In November 2016 there was a buzz sounding the return of retail. It started with the ‘jump’ in September retail sales in the US, and as initial October reports showed potential for similar growth, the story was cemented. Then, with the arrival of December’s retail reporting, that forced optimism faded – October failed to meet expectations and November’s sales forecast was nearly flat month-on-month.
Despite best attempts to pitch the fourth quarter of 2016 as different, it looked awfully similar to 2015, where companies went so far as to blame the weather for poor holiday sales. We discussed the impact of that poor performance in January and in March, and while 2016 saw extensive markdown strategies to combat swell, inventory is still piled up.
Last year, we called it a hangover, but its consistency is indicative of something bigger. The trend started at the end of the global economic crisis (GEC), when there was a legitimate need to replenish goods as quantitative easing drove increased spending. However, the headache set in as 2014 became 2015, and inventory to sales ratios hit pre-GEC levels.
A growing challenge
Around the same time, the growth of traditional retail sales essentially stopped and e-commerce sales growth increased even more. The US Census Bureau reports that since the beginning of 2015, the percent change in sales for e-commerce from the same period one year prior exceeds 14% in every quarter, and 15% in each of the last five. Over that same period, traditional retail sales (e-commerce sales subtracted from total sales) plateaued, with annualised growth near 1%.
Note, the divide may be even greater, as the Census Bureau’s categorisation of e-commerce appears to exclude pure online players, ie Amazon.
To put those growth rates in comparison, at a 15% rate, e-commerce sales will double in fewer than five years, while at 1% growth, it will take traditional retail sales 70 years to do the same. Generally, businesses acknowledge that e-commerce sales are growing, but few understand that 4x growth in nine years is a real possibility.
“Today is difficult. Tomorrow is much more difficult. But the day after tomorrow is beautiful.” (Alibaba founder, Jack Ma)
For many retailers, today’s supply chains are struggling to survive in the moment, as they were built to serve business models of the past. Patchwork solutions and manual workarounds are being put into place to deal with changes as they occur, but we’re not even close to e-commerce stability. In addressing the prospect of a much more difficult tomorrow, supply chains must face the following realities for retail in 2017:
- Stores are here to stay… for now. Contractual obligations and the public stigma of store closings are justifications for maintaining existing networks and points of sale, weak as they may be.
- Basic supply chain functionality cannot be compromised, as shipping and logistics disruptions is the runaway most common concern for retail respondents to our 2016 Future of Supply Chain survey.
- Retail supply chains are least likely to be considered an equally important part of business success, in comparison to other consumer-centric businesses.
The day after tomorrow isn’t far off
To survive today, and a tougher tomorrow, retail supply chains must face reality and break from the sameness – same products, same process, same service – to create differentiated consumer experiences. Those experiences will seem personalised and tailored to the moment, but they’ll really be an exhibition of a supply chain that combines process excellence with digital capability.
These supply chains will find strengths in their existing networks – for example, how do stores best serve the customer? – and identify where technology can be used to not only enable sense and respond, but also create predictive capabilities. For example, through its Go concept, Amazon can leverage its existing analytics to combine what customers really need to buy with how they need to make the purchase, enabling new levels of choice and convenience.
Whether it be through continued experimentation and reinvention like this from Amazon, or a change in perspective whereby Lululemon now sees itself as “a technology company investing in innovation to drive the business”, retail must accept that the future is very different from the past, and that supply chain will be leading the way to that beautiful day after tomorrow.