This is the third report in our X Factor series in which we identify themes that we believe will be critical for the US retail landscape in 2H17 and beyond.
In this report, we focus on the supply chain. We summarize the challenges that retailers face in their supply chains and analyze the initiatives they have embarked upon over the past few quarters. Based on our findings, we see the need for retailers to digitalize the supply chain in order to better position themselves to compete in the increasingly challenging retail industry.
X Factor―Competitive Advantages that Could Revolutionize an Industry
The Supply Chain as an X Factor of Retail
The rapidly changing retail environment and disruption from e-tailers have caused traditional retailers to suffer from decelerating top-line growth. Cost-cutting and enhancing operational efficiency have become the focal points of discussion during earnings calls these past few quarters. By investing in their supply chains, retailers are looking at solutions that will eventually transform how they source and deliver goods to the consumer.
By analyzing conversation between top management and analysts during recent retailers’ earnings calls, we have summarized three key initiatives that are transforming supply-chain operations:
In order to adapt to the fast-changing retailing environment, retailers need to look at digitalization to transform the way they operate their brick-and-mortar stores. The transformation needs to involve every stakeholder along the value chain, and all the processes and information flows―such as data accessibility, data sharing, collaboration and data analytics―need to be fluid and transparent.
Many US retailers have been suffering from weakening top-line growth in the past few quarters. Declining mall traffic, an overstored industry and the structural shift in consumers’ preferences toward online shopping have contributed to the stagnant demand at physical stores.
Most retailers strived to adopt an inventory-light model after the financial crisis in 2008; for example, Walmart, increased investment in its supply chain. However, emerging e-tailers have become a disruptive force that is driving rapid change in the retail industry, and retailers must once again adapt to survive.
Looking at inventory turnover at a select group of retailers and department stores since 2008, we notice that the inventory levels of major retailers are rising. Even at Walmart, known for its world-class supply-chain management, its inventory turnover in 2016 was close to levels seen in 2008―which were unusually high because of the aftereffects of the financial crisis.
And if we look at Amazon, even though its inventory turnover has also increased over the years, this is largely due to its strategy of offering as many different products as possible. According to ExportX, which is an e-commerce company, Amazon offered 488 million different products in 2015, introducing an average of 485,000 new products per day (by comparison, Walmart offers approximately 150,000 products at its Supercenter store format). The massive selection means inventory turnover rises significantly.
As such, increasing supply-chain efficiency has become a key area for retailers to sharpen their competitiveness. In the strategy updates during retailers’ conference calls these past few quarters, senior management have reiterated their focus on cost cutting and opening up new revenue opportunities by investing in supply chains.
In the second part of our report, we summarize the key points that top management at Macy’s, Walmart, Kohl’s, Nordstrom, JCPenney, Sears, Target and Amazon has mentioned during their recent earnings calls.
We break out the top retailers’ supply-chain initiatives into three key categories:
Challenges and Priorities
Marvin Ellison, President and CEO of JCPenney, said the key benefit of e-commerce is convenience. JCPenney had been learning how to simplify the in-store environment so it can offer a better shopping experience. Optimizing the network from an omnichannel standpoint, JCPenney decided to close some stores to ensure it could service its omnichannel customers more effectively.
Supply-Chain Initiatives
Challenges and Priorities
According to Kevin Mansell, CEO of Kohl’s, the weak apparel environment has hurt topline growth. Kohl’s strives to make the product offering in underperforming stores more relevant and more effective. It intends to continue to lower inventory per store by about 3% per year over the next three years, with larger inventory reductions at its retail stores and at its warehouses.
Supply-Chain Initiatives
During recent earnings calls, Macy’s management has commented on the huge challenge it has been to find the right size fit for its customers. It is difficult to standardize sizes and patterns for each of their brands when they have different manufacturing and sourcing partners. To ensure the stores have the size and color that the customer wants in stock, Macy’s need to build the assortments and hold sufficient stock for the best-selling styles.
Supply-Chain Initiatives
Challenges and Priorities
According to Michael Koppel, Executive VP and CFO at Nordstrom, the retailer has been working through the operational challenges of operating an integrated in-store and online business, as it did not have all the systems fully aligned. Processing returns made online in-store and finding the right way to balance inventory are also key challenges the company faces. During recent earnings calls, management has also mentioned changing customer expectations―what customers expect nowadays is very different from what they had expected in the past.
Supply-Chain Initiatives
Challenges and Priorities
A weak demand environment, warm weather, increased promotional activities and intense competition are the key challenges that Sears has mentioned on its recent earnings calls. The company intends to improve the performance of the apparel business through changes in sourcing, product assortment, space allocation, pricing, expense management and inventory-management practices.
Supply-Chain Initiatives
Challenges and Priorities
John J. Mulligan, COO of Target, reiterated that the challenge facing the company is to make retail shopping more experiential―in other words, delivering more of the inspiration that consumers can only find in the physical stores. He expects consumers to continue to be drawn to e-commerce to save time on shopping and emphasized that retailers need to understand how consumers’ preferences and expectations are evolving. By being able to anticipate the direction consumers are heading, retailers can find new ways to engage them at every stage.
Supply-Chain Initiatives
Challenges and Priorities
On recent earnings calls, Douglas McMillon, CEO of Walmart, has reiterated four priorities for the company:
Walmart focuses on sustainability and enhancing the shopping experience for its customers.
Supply-Chain Initiatives
Next, we look at how Amazon differentiates itself through supply-chain management.
Based on the three factors discussed above, we highlight a few examples to demonstrate what Amazon is doing compared to traditional retailers:
Digitalization of the Supply Chain
In order to enhance optimization, speed and innovation of the supply chain, retailers will need to rely on digitalization to transform their sourcing and distribution processes as well as how they operate brick-and-mortar stores. The transformation would require every partner along the retail value chain to be involved.
Some examples of digitalization along the value chain include:
On the supply-chain side, end-to-end inventory tracking through IoT enables closer integration with all stages of the supply chain, i.e., distribution, supporting more efficient operations and limiting the occurrences of misplaced or out-of-stock items.
Connected supply chains also increase the opportunities for customers to connect and interact with products, and retailers to capture new revenue opportunities. In-store connected technology increases merchandise engagement—for example by using smart mirrors that enable customers to virtually try on items or through NFC tags that send information about an item to the customer’s smartphone.
For more detailed analysis of digitization of the supply chain, please refer to our reports: IoT in Retail—Digitalizing Brick-and-Mortar Stores and An Overview of the Digitalization of the Apparel Supply Chain.
The brick-and-mortar channel is currently losing the growth fight to e-commerce. As a result, major retailers are undertaking new supply-chain initiatives focusing on optimization, speed and innovation in order to survive in the new digital commerce era. The premise is to make physical retailing as convenient as online shopping for the consumer, and to achieve operational efficiency based on an omnichannel business model. Given the speed of technological innovation, traditional retail businesses are faced with an “innovate or die” proposition and one major area that requires innovating is their supply chains. By digitalizing the way goods are designed, produced, sold and delivered, retailers stand to benefit from operational efficiency as well as new revenue opportunities, competing more effectively in a digital world.