The COVID-19 pandemic has deeply affected retailers from all over the world. Managing demand volatility was difficult before the virus outbreak; now, it’s harder than ever before. In this unprecedented situation, an agile and responsive digital supply chain was (and is) key.
Unfortunately, when the pandemic stroke, not every retailer was ready to withstand a situation as complex as this. Some industries experienced almost total lockdown, while others had to respond to unprecedented demand due to panic-buying.
How can brands identify risk ahead of time and create a strategy to mitigate it? How can they operate their supply chains while responding to uncertainty and volatility? How can companies emerge stronger from this crisis?
In April 2020, amidst the coronavirus pandemic, we hosted a webinar with Ronen Lazar, CEO & Co-Founder of INTURN, and Sanne Manders, COO at Flexport. For this article, we have put together insights taken out of that webinar, as well as others shared by our retail experts within Plug and Play.
Essential vs. Non-Essential Goods
When the pandemic stroked, the retail supply chain was completely disrupted. Suddenly, everything had to remain closed in an economy built around stores, malls and fulfillment centers. The few retailers that stayed open had to face unprecedented demand, with customers stockpiling products and emptying shelves (why on Earth would you need so much toilet paper, one may ask).
As you can imagine, businesses that manufacture or distribute essential goods have experienced a completely opposite situation to those selling non-essential goods, such as those in the fashion industry. We’re going to review how this situation has affected both sides:
It started with toilet paper around mid-March. Cleaning supplies came next, and then meat, rice and pasta started disappearing from supermarket shelves. Grocery stores had to limit the number of products customers could buy.
During our webinar, some relevant figures came up:
- The average family spends just under $8,000 a year on groceries. About 45% of that is usually spent outside the house. With stores closed, that amount is now spent inside the house.
- There are also consumers overbuying products. Despite the 15% reduction in overall spending, there's still quite a bit of spending on products of this category.
- There’s an accelerated demand from a consumer standpoint. Consumers are narrowing focus on the must-have products in the market, but the volatility is there anyway.
Circumstances were already challenging for companies before the pandemic. There was a changing consumer spending, strong pricing pressure on the discount level, dwindling foot traffic, etcetera.
During COVID-19, spend in non-discretionary areas such as fashion went down:
- Apparel and footwear went down 70% compared to pre-COVID.
- Fast fashion sales went down up to 90%.
- Luxury, from Q1 alone, had over $125B products unsold.
But there’s a key takeaway here, that we’ll analyze later: the more innovative a brand has been in the past, and the more digitally-ready a company is (and we’re talking mainly about e-commerce infrastructure), the better they fared through all this.
As you can see, companies distributing essential goods and those distributing non-essential goods have to face a very different landscape. However, there’s an underlying problem that all of them have to face, and that is the extreme demand volatility.
What To Do With Unsold Stock?
“There are literally hundreds of billions of dollars of product,” said Ronen Lazar during our webinar. “This is absolutely unprecedented, no one’s ever seen anything like this before.”
Some product categories have experienced high demand (such as cleaning, health, fitness or even sex toys!). But this isn’t the norm. Many businesses had millions of dollars in inventory that was coming or that was already in the warehouses. However, stores closed and orders were canceled. What could brands do with all this incoming product and how could they be positioned or prepared for what's to come once we're through this?
How to Be Prepared For the Next Black Swan Event
As Mike Tyson said, “everyone has a plan until they get punched in the mouth.”
“We need to think in volatility as the new normal,” said Sanne Manders. “There have been smaller disruptions in the past five-six years, but this is a big one.”
He advised to look at three things:
- Redundancy: Retailers might have to have a little bit of redundancy in stock. If a country shuts down, you’ll need to switch to another country to manufacture your goods. Redundancy is expensive, yes, but it’s necessary.
- Flexibility: And that is understanding what you signed up for. “We see that a lot of customers sign up for pretty inflexible contracts. And as a result, if something happens, they don't have any room to maneuver. They need to see what they sign up at their contractual agreements. Do you have space protection? Do you have a multi-carrier strategy? That will cost you some money, but it’s not that expensive.”
- Risk management: Check your vendors’ own business continuity. You’ll need agile vendors if you want to be agile yourself.
There’s more, though:
The Importance of Being Digitally-Ready
“Companies need to rely very heavily on e-commerce to maintain sales. If they’re not set up for that, they’re going to struggle,” said Lazar. “Even among department stores, those who have a strong e-commerce presence, the decline is deep, but nowhere near as deep as circumstances for those that have a department store and are not digitally ready”.
“I think over time stores will open up and there'll be an opportunity for retailers to start to liquidate again. Those who have true omnichannel environments will be able to leverage both the brick and mortar and digital opportunities that are ahead of them, although I wouldn't anticipate any major brick and mortar sales to really kick up”
In any digital strategy, data plays a key role.
Why Valuable Data Is Key to Facing Volatile Demand
“It’s not just being digitally-ready, but being able to export the data from multiple systems and understandig what you’re looking at,” said Lazar. “And then analyzing this data and deciding the next steps.“
Manders went even further: it’s not only the data points you need. Data needs to be:
- Accurate: How accurate is your data? Can you rely on it? “The world of international logistics is not a world where the accuracy of data is very high, and as a result, your decisions are just going to be worse. Accuracy of data is extremely important.”
- Quick: Do you get it in real-time? Can you collaborate along the supply chain with your vendors in real-time or do you still have to get it through telephone calls or emails? Can you work in a platform together in real-time, have perfect visibility of all the data and collaborate as a team to find solutions?
What Happens Next? Demand Volatility After The Pandemic
Sanne Manders is convinced that demand volatility will remain after the pandemic. According to him, volatility comes in three different ways:
- In demand: consumer demand is going to be different. It’ll be harder to plan. The arrival of the retail apocalypse might accelerate.
- In manufacturing: Factory footprint. Am I gonna rely on one factory? Or am I going to build in redundancy?
- In logistics: The time performance is very different if you’re sourcing from Vietnam or Malaysia than if you’re sourcing from China. The infrastructure is wildly different. There might be some carriers (whether ocean, air or trucking) that go into bankruptcy as a result of this.
What About Consumers?
We’ll probably see two types of consumers:
The conservative kind
“With COVID-19, traveling entertainment has been halted, so there's no spending,” said Manders. So, where's all this money going? Because department stores are also down by 60-70%. Consumers are saving as much as they can save because jobs have also been affected and they need to plan for the future.”
These conservative consumers will probably stay at home and buy online. This will accelerate the need for e-commerce capabilities.
According to Will Decker, VP, Brand & Retail Innovation at Plug and Play, e-commerce won’t be the same after the pandemic. “This is it. After this, there’s no doubt that e-commerce is gonna stick. This is the moment when mass consumer change happens. People are just now intimately familiar with how things work by buying things online and getting them delivered at home.”
The not-so-conservative kind
“We’re social animals,” said Decker. “There’s only so much we can do while sheltering in place and social distancing. I feel like there's going to be a rush back to some of these shopping centers, just because of commerce. And because we want that human connection.”
“There’s an allure in being able to go to one place and I think there's a general trend of going to these large stores and locations, to do a lot of different activities and discover the bargains. I don't think that is going away, and I think it'll come back better than ever.”
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