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October 29, 2015 - Supply Chain Flagship Newsletter

This Week in SCDigest

bullet Amazon's Stock Price and the Fate of Omnichannel Commerce bullet SC Digest On-Target e-Magazine
bullet Supply Chain Graphic & by the Numbers for the Week bullet Holste's Blog/Distribution Digest
bullet Cartoon Caption Contest Continues bullet Trivia      bullet Feedback
bullet New Supply Chain by Design and New Expert Insight bullet Videocasts and On Demand Videocasts


Download this Ebook to learn the top eight reasons supply chain analysts say they prefer supply chain modeling software to spreadsheet-based solutions

first thought


Supply Chain Graphic of the Week
Walmart Once Again Battles Inventory and SKU Count Issues

Walmart Inventory Cold has Vendors Worried about Pneumonia
Truck Driver Pay Heading Up and Up
Ocean Carriers Pushing Migration to East Coast Ports
China's New Approach to Growing Economy



October 13, 2015 Contest

See The Full-Sized Cartoon and Send In Your Entry Today!

Holste's Blog: Deploying Flexible & Scalable System Operations Presents Unique Challenges


Weekly On-Target Newsletter:
October 28, 2015 Edition

New IoT Cartoon, Walmart SKU Counts, DC Automation, Amazon Logistics? and more

How to Take Advantage of the TPP

by J. Anthony Hardenburgh
Vice President, Global Trade Content
Amber Road

CSCMP Report: Six Insights from LLamasoft and JLL

by Dr. Michael Watson

Townhall Meeting! The State of Retail-Vendor Relationships 2015

Results from SCDigest's New Benchmark Study of Retailers and Their Suppliers - and SCDigest's New Index to Measure the State of the Relationships

Featuring Interactive Event Format - Live Expert Panel and Audience Questions

Featuring Greg Holder,CEO, Compliance Networks, Kim Zablocky, President,

RVCF (Retail Vendor Compliance Federation), Victor Engesser, Retail Executive Advisor, RVCF and SCDigest's Dan Gilmore


What is the current spot market cost to ship a 40-foot container from Shanghai to the Port of New York?

Answer Found at the
Bottom of the Page

Amazon's Stock Price and the Fate of Omnichannel Commerce

A couple of weeks ago I had the chance to speak to Penn State University's Supply Chain Leaders Forum, and at the event there was a very interesting group discussion on "free shipping" in ecommerce.

I'll be back on that topic in just a bit, but first just a quick note on the tensions between the US and China over artificial islands in the South China Sea that I wrote about last week. (See Pacific Islands and the Supply Chain.). China claims sovereignty over the artificial island it has created there as well as nearby tiny rocks and outcroppings that are far, far from the Chinese mainland.


"My main point is that if Amazon's stock did take a plunge over lack of profits, it just might be forced to ease up on free shipping to shore up the bottom line. But that simply is not happening."


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As I predicted last week, the US did sail some naval ships just within the 12 nautical mile range of the fake island on Tuesday. As also predicted there was no shooting, but instead of "escorting" the US ships, as I expected, Chinese naval ships were said to have trailed the US Destroyer from a distance.

Is this over? Hardly.

The Chinese government called the action an "illegal entry" into its waters that has "threatened China's sovereignty and security interests." A senior Chinese official later said the country will need to make it clear that this area of the China Sea is not open international waters, a position obviously the US and the rest of the world vehemently oppose.

The US will test China there again and again. Eventually, something is going to happen. Where it goes from there no one knows. If your supply chain or market plans are heavily China centric, I again strongly suggest you keep close tabs on what is happening and begin contemplating contingency plans.

OK, back to ecommerce. After my opening keynote at Penn State, one executive from one retailer gave an interesting presentation about his company's views and activities on omnichannel, which included this emphatic statement: "There is no free shipping!"

He added: "The last time I negotiated with UPS or FedEx or the United States Post Office, none of them were talking about shipping our orders for free."

