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The Supply Chain Evolution Is Retail’s Next Frontier

Retail is getting disrupted in a number of ways that include supply chain automation—connected online/offline networks where the stores become the eco-system’s hub and learnings are informed by data analysis.

Those are the key conclusions in a report by Cowen & Co.’s retail team, led by Oliver Chen. While Chen’s key coverage area centers on retail and luxury, lessons from one sector could serve as examples for adaptation by other categories.

One example is the rise of supply chain automation in grocery retail. It’s an area that deserves some attention, especially as behemoth discounters such as Walmart Inc. and Target Corp. have been making significant investments in technology and in their internal supply chain processes. Both discounters have also been expanding their grocery assortments, as well. Also, in August 2019, U.K.’s Marks and Spencer Group plc and grocery pureplay Ocado became 50-50 joint owners of Ocado Retail, which has proven to be a success for the department store retailer as a select range of Marks & Spencer apparel and home products are now available for purchase on Ocado.com.

Online grocery options last year saw substantial growth as consumers shifted to the category for their food and daily essentials over fears of in-store shopping during the initial wave of the coronavirus.

According to Chen, the rise of online grocery “will result in an accelerated cycle of investment in automation as manual picking and packing is not feasible at scale.”

Currently, the three solutions are micro fulfillment centers (MFC), centralized fulfillment centers (CFC) and third-party partnerships. Of the three, MFCs are the most profitable. They are located within or next to stores for e-commerce orders. Picking and packing is completed by robots and staffers and orders are either picked up by shoppers or delivered to their homes. The benefit of MFCs is that they can leverage existing supply chains and often result in lower last-mile delivery costs. However, the initial integration with existing systems could be a challenge. Ocado uses the CFC approach, where the centers tend to be located outside of major metropolitan areas. Automation is part of the picking and packing process, but the CFC model fails to solve the last-mile challenge and can require significant transportation costs.

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Chen also noted that Walmart is already using different forms of robotics. They include an autonomous floor scrubber in 1,800 stores, a Bossa Nova for inventory accuracy, an Alpha Bot in one door for picking and packing and a FAST unloader for inventory unloading in more than 1,500 locations.

Walmart’s competitor Target has been making its own statement on how stores can be used as the central hub for a connected online-offline retail dynamic. It’s store-as-a-hub strategy helped it remain flexible and agile as it adapted to changing consumer shopping patterns during the pandemic. The discounter’s investments helped it offer a suite of fulfillment options centered on improving service that included contactless choices for consumers.

Target pioneered curbside pickup for general merchandise categories, and quickly scaled Drive Up to over 1,600 locations, with its next catalyst the inclusion of food and adult beverages across the stores, Chen noted. In addition, Drive Up and other same-day services has been driving the retailer’s e-commerce growth.

“Cowen estimates Drive Up revenue may reach close to $8 billion in fiscal year 2021,” the analyst said, adding that “Cowen sees Shipt as a long-term growth and loyalty service and expects the service to be incrementally additive to Target’s omnichannel ecosystem.”

Chen sees the connected online-offline framework as a “retail imperative” for the new retail frontier. As mall traffic declines as the consumer has moved to online and mobile, retailers have needed to focus on a customer-centric model that includes bricks-and-clicks, is mobile responsive, and uses a smart supply chain. Convenience, culture and curation become key in asset utilization as retailers think about the customers’ shopping journey from pre-purchase to post-purchase. That has had retailers such as Walmart including “buy online, pick up in store,” drive-up and ship-from-store as service options, while Nordstrom Inc. has developed its Local Market strategy in its top markets.

He sees the next incarnation of the customer-centric model as one where instant service means delivery moves from two days to 20 minutes and curbside pickup becomes the norm. In addition, resale and rental become bigger components of the retail landscape as consumers focus on the circular and close-loop economy. In addition, consumers also could be at the point where they’re now more willing to give up some privacy concerns to get personalized deals and pricing through the use of artificial intelligence—it’s something that’s already become part of some retailers’ loyalty card programs where information is gleaned from past purchases.

Another area where Cowen expects to see change is the use of data analytics to provide retailers with better intelligence for their merchandising assortments.

According to Chen, there are hundreds of millions of data points from various sources that capture information useful to retailers. What customers buy can provide retailers with “read and react” information to inform them of the trends that are selling to mitigate fashion risk. For certain styles, the data can also provide automated tracking and predictive guidance to improve re-order capability. And algorithmically-driven margin maximization through technology can provide recommendations on pricing based on demand. One example Chen cited is fashion e-tailer Revolve Group, which looks at the 10 bestsellers and then synthesizes overlapping attributes to inject into new styles. In addition, 35 percent of styles are automatically re-ordered.