Surveying the retail landscape of 2016 and beyond, I am reminded of that iconic verse sung by Stephen Stills of Buffalo Springfield in the late 1960s.
"There is something happening here, What it is ain't exactly clear."
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| In the face of decreasing topline growth and increasing competition, where have traditional retailers turned to increase bottom line profitability? Understandably, supply chain. |
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Grammar aside, many of the senior retail executives I work with believe we are going through a period of rapid change or even a paradigm shift. When asked to define it, the common response is that while many have a hard time fully articulating it, they know major change is occurring.
Retail is Changing
There are plenty of signs that change is abound in the retail sector. We have witnessed continued earnings pressure amongst the traditional retail stalwarts and in some cases bankruptcy. Consumer buying trends are shifting from stores to on-line as the time-pressed consumer opts for price and convenience over the in-store experience. In addition to Amazon, new competitive forces fueled by private equity are emerging by leveraging technology, smart phones and social media. It's no wonder that shifts in consumer spending and behavior are viewed as one of the top disruptions in PwC's 2016 Global CEO Survey.
So what does this mean to supply chain? The short answer is: buckle your seat belts! In the past, most retailers competed solely on merchandising, assortment and the customer experience. A "buy it and they will come" mentality permeated retail buying organizations, fueled by top line growth. But then two major events occurred that I believe has changed retail forever, (1) the Great Recession and (2) the rise of ecommerce. Not only have these two events changed retail as we know it, but supply chains as well.
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The Numbers
A clear victim of the Great Recession was top line retail growth. Since unemployment peaked at 10% in October of 2009, consumers flocked in droves from the traditional department stores (Nordstrom & Macy's) to the off price retailers (TJ Maxx & Burlington Stores) and Amazon. While the unemployment rate has recovered to 5%, the consumer remains not only price sensitive but equally time constrained in the face of modest growth and stagnant wages.
To add additional angst to the traditional department store retailer's woes, Amazon has decided it wants in on apparel in a big way. Already the biggest clothing seller online, Amazon is "expected to triple its share of the U.S. apparel market over the next five years," according to Bloomberg. In an April 2016 Morgan Stanley survey, the top reason consumers gave for shopping on Amazon was interestingly: "ease and convenience". Shelly Banjo from Bloomberg recently noted that "The sexiest part of Amazon's fashion push was not the clothes on its site but its logistics."
What's Next?
In the face of decreasing topline growth and increasing competition, where have traditional retailers turned to increase bottom line profitability? Understandably, supply chain. While merchandising, assortment and the "customer experience" may have defined the playing field in the past, going forward inventory speed, execution and visibility are also successful components to a profitable retail enterprise. Customers' expectations of price and service have changed forcing supply chains to evolve as well.
Leading retailers such as Home Depot, Walmart and Target have all made public announcements placing additional demands on their supply chain performance. All expect their stakeholders (vendors, supply chain and merchants) to provide a higher level of service to their distribution centers while reducing inventory values along the way. In a recent Wall Street Journal article, a senior executive at Home Depot was quoted as telling store managers to "get comfortable with days of supply, not weeks." Quite simply, where once only merchandise teams competed from retailer to retailer, now supply chain teams must as well.
In the quest to grow bottom line profits and remain relevant against the ecommerce pure plays, traditional retailers have identified a common challenge to their objectives: supply chain variability. Supply chain variability adds avoidable costs, reduces speed, impairs execution and increases capital requirements to fund unnecessary safety stock inventory. In addition to being a competitive disadvantage, supply chain variability reduces the key metric ROIC (return on invested capital) on which many senior executives receive bonuses.
While I profess not to know what Supply Chain 2.0 fully looks like, I am reasonably confident we all must up our game to meet the new challenges that lay ahead.
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