Article by: Andrew Cox
Rather than recapping 2020, I’d rather look onward. There have been a ton of retail supply chain changes this past year. Some will last, others will not. Let’s collectively lick our wounds and look forward. Here’s 5 predictions for the retail supply chain in 2021.
Much has been made of relatively low inventory levels across the retail supply chain this year. The inventory-to-sales ratio currently stands at 1.31, down from 1.40 this time last year. We at FreightWaves have touted this data as evidence for a continuation of the freight bull-run we’ve experienced in the back half of the year. But too few have analyzed the disparity in growth rates between retail sales and import volumes.
Sea-Intelligence CEO Alan Murphy warned, “It is clear that there is a mismatch between container volume growth and total sales”. He pointed to October where total sales rose 2.2% yoy, while container imports were up 20.4%.
Christopher Rogers, a senior analyst at Panjiva, saw ominous signs in the November data. According to the Commerce Department, retail sales grew 4.1% yoy. But Panjiva data shows that imports of consumer discretionary products jumped 30% in November, after growing 31.8% year-on-year in October.
Murphy foresees “a distinct likelihood that the ongoing cargo boom supports a large inventory buildup, bringing inventory levels significantly above pre-pandemic levels.”
According to the monthly Global Port Tracker report released by The National Retail Federation (NRF) and Hackett Associates, retail imports will remain strong beyond April and possibly through peak season 2021. In fact, the report estimates container imports to be up in the low single digits through February, but then estimates yearly import growth of 18% in March and 8% in April. Hackett points to the near-zero Chinese production in March of 2020 when China failed to reopen after the Lunar New Year holiday.
There’s an additional catalyst that will drive inventory replenishment in 2021, and it’s the same that dwindled inventories in 2020: e-commerce. As retailers adjusted this year, the victors were those with the most robust omni-channel offerings and ability to efficiently fill online orders. What the best-in-class retailers realized is their e-commerce efficiency can be greatly improved by leveraging their physical locations.
“The store is becoming an extended part of the supply chain, to do ship from store,” said John Morris, head of CBRE’s industrial and logistics and retail divisions. Retailers have begun fulfilling online orders from stores and in turn have pivoted portions of their back rooms to mini fulfillment centers. No one is doing this better than Target, which was fulfilling 95% of its e-commerce orders from its stores as of Q3. “I think the first thing you’ll see is increasing inventories at the store level”, stated Morris.
But retailers must be preparing for a reduction in goods spending when a significant portion of the population is inoculated. Look to Asian countries where life has returned to a semblance of normalcy – Richard Gelfond, CEO of IMAX noted movie theatre attendance has already returned to pre-pandemic levels in Japan and China.
People want to do the things they have been unable to do for the past year – travel, go to concerts, movies, and sporting events. This means services return and replace goods in the second half of 2021, barring any major mutation or unforeseen additional COVID outbreaks. Normalizing consumer behavior will support a continued strong freight market, but will likely flip the script on inventories.
Reverse logistics and the returns process took center stage this year as commerce shifted online. The words ‘seamless’ and ‘frictionless’ have become part of the layman’s vernacular. For good reason – reverse logistics is big business and the NRF estimates $70.5 billion of holiday sales will be returned.
Even if return rates remained stable, the influx of online demand translates to higher total returns and reverse logistics costs. But that’s not the case – Nicholas Isasi, executive VP, DM Transportation Management Services, says some of his clients have seen return rates grow exponentially this year. Other providers, like goTRG, which handles returns for national retailers like Walmart and Lowe’s, has seen return units up 200% since March.
The trend started long before COVID, but retailers have been busy spinning out services and options for consumers to return items easily. Amazon partners with Kohl’s to allow Amazon return drops at stores. Many retailers contacted Simon Properties to leverage the concierge desk in malls as a return location. Last week, Walmart rolled out Carrier Pickup by FedEx, which allows customers to return items for free without leaving their home.
It’s not that we won’t see more of this–we will. In fact, I think the 2021 reverse logistics term of the year will be BORIS (Buy Online Return In Store). Curbside returns will become a norm in the coming year.
But all of these efforts are missing the bigger picture. The best returns process is one the customer never has to engage in. If retailers want to get a grip on reverse logistics costs, they must focus as much energy on the pre-transaction process as they are the post. Those that are putting a concerted effort towards the former are seeing remarkable results.
SeekXR, an augmented reality retail software provider says it has measured a 25% decrease in returns from AR-guided purchases. Shopify has recorded an even more substantial 40% decrease in returns from 3D visualization.
I’m not seeing reverse logistics providers touting a 40% reduction in returns costs anywhere. Nor am I seeing any post-transaction focused effort reducing fashion waste by 40%. 2021 will be a year of pre-transaction focus, driven by technology.
Made for You
On-demand garment manufacture was once seen as a luxury process only available to upscale customers willing to pay top dollar. That’s changing. There are two major catalysts for this change: changing customer preferences and sustainability expectations, and mounting reverse logistics costs.
Amazon, the nation’s largest apparel retailer, sees on demand clothing manufacturing as a way to agily meet changing consumer demands and minimize returns. Amazon recently launched “Made for You”, a made-to-order, customizable t-shirt service. Initially, the offering is only for t-shirts, but Amazon has plans to expand to other product categories.
Amazon is betting on customization as a way to solve issues of size and fit, which have plagued online apparel. Shopify says 72% of all fashion product returns are due to preference-based reasons (e.g., size, fit, style, etc.).
