When it comes to how brands and retailers reacted to the pandemic’s challenges and are plotting future strategies, it’s a mixed bag. On one hand, the industry knows it needs to change to keep up, but many companies just don’t have the cultural or physical wherewithal to do so. On the other, the speed at which many companies adopted and accelerated solutions has been nothing short of impressive.
At the Sourcing Journal Summit on Tuesday, Murali Gokki and Joe Schmitt, managing directors at consulting firm AlixPartners, dove into the somewhat contradictory state of retail today, presenting key highlights from “AlixPartners + Sourcing Journal: Fashion in Focus, Investing in a Future Forged by Adversity,” a joint survey report published the day of the event.
The report measured what was really going on around supply chain complexity, assortment planning and omnichannel evolution—on the ground and upstream—so companies can learn and benchmark against their peers, instead of relying on anecdotes and speculation.
The consumer is king…and queen, and prince
Consumers had already been gaining more power and controlling the dynamic of what to buy, where to buy it and how product got to them, but the pandemic has crowned them true royalty. Right now, consumers are feeling all-powerful and they are not afraid to wield their buying power, but stores need to realize that bending over backward with added products and services like BOPIS, next-day shipping, buy online return in store and countless other conveniences doesn’t come without a cost.
“Many retailers, in their desire to keep up with expectations, are not able to protect their profitability,” Gokki said, pointing out that traceability and sustainability are also emerging as elements that consumers expect—but aren’t necessarily willing to pay for.
Along those lines, solely using consumer-driven sales growth as the main indicator of business success can mask core issues.
“Historically, retailers had a tendency to rely on sales growth as the metric to measure success, but today, because of the added cost of doing business associated with all the demands and expectations of the consumer, KPIs need to be extended to margin drives,” said Schmitt. But while retailers overwhelmingly agree (70 percent) that industry KPIs need to change, almost 60 percent are still optimizing for sales growth.
Historical data metrics and KPIs are outmoded
Another key finding is that while everyone seems to have endless streams of data, few companies really know what to do with it, or are stuck with obsolete metrics.
“When you think about what’s most relevant and directed toward your business, it would be sharing data with and using data from other businesses like yours—your suppliers, wholesale partners, and other partner retailers,” said Schmitt, who was surprised to see that only 17 percent of survey respondents actually use that tactic as a primary decision-making source.
Gokki noted the need to move forward. “Old retail rules don’t apply anymore, and this is especially true for demand planning and forecasting. If you’re still only using tools and data sources that the industry has had forever, you’re already behind the curve.”
The store has survived, but its purpose has shifted
The role of the physical four-wall store has changed dramatically in our omni world, but getting an accurate account of how remains rather opaque. The AlixPartners team was surprised to learn that 60 percent of respondents felt they have enough information to make decisions around closing or relocating stores, but Gokki and Schmitt question if those respondents fully factor in everything that impacts the total economic value of a store—like a store’s branding, product discovery or its halo effect on e-commerce.
This Omni Economic Value (OEV) of store isn’t a defined metric since the variable impacting it is different for every business, but it does ask retailers to examine the factors needed to calculate if a store is profitable or valuable.
“Valuable doesn’t necessarily mean profitable, either,” said Schmitt. “There are a number of roles a store can play beyond being a traditional sales outlet, they serve as marketing venue with their windows and displays, customer experience and service, return venues, pick-up venues, and in special cases a dark store that solely function as mini distribution centers [dark store], which lots of our clients are using today for stores that aren’t profitable from a sales perspective.”
“What we’ve seen coming out of the pandemic now is there’s a massive acceleration to build out omnichannel capabilities without having a clear understanding of the full cost or the return on investment,” said Schmitt.
The key is figuring out how to measure the Omni Economic Value (OEV), and then making decisions based on OEV contribution of the specific location.
Meanwhile, online selling might have appeared to swoop in to save the day during pandemic store closings and beyond, but digital isn’t a universal panacea. The report showed that while 38 percent of respondents said the boost was accretive to their bottom line, an almost equal 36 percent said it was dilutive.
Meanwhile, online selling might have swooped in to save the day during pandemic store closings and beyond, but digital isn’t a universal panacea. The report showed that while 38 percent of respondents said the boost was accretive to their bottom line, an almost equal 36 percent said it was dilutive.
“The industry had to roll out solutions to meet consumer demand in an uncertain environment overnight, and we didn’t think at all about how much it would cost to sell out product,” said Schmitt. Now a year down the road, he said, a lot of these processes that were built quickly are still in place and many don’t have good visibility to see how much they cost.
Global supply chains are shaken and bruised
Supply chains are more frayed and fragile than ever, and when looking at rising commodity costs and tense geopolitical situations over the next two to five years, things get even more precarious. Almost 40 percent of the respondents said the most impactful solution to strengthening supply chains was to put an end to transactional relationships.
“You have to almost treat your suppliers as a joint venture, an extension of your own organization,” said Gokki. “And don’t just stop at the supplier. You need to start building the same level of relationship with your raw material vendors as well. This is not just a nice-to-have; it’s absolutely essential.”
And while nearshoring is getting an uptick as a way to move production closer, boost speed to market and circumvent tariffs, it hasn’t caused a 100 percent relocation, nor should it. There are costs involved with nearshoring and onshoring, and the raw materials and technical know-how aren’t necessarily there. “Nearshoring shouldn’t be used as a Band-Aid to mask an inability to plan effectively,” said Schmitt. “It has to be done for the right reasons.
“I think the new buzzword is going to be ‘glocal,’ which is a global plus local strategy,” said Gokki.
To download the full report, click here.