Supply Chain Nation recently interviewed Gartner Research Vice President, Mike Griswold, on the current trends in food retailing. In Part 1 of this blog Mike covered the biggest challenges they face today and in the future. In this post, Mike dives deeper into the most exciting challenge today, e-commerce.
SCN: U.S. food retailers have been behind their European counterparts in implementing e-commerce strategies such as “click-and-collect.” With the rapid advances of AmazonFresh and Walmart home delivery, is this changing?
Griswold: Multi-channel has a different flavor between North America and the UK and Europe. In Europe there has been more of an appetite for home delivery. That marketplace has voted with their wallet, for various reasons, that they are very comfortable with ordering online and having it shipped to their house. I don’t think the North American customer has necessarily voted with their wallet enough to say we want to do that. So you’ve got Peapod that has had some degree of success, but a lot of the others such as Webvan, have tried and failed. I think there were certainly infrastructure supply chain challenges, but I also think the vast majority of why they were not successful is that U.S. customers haven’t really asked for that. AmazonFresh and Walmart Home Delivery are slowly gaining some traction, but even AmazonFresh is by no means widespread in terms of the markets that they’re in with home delivery and the same thing for Walmart. For the next 2-3 years, what omni-channel means for food retailers is order online and pick-up in-store.
That puts a number of pressures on food retailers. On the forecasting side – how do I start to include what may or may not be incremental demand? How do I reflect that online demand into my overall demand process? And then on the inventory side, I need to have much better discipline around managing perpetual inventory such that if I expose that to the online shopper, I have confidence what I am showing them, in fact, is reflective of what is in the store. We don’t want customers ordering online, coming to collect, and then everything isn’t there to collect. Those are the two big challenges the North American food retailers need to work through.
The third challenge is a logistical challenge. The stores right now are not really set up to handle a click-and-collect environment. The customer probably does not want to have to go all the way through the store to pick up their stuff. If these orders are larger, with bulkier items, how do we get them to the front of the store? Do we reconfigure the front of the store to facilitate click-and-collect? Do I potentially put freezers and coolers in the front of the store to hold products as I wait for customers?
There is a design element to this that is one of the more important things people are not necessarily talking about because the design element is often two-to-three years in the making. Right now, food retailers are designing what a 2015 or a 2016 store may look like. People will have to start hedging some bets around this click-and-collect movement. They may have to start working some of these things into the design. The challenge is there hasn’t been enough analysis and real data rigor put around this to really understand the ramifications. Should they move forward with this? Should they pilot? I think most food retailers are running some kind of pilot around click-and-collect. But part of the challenge is just the business case. Are we truly getting incremental sales? That’s the challenge, because without incremental sales, it’s hard to build the business case around some of these other changes.
SCN: You mentioned that supporting “click-and-collect” and other e-commerce strategies requires much better visibility to in-store inventory. Are food retailers adopting perpetual inventory practices, and if so, what challenges are they facing?
Griswold: Perpetual inventory becomes part and parcel of being able to replenish in an effective manner. If you’re at a point where your perpetual inventory is good enough to drive replenishment, then I think it is at a place where you can link that and visibility to the customer. The challenge becomes getting to that point where you feel pretty good about your perpetual inventory. Right now, depending on which study you look at, perpetual inventories are between 50 and 60 percent inaccurate. Having said that, how you define inaccurate is a really important consideration, and may change relative to your click-and-collect strategy. If the order on hand says 10 and it’s actually 8, but I’m going to get an order tonight, then yes, it is inaccurate, but the effect of being off by 2 units is not going to be material. Unless there is an unforeseen spike in demand, I should have enough to get me through until the next order arrives. So it is really those instances where the system says zero and you have some or the system says some and you have zero that you really have to focus on.
We may start to see changes in how people measure inventory accuracy. People may go to more of a threshold where at greater than ‘X’ percent I’m going to start worrying about it. Then it’s a case of what the perpetual inventory says versus what I show the consumer, because there is only a handful of retailers across industries that are going to show the consumer I have 12 versus I have 13. It’s more likely that it is in stock or out of stock and I am going to use some threshold like if it is 5 or less and it is coming from an online order, I’m going to say it is out of stock only because I need to buffer for the time the customer is going to come in and I also need to buffer for the fact there may be two in a shopping cart.
That definition of out-of-stock and what I share with the outside world is a pretty elaborate discussion that has to take place. Even in those segments of retail that we would consider more mature at click-and-collect, are struggling in this area. Once we get to the point where we are comfortable with the perpetual inventory, then the next discussion is what do we show the consumer? And if we offer that, do we now need to start reserving inventory? For example, if I have 25 boxes of Cheerios in the store, do I reserve 10 of those for online shoppers knowing I have shoppers in the store who might have some in their carts? So there are a lot of logistical questions in the store that still need to be walked through as the food retailers start to sort this out.
SCN: Well, this certainly sounds both challenging and exciting for food retailers. Thanks, Mike. To read Part 1 of this discussion with Mike Griswold, click here.