The Supply Side: Suppliers seek answers for changing retail paradigm

With the shift of many retail categories to online, suppliers who typically have served brick-and-mortar stores are facing somewhat uncharted territory, according to Chris Moore, vice president of sales and customer solutions for Prime Distribution Services.

During a recent WalStreet Fireside Chat meeting sponsored by the Greater Bentonville Area Chamber of Commerce, Moore spoke candidly with suppliers about challenges they are facing with the shifting retail paradigm and its impact on the supply chain.

Moore said the supplier/merchant buyer dynamic has evolved into a relationship that values speed, insights and digital acumen. He said in this age of “everywhere shopping” there are barriers to commerce as well as facilitators of commerce. But suppliers should ask a minimum of five questions when evaluating their supply chains for e-commerce.

OMNICHANNEL OPPORTUNITY
Fresh on the minds of local suppliers to Walmart has been the rapid growth of online grocery pickup. The retail giant said the service was available in more than 1,800 locations as of Aug. 1. Online commerce added roughly 1% to the overall U.S. sales comp of 4.5% in the recent quarter. A big part of the growth was from online grocery pickup, Walmart U.S. CEO Greg Foran said.

Foran was quick to add the company’s grocery business also fared well as fresh food sales led to the company’s best grocery comps in nine years. He said consumers continue to like and use online grocery pickup, which was available in more than 1,800 locations at the end of the quarter. While traffic was up 2.2%, ticket comps rose 2.3% in the quarter, and that’s largely because of growth among the users of online grocery pickup.

Moore was asked during the chamber event where he sees grocery pickup two years from now. He said anything that simplifies commerce and accelerates convenience opportunities for the shopper is a win.

“Because people are busier than ever, retailers need to create convenient grocery pickup solutions for their customers,” Moore said. “By creating services such as drive-thru grocery pickup and online grocery ordering, retailers such as Walmart can ensure that they are providing their customers the best possible service.”

OUT-OF-STOCKS
Suppliers also wanted to know if out-of-stocks really have a negative impact for online sales. Moore said the short answer is “Yes.” He said for online sales, out-of-stocks account for about $17 billion in lost revenue for e-commerce retailers. Moore said that doesn’t have to be the end of the story.

“If suppliers and retailers are continuously optimizing their supply chains to ensure that their products are in stock, they will be able to gain back lost revenue,” he added.

Given the toll out-of-stocks have on topline revenue, Moore was asked what companies are doing to ensure they are in stock at a time when retailers are carrying less inventory overall and the entire industry is challenged by tight freight capacity.

To reduce out-of-stocks, Moore said companies must understand buyer behavior, both for their e-commerce websites and brick-and-mortar locations. If an online customer is faced with an out-of-stock situation, he or she is more likely to swap products or sizes, but remain on the website to finish their purchases. But customers shopping at brick-and-mortar locations have a higher chance of swapping stores when faced with an out-of-stock situation.

In the case with online grocery pickup, Walmart personal shoppers will substitute similar items when they experience out-of-stocks in some categories. The customer has the right to accept or refuse the substitution. There is some liability for suppliers if a product is substituted and there is a price difference. For instance, if the customer is given a larger size because the ordered item is out of stock, they do not pay the higher price. Walmart will charge the supplier being covered.

A recent report from the Grocery Manufacturers Association (GMA) shows out-of-stock rates for online purchases of consumer products in the U.S. are nearly twice as high as in-store availability. The report found U.S. retailers on average suffer 25% of the adverse consequences compared to 35% for brands when products are not available online.

“This is one of the first studies on online availability after previous reports over the past decade studying on-shelf availability and its effects on consumer purchasing patterns,” said Keith Olscamp, a GMA director of industry affairs and collaboration. “The findings should encourage retailers and brands to collaborate and enhance online availability in the fast-growing area of online retail.”

AMAZON THREAT
Walmart supplier teams all want to know how to better compete effectively with Amazon, and Moore was asked to provide his insights on this topic. Moore said there are two factors he considers important when trying to compete with Amazon. First, suppliers need to have an expanded, robust online assortment catalog. Secondly, they must be competitive on price.

He said because Walmart’s physical stores can positively impact their supply chains, suppliers can use brick-and-mortar locations — along with their logistics expertise — to compete with Amazon effectively if they are in-stock and priced competitively.

Brick-and-mortar does offer instant gratification, but it also has to be a positive experience. Working with retailers on better in-store promotions is one way to keep customers returning for the branded products and perhaps hold Amazon at bay.

That said, with Amazon’s push to add more private brands across multiple categories such as dog food, beauty and dry grocery, there’s a growing threat. If consumers who are also Amazon Prime members (100 million consumers) get in the habit of buying private brands online for quick delivery as part of their annual membership, they may never return to brick-and-mortar.

Regardless of where consumers shop, Nielsen expects private label could reach a dollar share of 25.7% by 2027 in the food and consumable categories, and Amazon will be a major player. Last year, Amazon was able to add $2 billion in private-label grocery sales with the help of Whole Foods Market’s 365 Everyday Value brand.

Cadent Consulting Group predicts Amazon will grow the 365 brand sales to $20 billion by 2027. Cadent also expects private labels will steal $64 billion from national consumer packaged goods brands in the next 10 years.

Nielsen warns food manufacturers to innovate and make sure their national brand is worth the extra money it may cost. If not, the U.S. could end up looking like the United Kingdom over the next decade, where private labels have a 45% share of the grocery market. Nielsen said as consumers have more and more choices today, national brands must do more to market and differentiate their products sold online and in stores.
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Editor’s note: The Supply Side section of Talk Business & Politics focuses on the companies, organizations, issues and individuals engaged in providing products and services to retailers. The Supply Side is managed by Talk Business & Politics and sponsored by Propak Logistics.