Plans like Amazon Made for You and Stitchfix fit the ethos of today’s shoppers – sustainability and less waste. There are significant benefits for the retailers as well including the ability to respond quickly to evolving fashion trends, keep minimal stock on hand, and discount less at season’s end.
A broader question remains about the psychology of the e-commerce consumer and who actually benefits from algorithmically-tailored clothing. Zappos shoppers have been ‘bracketing’, or ordering multiple sizes to find the perfect fit and returning the rest, for more than a decade; it’s an entrenched behavior. And much of Amazon’s advantage over other e-commerce retailers is superior fulfillment speed—’Made for You’ will likely buck that trend.
It’s a case of two competing strategies: on the one hand, making returns as frictionless as possible, but on the other hand, trying to steer customers toward apparel experiences that may take longer to fulfill but should deliver better-fitting clothes.
At this point, ‘Made for You’ is just one of many experiments at Amazon, but it’s an early attempt at solving the hardest problem in e-commerce: re-aligning a delightful customer experience with sustainable (and sane) supply chain practices.
Supply Chain CEO
Anyone who’s been paying attention knows that supply chain management has emerged from its status as a back-office function to become a major strategic differentiator for business. The supply chain profession has transformed itself from the disparate functions of procurement, logistics, and manufacturing into an integrated amalgam, and in doing so, raised its prominence to occupy the minds of corporate boards and the attention of Wall Street investors and analysts.
Notable supply chain leaders such as Apple’s Tim Cook and GM’s Mary Barra have risen through the ranks to lead their companies. Now, companies are adding supply chain specialists to their executive suites. Most recently, Nordstrom promoted Amazon alum Alexis DePree and her role as Chief Supply Chain Officer to the company’s C-suite.
As retailers’ sales fragment between physical stores, online, BOPIS, and social media, having someone with supply chain transformation expertise will be paramount. Nordstrom’s move to add supply chain leadership to the C-suite emphasizes the critical nature of the supply chain to satisfying customers and maintaining margins.
More will follow in Nordstrom’s footsteps. From January to May 2020, “supply chain disruption” was mentioned 30% more during earnings calls than the same period in 2019. The major disruptions retailers have managed this year are fresh on their minds.
In addition to the demand, the pipeline of potential executives has been growing. The Wall Street Journal called Supply Chain Management “The Hot New M.B.A.” a few years back. 2021 will be a year of the supply chain executive, and possibly the year of the supply chain CEO.
Malls Get Clever
I haven’t been in a mall all year. I’d guess many of you haven’t either. Even when shoppers returned to retail locations, mall traffic lagged behind. Super Saturday, typically one of the busiest days of the years for malls, saw traffic at mall anchors like JCPenney down more than 40% yoy.
Indeed, COVID has instilled fear in shoppers’ minds but this secular decline began well before the pandemic. A large number of malls are being called to reinvent themselves, redevelop, and provide unique experiences in order to survive. This begins with a reimagination of which types of tenets fit best.
What types of repurposing should we expect to see? The freight and logistics industry has been clamoring for more warehousing and fulfillment space. Real estate services giant CBRE says every $1 billion in incremental e-commerce sales generates 1.25 million sq. ft. of warehouse space demand. CBRE projects an additional 400 million sq. ft. of warehousing space will be needed just to handle returns by 2025.
As department stores close at record speed, mall operators are embracing the idea of leasing these vacant store spaces to online retailers for use as fulfillment centers. Simon Property Group, the nation’s largest mall operator, and Amazon have recently discussed repurposing closed anchor spaces into fulfillment centers.
While the rapid growth in ecommerce makes this transition attractive, there are major headwinds. Malls’ foot traffic and subsequent city taxes would decline. In many cases, this would require the rezoning of malls as industrial areas, something residents vehemently oppose. A more middle ground approach could be an omnichannel tenant combining a physical store, fulfillment center, click-and-collect, and return center. If malls work directly with retailers, it could provide a powerful win-win scenario for both parties and satisfy shoppers and local residents.
But there are other options that may be advantageous for both consumers and mall owners. The one-size-fits-all mall format that has been copied and pasted across the country isn’t working and hasn’t for a long time. As the anchor stores that once carried the mall fell like dominoes, malls realized they must introduce new types of tenantts to fulfill that traffic generator.
Mall visitors want to do more today than just shop. With new brands across sectors looking for offline homes, malls have an opportunity to think creatively about the types of tenants they host. By transforming struggling retail spaces into offices, schools, fitness centers, or medical centers, malls can create engaging experiences that attract traffic and enable these locations to thrive.
These tenants also bring malls something that has eluded them: consistent traffic. Mall traffic is significantly higher on the weekend, while traffic at offices, gyms, fitness centers and medical centers is concentrated on weekdays. For gyms, the traffic benefit is particularly valuable. The peak season for gyms coincides with the weakest times for malls: Q1 after New Year’s resolutions of saving money and getting in shape.
These are just a few of the examples of mall repurposing ideas. Others have included pop-up shops where DTC brands can create a unique in-person connection with their customers. Most notably, California’s South Coast Plaza mall hosted a Kim Kardashian beauty pop-up that saw huge success during its three-month run. And foot traffic plummeted when the experiment ended.
To stay relevant and timely, malls must transform their customer experience and value proposition. What better time to do it than when traffic is down 40% YOY?
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