The situation of etailers giving away shipping simply can't last, he argued, It has to end or no one will make any money. That's when another supply chain executive said (paraphrasing) that "Our board and our shareholders expect a given rate of return and profitability, and it will be difficult or impossible to hit those objectives if free shipping continues."

My question back to the audience: "Is that viewpoint a prediction or just a hope?"

In the world we used to know, this perpsective would certainly be correct, the financials would push etailers away from free shipping eventually. Heck, it wasn't all that long ago that many companies, certainly catalogers selling to consumers direct, used shipping fees as a clear profit center. What a quaint notion in 2015.

I will note there was also a brief discussion on how many etailers often pay for the shipping for customers that order several items to try on, and then keep one and send the rest back. Of course, that return shipping is free too - a double whammy - and maybe the consumer puts the return in a large box that is subject to dimensional weighing add-ons charges from the parcel carriers.

Ouch! Omnichannel madness indeed. Maybe some must be right, it just can't last. There is just one problem -

Let's face it, Amazon is the "prime" (pun intended) driver of the current shipping scenario. It offers free ground shipping on all orders over $35, free two-day shipping for Amazon Prime members, free two hour shipping for Amazon Prime members in markets served by Amazon Prime Now, free shipping on small orders that weigh 8 ounces or less and cost no more than $10, etc.

The operative word here would seem to be FREE.

But of course it isn't free to Amazon either. In the just ended third quarter, Amazon had shipping revenues (regular shipping charges plus Prime Now revenues) of $1.49 billion (that's an amazing number on its own, isn't it?), but it had shipping costs of $2.72 billion. Its net loss on shipping just in Q3: $1.22 billion.

Amazon reports its shipping loss is a hefty 5.3% of net sales - but that isn't the real story. Net sales includes web services, Amazon Marketplace, electronic media, and other buckets that have little or no physical shipping. As we have done before, if you divide Amazon's net shipping costs into just its merchandise sales of $17.7 billion, now the percentage climbs to an even heftier 6.8%.

By the way, fulfillment costs (which do not include shipping) were $3.23 billion in Q3, or an incredible 18% of merchandise sales. That means shipping and fulfillment costs combined are 24.8% of merchandise sales. That for a company that had gross margins in Q3 of 34% - before those logistics cost and a whole bunch of other administrative costs.

Is it any wonder then that Amazon can't make any money?

It did eke out a small profit of a puny $79 million, just 0.3% of its $25 billion is quarterly sales, so basically break even. But its stock price shot up anyways because Wall Street was expecting another loss.

In its latest quarter, Walmart was solidly profitable and said it will be again next year, but said earnings could decline 6-12% due to heavy spending on ecommerce (just like Amazon) and costs from increasing store associate pay. Its stock was hammered, down 10% in a single day, continuing a downward trend for all of 2015.

Here is the chart that says it all: Walmart and Amazon's stock price histories over the past 10 years. In this case, a picture truly is worth 1000 words.

In a normal world, Amazon's lack of profitability would lead to the stock also getting hammered. But of course it still has incredible growth on its side, and investors continue to believe that all this investment will eventually pay off in big profits some day. And it just may - though they have been saying that for at least a decade. Maybe in 2025.

And my main point is that if Amazon's stock did take a plunge over lack of profits, it just might be forced to ease up on free shipping to shore up the bottom line. But that simply is not happening.

So in the end, it simply may be that for quite some time that Amazon will force free shipping for all no matter how irrational it seems to its competitors (though I will note Amazon has lots of data showing the sale uplift it gets from Prime customers).

And just like the airline sector for decades, it could just mean that profits in ecommerce will be very difficult to achieve for many etailers in the country and maybe the world no matter what they do - regardless of what boards or retailer shareholders expect.

So those companies should probably be rooting for an Amazon stock price collapse, and indeed many analysts continue to believe the company is way overvalued.

But they have been saying that almost since the company first went public - and just look at the graphic above. I, for one, would hardly be a short seller.

