January 22, 2014
By Bob Ferrari (Guest Blogger)
In a previous blog, I commented on the all-important 2013 holiday buying surge period and supply chain fulfillment activities. It addressed two critical areas that have emerged as the most visible weak points for online and physical customer fulfillment and what initiatives supply chain and B2B teams should be undertaking in 2014 to prepare and address these needs.
In this posting, I’m going to further elaborate on the profound implications of omnichannel commerce that are now becoming far more evident as business media begins its brutal assessments in the aftermath of 2013. Shopping patterns have been permanently altered as consumer price consciousness rules the majority of buying patterns, and the implications to B2C and consumer goods supply chains are profound.
Last week, the printed edition of the Wall Street Journal featured a front-page article that concluded what some B2C supply chain fulfillment teams already know, that a long-term change has perhaps permanently altered consumer shopping patterns. (Paid subscription or free metered view.) That conclusion has become more obvious from the latest earnings warnings and reports coming from major retailers. The WSJ cited ShopperTrak data, garnered from tracking mall visits, indicating that retailers experienced only about half of the 2013 holiday foot traffic as they did three years earlier, while online sales increased by more than double the rate as brick and mortar retail outlets. Electronics retailer Best Buy overhauled its store layouts, openly invited consumers to showroom, opened its doors during the Thanksgiving holiday and stayed open late into the holiday period. Its CEO has now communicated that all of these efforts could not offset the now permanent effects of consumer online shopping habits. Best Buy and other traditional retailer stocks were punished by investors as a result of that news.
Beyond shopping malls, major broadline retailers such as Target and Wal-Mart have indicated reduced store traffic and physical store sales.
This omnichannel shift is further reflected in grocery retail and consumer product goods. The CEO of Kraft Foods recently stated at a recent industry conference that: “Club and dollar stores are the only channels that are growing” and further stated that Kraft has witnessed the value consciousness of consumers intensifying with shopper trips dramatically down across grocery outlets. That data is reflected in reported from other CPG companies as well as major grocery chains. On Supply Chain Matters, we recently amplified business media reports of how Amazon co-locates its online fulfillment for everyday consumer goods replenishment within Procter and Gamble distribution centers and how other CPG firms are sharing omnichannel distribution fulfillment with online sites.
Retailers have little choice but to respond. Investments in new store openings are being curtailed in favor of those focused on improving or expanding online operations. Distribution center investments are being focused towards facilities dedicated to online B2C fulfillment needs. Existing brick and mortar stores themselves are increasingly being re-evaluated for shopper density along with making them more of an adjunct to online sales. Macy’s has converted more than half of its 840 physical stores to be able to both fulfill online orders or serve as online customer order pickup sites. Best Buy took similar measures expanding its ship-from-store program to more than 400 locations.
Mike Kilgore, President and CEO of Chainalytics, and I recently discussed these trends, and Mike commented how Macy’s has elected to re-engineer its order fulfillment algorithms to determine from what site the order would ship. The algorithm also considers highest probabilities for merchandise markdown in addition to other traditional factors related to logistics costs.
The important takeaway for retail, CPG and other consumer-facing industry supply chain leaders is to internalize the reality that permanent changes in shopping behavior are underway and to proactively educate the rest of the business to the implications. These are hard to answer questions because previous distribution and fulfillment strategies built on many years of prior assumptions of customer buying patterns are potentially flawed or in need of a comprehensive review. Such a review needs to consider the scope of supply chain strategy, overall planning and customer fulfillment impacts. As consumer-facing firms make online presence and customer fulfillment the top business priority, it is critically important that the supply chain implications along with required investments and initiatives are understood by respective C-level executives.
The permanent consumer buying trends brought about by omnichannel fulfillment is a new awareness that the entire scope of supply chain network design, deployment and customer fulfillment is changing rather dramatically and firms need to be able to proactively respond to these market shifts in the most efficient and least disruptive manner.
Insure that your 2014 plans factor these shopping pattern implications and that you have the supply chain talent and resources in place to assure a positive business transition.
Bob Ferrari is the Founder and Executive Editor of the Supply Chain Matters blog and is a recognized thought leader in B2B fulfillment and supply chain management.