 financial performance relates to UPS, and its recent announced efforts to impose added surcharges to B2C retail shipments during select week leading-up to this year’s Christmas holiday.

In a commentary last month, we raised the specter that UPS’s added surcharge efforts would lead to added structural shifts in online business practices. The question is whether this would benefit UPS at the expense of shippers and the broader retail industry.  UPS Natural Gas Van 300x177 UPSs Continued Pitch for Added Holiday Parcel Surcharges

The motivation for the new UPS pricing actions were obvious, namely to protect or boost the carrier’s own profit margins by compensating the carrier for needs to add surge personnel and logistics capacity. UPS has communicated that such added charges will motivate retailers to plan merchandise promotions earlier in November and thus lower the need for peak staffing and augmented capacity costs. However, the open question is whether holiday consumers will change their shopping habits, especially those procrastinators who always wait until the just before the holiday to execute holiday buying decisions. Up to this point, rival FedEx has not weighed in with a similar structural surcharge.

Thus, we viewed as interesting that The Wall Street Journal ran yet another article today indicating that UPS expects most retailers to agree to the higher “necessary” surcharges. One could get the impression that the parcel transportation provider needs to reinforce the message of necessity for shippers to fall in-line with added holiday peak surcharge rates.

Online retailers are fully aware at this point, that Amazon’s model of Free Shipping has become the expected norm for consumers to finally execute their online purchase. They further comprehend that the power of Amazon is in its flexibility to accommodate online consumer buying needs even on the day before Christmas. Retailers are thus placed in another difficult position. They must compete for consumer business by matching Amazon’s or Wal-Mart’s capabilities to accommodate consumer buying preferences right-up to the actual holiday, and must find ways to absorb the added parcel transportation surcharges. Retailers with significant brick and mortar store presence can channel Free Shipping toward in-store pick-up. However, smaller specialty retailer and businesses lack such flexibilities and lack the leverage to negotiate rate flexibility with the likes of a UPS.

Thus, more-and more-specialty producers and retailers will likely evaluate placing goods on the Fulfilled by Amazon platform if not this year, next year.

The sum-total is that UPS may well find another way to sustain or grow near-term margins, but Amazon will gain even more online market influence.

Perhaps in 2018, UPS will not need added surcharges to fund its surge transportation needs since Amazon will have its network already at the ready.

Something to consider.

Bob Ferrari

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


Our Supply Chain Matters View of Amazon’s Q2-2017 Financial Performance

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Amazon reported Q2 financial performance this week with mixed results, to state the obvious.

While net sales rose 25 percent to $38 billion, profitability fell 77 percent driven by major investments in operating businesses.  Investors were not necessarily pleased with the latter news, driving Amazon stock down 2.3 percent on the news. FBA sized 300x145 Our Supply Chain Matters View of Amazons Q2 2017 Financial Performance

In the context of recent retail industry financial performance, a double-digit increase in revenue and nearly $200 million in profitability would be a basis of celebration.  But, this is Amazon, which as we all know all too well by now, marches to its own cadence of financial management.  For Amazon, bold and aggressive investments that can drive business growth can often overshadow Wall Street’s expectations for high levels of near-term profitability. Company management solidified that expectation with guidance for Q3 indicating a potential $1-2 billion increase in sales with operating income ranging from negative $400 to positive $300 million.

As business media points out, while many retailers today are in crisis mode attempting to deal with declining foot traffic and negative margins, Amazon has been a compelling driver of permanent shifts in consumer buying activity, in favor of the Amazon fulfillment model.

Let’s touch upon some insights from the latest June-ending quarter:

Amazon CFO Brian Olsavsky indicated that customer fulfillment growth continued at a 40 percent growth run-rate during the recent growth. Amazon Prime membership increased to 53 percent year-over-year in Q2, and that program provides funding for Free Shipping offerings afforded to Prime members.

The Wall Street Journal noted that Q2 shipping costs during Q2 rose 36 percent year-over-year to $4.52 billion.  Think about the magnitude of that number, or on the number of $18 billion in annual logistics and transportation costs.  During the quarter, the online retailer launched its 25th leased air cargo plane, now representing the equivalent of a full-blown global operating air freight company. By the end of this year, Amazon’s physical fulfillment centers will total in the mid to high 30 range. The online retailer just launched a new hiring campaign across the U.S. with the goal of filling upwards of 50,000 fulfillment center openings to again meet expected volume growth for the holiday fulfillment quarter later this year.

This is why we declared months ago that Amazon to be a logistics and transportation services provider in addition to an online retailer. We continue to reinforce that insight because it is important for readers to comprehend and understand Amazon’s broader strategies related to online and physical.  The B2C consumer goods, retail and third-party logistics industries are quickly understanding the magnitude of Amazon as a disruptive force, not only for retail, but for contracted customer fulfillment and logistics. And, we must add Wal-Mart as a consideration as-well, since that retailer is instituting aggressive plans to compete with Amazon for online market-share.

Another open-question is how long can Amazon keep-up with this pace of growth without a major operational hiccup.  Thus far, an open checkbook, fueled by the revenue and margin growth of other Amazon businesses such as AWS, have been the cushion to insure adequate physical fulfillment capacity and capability.

There are some tough decisions to be made, and at the end of this year’s holiday fulfilment period, more industry casualties and subsequent implications will once again be evident. But time is not a luxury for many, and disruption is indeed the call-to-action.

 

Bob Ferrari

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


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