I am pretty pleased with this column, if I do say so myself. I would welcome your thoughts on this matter.

Is Amazon's free shipping ruining profits for all etailers? Is the impact likely to be felt for many years? What can etailers do, if anything? Let us know your thoughts at the Feedback button (email) or section (web form) below.

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We received a number of emails on our recent story on American Apparel trying to keep its production on the US despite just filing for bankruptcy protection, as Wall Street analystcs urge it to go offshore. Some of the Feedback come from our friends at RetailWire, which republished our story. A few of these Feedback below, maybe more later.

Feedback on American Apparel's Attempt to Keep Producing in USA


The reason why American Apparel has an opportunity to succeed is exactly its model of sourcing close to the point of demand. This is what fast fashion is all about, and it's also the reason that companies like H&M and Zara are knocking the cover off the ball at the expense of department stores.

What American Apparel really needs is a few creative merchants and product designers.
The dynamic of fast fashion is about getting product in and out of stores quickly. The brand can place smaller bets because it's not sending big slugs of product on a month-long journey. Mistakes are minimized. If it costs a few bucks extra to get it in, it'll get made up in turn and fewer markdowns.

The sourcing of product far from the point of demand creates a set of decisions that are not good: 1) big bets which are generally made on 2) safe products. The net of that is boring product, and that's why sales can languish. No merchant is that good that they can or will roll the dice so far out.

I believe the industry is moving back to near-sourcing, whether it be made in America or made in the "Americas." There's no choice really. No other way to compete on anything but underwear.

Paula Rosenblum
Managing Partner
RSR Research


This is a no-win situation for American Apparel. I love the fact that they want production to stay in the U.S., but financially with much higher wages plus ACA and regulation burdens, it is very difficult to produce a clothing item for the mainstream consumers. Niche clothing that creates very trendy items and custom shirt and suit ma kers have a good chance at success if their clothing resonates with the higher income crowd.

Walmart's success is built on cheap products, from ties to home appliances, and undersells American goods all day long. Turning this trend around requires very bold thinking, which in D.C. is not happening. We have trillions of dollars parked overseas, and there is a way to bring it back without any penalties or taxes for starters. Is the country ready for a new manufacturing revolution? I hope so, as manufacturing in the U.S. could and should happen again.

My solution is simple:

1. Create a partnership with workers on new facilities using an ESOP plan to get the employees some skin in the game.

2. All products produced in the U.S. would have a special universal stamp or label somewhere on the product that easily distinguishes the products as made in the U.S., 100% from start to finish.

3. Reduce the insane regulations to the point where real common sense safety standards are met with accountability that can be measured. This is vital, as success depends greatly on a truly free marketplace.

4. The warranty on goods made here would be double the manufacturers warranty of any other country producing similar products. I believe that this would up the ante for us, making sure we produce outstanding products, that the consumers will feel comfortable paying a little extra for.

5. With the ESOPs, all levels of employees inside the plants would have a seat at the table in how the products are made, including technologies that save time and make us the most efficient producers in the world.

6. Lowering the corporate tax rate is a must, and shrinking government by at least 20% is key. This would be the toughest thing to do, as we have corruption and waste that exceeds the 20 percent level for sure.

7. Re-training of workers to a real high-tech world would be a part of using the money we waste paying people to stay home, and obviously this would fold into real entitlement reform by not punishing the needy, vets, children or the elderly who deserve to have the SSI they earned and not stolen.

Sorry to vent, but bold ideas to make America a manufacturing powerhouse are out there, and these are just my thoughts as a proud patriot who believes that time is running out if we keep doing the same old thing. God Bless America.

Tony Orlando
Tony O's Supermarket & Catering



Q: What is the current spot market cost to ship a 40-foot container from Shanghai to the Port of New York?

A: Just some $2300, about $1,800 lower than it was a year ago, as it appears carriers are trying to lure importers using West Coast ports with low rates to move containers to East Coast ports for when the new Panama Canal opens.

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