Retailers have been among the most visible casualties of the COVID-19 crisis. Even as lockdown eases, many shutters remain down. Some may never re-open. Others need to learn some tough lessons about what it will take to thrive in a post-pandemic world.
Three groups – supermarkets, clothing outlets, and department stores – have long been indicative of the tensions in a sector, where customers have become disloyal and intolerant of friction or delay:
- Both online and in store, supermarkets’ fortunes have tended to rise or fall in relation to their ability to use technology to create a unique value proposition.
- Successful clothing outlets have had to evolve different ways to ride the peaks and troughs of seasonal demand, keep customers engaged, and create sustainable lines.
- Department stores, meanwhile, have struggled to define a role for themselves in an Amazon-centric world – beyond a handful of destination outlets, such as Selfridges or Bloomingdale’s.
In each of these groups, poorly defined mid-market brands have found themselves pulled apart by the polar forces of upscale, exclusive outlets and the rise of the so-called value-based chains. It’s depth, personal touch and exclusivity versus speed, low cost and convenience. Many retailers find themselves caught in the middle, offering too little of either approach. The result? Carnage in the malls and on the high streets.
At the same time, everyone is facing Amazon and the digital behemoths online. The battle for omni-channel retail was already fierce, as diginomica’s ongoing analysis of key players has ably shown, but has been intensified by the pandemic.
For a whole economic quarter, almost everyone has been shopping online or via their phones – apart from those essential trips to the supermarket or chemist, where social distancing has created an in-store experience that was on no one’s strategic plan, as retail veteran Angela Ahrendts discussed recently.
Supply chain crisis
Yet behind all of these epic challenges is another, perhaps larger one: managing the supply chain, which has itself been disrupted by lockdowns that have rolled across the globe, pulling apart networked relationships and demand forecasting – as seen in the case of HEMA back in March in the earlier days of the COVID crisis. After all, what is any bricks-and-clicks store but a branded supply chain that is displayed to passing customers?
A new study from WMG (Warwick Manufacturing Group), a collaborative department for knowledge transfer between industry and academia out of the UK’s University of Warwick, finds that just 15% of retailers worldwide have what WMG calls “digitally-ready supply chains”. This has made it difficult for them to beat a path through COVID-19 disruption, is the report’s grim conclusion.
For the study, WMG spoke to 104 large retailers worldwide, 80% of which have a turnover of more than $500 million. Most are in those three exposed groups highlighted above - supermarkets, clothing outlets, and department stores - along with some in household, DIY, and other sub-sectors.
Researchers found that many are still relying on legacy processes, such as spreadsheets for demand planning (22%). However, retailers recognise that they need to understand automation, Artificial Intelligence (AI), and other technologies much better, with a view to having prescriptive or autonomous supply chains in place by 2025.
Other headline findings include the fact that as little as 11% use AI for markdowns, but almost half want to do so in the next five years, while only seven percent are able to do their financial planning in real time. The report also reveals that the vast majority of retailers are unable to react to changes in demand fast enough, with only eight percent capable of refreshing their demand planning processes in real time.
Nearly two-thirds (61%) of respondents still manage omni-channel inventory as separate channels, although 75% of respondents say they want to achieve full omni-channel capability in the next five years. Forty-one percent aim to “use AI to evaluate optimum inventory locations for each customer transaction”, says the report.
And the majority of retailers still work from a static promotional calendar, with only 13% continually optimising prices dynamically. At present, just 11% of retailers assess factors such as inventory, margin, and waste for their promotions, but with nearly half (46%) expecting to be doing this in five years’ time.
Must do better
If nothing else, COVID-19 has demonstrated that supply chains need to be much smarter and more agile than this. The crisis is likely to be with us for months or years to come. There’s a prospect of a global recession, while in the UK next year, a potential ‘No Deal’ Brexit may yet create supply chain problems internally and for global brands.
The WMG retail survey was carried out as lockdowns were implemented in March and April, timing which leads Jan Godsell, Professor of Operations and Supply Chain Strategy at WMG, University of Warwick, to observe:
Sixty-one percent of organizations are using inventory as a strategy to buffer against disruption. Now, for a supermarket that's absolutely fine, because their demand has actually increased slightly, but in other sectors – clothing, household goods, DIY – these are things that people just stopped buying. So it isn’t a good buffer, particularly if you are in clothing.
The alternative is really about having an agile supply chain, one that can respond. But at only 29% it was the least popular of the structures that people used to deal with COVID-19. What this suggests is that we put too much reliance on inventory and not enough on agile production systems. This time it caught out clothing retailers, but we don't know in a future shock which type of retail it might affect. A more resilient strategy would be to shift towards an agile production system.
This raises the question of whether there is a particular challenge in retail that makes it tougher to modernise the supply chain – and, therefore, the business – in the face of digital-natives like Amazon? Godsell suggests:
I think it's because of the organizational structures. Retail organizations are dominated by the commercial functions, who are choosing the products, the merchandise, and actually doing the procurement. It's all about choosing the right range, creating the right look. That's the sexy part, but they are disconnected from other parts of the business.
The difference with a business like Amazon is that 25 years ago it used the book and the DVD as a pilot for how to develop the most advanced order capture and order fulfilment processes in the world. It can now apply those processes to anything.
We looked at nine processes [for the research], such as demand forecasting, and found that they tend to be optimised in isolation. But the critical breakthrough comes when you don’t think of those as separate processes, but as a single end-to-end one that’s delivering value to the customer.
That said, the study did find that a majority of retailers believe their planning systems have actually allowed them to be more resilient in the crisis than might be apparent. That suggests in turn that there are some key lessons for the future, advises Godsell:
The first step is just to use a digital technology to optimise processes. Make those processes better, and that’ll free up some cash. The second step, which is probably the hardest, is about how to use those technologies to create that end-to-end flow.
Don’t be scared to play around with technology, to do proofs of concept and digital pilots to see whether or not things work. What we see with many organizations, particularly large, incumbent ones, is they are setting up a separate organization to trial out new business models. When you're doing that, you don't necessarily want the culture, the thinking of your incumbent business, to hinder the agile thinking you might require for your new business model.
In the report, Godsell writes:
At this time, it’s crucial for retailers to be able to manage multiple factors and complications across their supply chain in real time. At the moment, however, an over-reliance on manual processes means too many retailers are taking time to adapt in line with this unique set of challenges. As the research reveals, retailers know they need to get their supply chains digital-ready. This will enable them to evolve and make adjustments, both in line with internal factors, such as changing organizational goals, and external ones, such as changing customer desires.
Wise words in a difficult time. Like many sectors, retail has found its best-laid plans put to the severest of tests, but it has seen that the crisis left some brands better placed than others to survive and even thrive. Take COVID-19 out of the picture and the same challenges remain. The lesson? Modernize now to survive.