Time or space?

In the run-up to their peak delivery seasons, UPS and FedEx are emphasizing different aspects of reality, according to the Wall Street Journal.

UPS will add surcharges to deliveries mostly after December 17.

FedEx will charge more for "oversize boxes and odd-sized goods".

But UPS also adds fees over certain weights and sizes.

And the FedEx rate adjustments announced on August 3 "take effect during the holiday shipping period of Nov. 20, 2017–Dec. 24, 2017." So the FedEX increases are also time-oriented.

The perceived differences are more a matter of rhetoric than physics.

Time and space.

BASF, the German chemical company, is beginning to use blockchain technology for early identification of supply chain problems. According to a news release, "How do you recognize that a delivery is incomplete or damaged, even before you receive it? The start-up Quantoz, together with
BASF and start-up Ahrma, found a smart answer to this question: an intelligent pallet that not only informs about its position and movement, but also its loading status as well as a possible impact or drop. Thus, missing or damaged parts could be automatically re-ordered. By using Quantoz’ blockchain technology, the security and trust in the data integrity could be additionally increased. This combination provides an outlook for a secure and transparent material and data flow in the future."

Another news release makes similarly ambitious claims about another application of block chain -- combined with social networking -- to improve supply chain management.  "The combining of Sourcemap’s supply chain social network and Provenance’s blockchain technology offers an unprecedented way for companies to overcome the complexities of modern supply chains, tracing and tracking them in real-time. Sourcemap’s supply chain social network connects all of the suppliers and sub-suppliers in a global network, ensuring that they are who they say are, while Provenance’s blockchain technology is able to track every transaction between the suppliers in real-time, to verify that every product is sourced through the authorized chain of custody.

A third news release is not block-chain related but no less ambitious: "Protecting the integrity of the medical product supply chain is complex and requires a global approach. FDA led a collaboration within Asia Pacific Economic Cooperation (APEC) economies to create a Supply Chain Security Toolkit for Medical Productsdisclaimer icon to maximize available global resources and to deliver quality trainings and best practices and for securing the global supply chain for medical products. The toolkit covers the entire supply chain and lifecycle of medical products from raw materials to use by patients. It focuses on developing — and implementing through training programs — processes, procedures, and tools directed at enhancing global medical product quality and supply chain security."

According to the Wall Street Journal, Amazon's second quarter "sales jumped another 25% to $38 billion. The sales growth is a big contrast with financial reports from the big store-operating retailers, but Amazon also saw the costs of getting those online orders delivered soar. Shipping expenses rose 36% and fulfillment costs jumped 41%, measures that reflect both Amazon’s growing share of the retail market and its drive to control its own logistics and shipping operations."

In the Sunday, July 30 New York Times there is a long piece on Amazon's stock price.  According to Jeff Sommer, "over the last 15 years through Tuesday, Amazon returned more than 8200 percent compared to 125 percent for Walmart, 2.2 percent for Seats, and 302 percent for the Standard & Poor's 500-stock index, dividends included."  Over this same period Amazon's revenue has increased from $148 million to $135.99 billion.  Famously,  Amazon did not make a profit until 2003 and has remained less focused on profit-making than many.  The stock price reflects investor perception of growth potential.  There remains plenty of such potential.  And... the cost of future growth is likely to pinch profits.

Here's how UBS breaks down the US grocery industry

After the big announcement:

The New Yorker explains what Amazon's purchase of Whole Foods really means.

Reuters explains how Amazon will leverage and enhance the Whole Foods warehouse network

Bloomberg also takes a close look at the integration of Amazon and Whole Foods supply chains.

According to Reuters, Walmart will not make a rival bid for Whole Foods.

CNBC and others quote a Moody's analyst who offered, "We continue to believe that most US consumers will refrain from buying their groceries online. But if online grocery delivery can ever reach scale, Walmart is the retailer that will benefit the most, as it has the most complete distribution network."

According to some Walmart is warning trucking companies that if they carry for Amazon, they will not carry for Walmart (thanks Bill)

CBRE says that e-commerce is spiking demand for distribution center space in several secondary markets.

The Wall Street Journal has a nice roundup of grocery delivery services... spinning up in anticipation of the Whole Foods merger with Amazon.

Cyberattacks:

Supply chain players are prominent among the targets of recent ransom-ware attacks (and I think the DW website is/was impacted)

But some think the ransom is just a smoke-screen for cyber-war against Ukraine.

On Thursday, June 29 my own plans were screwed-up by the FedEx Office computer network being down in Philadelphia and New York (and elsewhere -- everywhere?).  Related? I don't know yet.

Photo composite by Adweek

In June 1974 Marsh grocery stores -- anchored in Indiana -- introduced scanning technology to retail. On May 11 this year Marsh filed for bankruptcy protection. Several Marsh stores have since been purchased by Kroger and other operators. The remaining stores are expected to close before the end of July.

Walmart was not yet selling groceries when that packet of Spearmint gum was scanned. Today Walmart sells at least twenty-five percent of the groceries purchased in the United States. Sam Walton succeeded largely by leveraging logistics with information technology, facilitated by that scanner expressing an early whisper of "digital demand".

In about one decade Walmart transformed grocery pricing by transforming the efficiency of grocery procurement and distribution.  Marsh and many others were not even in that game. Some that were (see: Fleming (and here)) tried to challenge Mr. Sam and failed dramatically. In the Indianapolis market Marsh had recently fallen to a distant fourth place (7.8%) behind Kroger (37.6), Walmart (22.6%), and Meijer (13.3%). Meijer is a regional chain with meaningful merchandising expertise.

Kroger is headquartered in Cincinnati. It has been a big regional grocer since the 1930s.  It was testing scanning technology even before Marsh and deployed it just after Marsh.  It has been close to a national grocery operator since at least the 1960s.

Kroger responded to the Walmart effect by making substantial improvements to its supply chain management, staying ahead of Walmart on merchandising, and cultivating innovation.  Many of Kroger's innovations have been merchandising-related.  Complementing groceries with pharmacy and fuel has been very effective  and widely copied.

In the 1980s Kroger responded more quickly than many others to Walmart's explosive seizure of grocery market share.  Maybe because it was already big, Kroger was able to claim a cost-to-price structure similar to Walmart's.  Then it pushed to seriously differentiate its customer experience.  In the United States Kroger is the second-largest grocer and retailer (behind Walmart).  It has survived and serves a very sustainable market segment.  Kroger is better positioned than Walmart in affluent urban markets.

Walmart spent decades in retail before it took on grocery.  Some of its early forays into grocery -- especially fresh products -- failed.  But grocery was always seen as the ultimate prize of mass market retail.  Walmart's eventual success with grocery cemented its lead in every other category.

While grocery is an increasingly concentrated market -- in most places dominated by no more than five or fewer big players -- it is also very competitive.  Recent grocery price-deflation reflects the intensity of the fight (here and here).

Today the fastest growing big retailer in the United States is Amazon.  But despite various grocery plays -- such as Amazon Fresh and Amazon Go -- the online behemoth is not yet a major grocery operator. Most estimates give Amazon no more than 1.1 percent of the US food and beverage market... and online grocery altogether, not much more than 2 percent.

Given Amazon's success in disrupting the book, fashion, and electronics industry, the grocery sector has been very attentive to Amazon and other online food ventures (see Blue Apron and Sun Basket). But the ambitious plans of Aldi and Lidl have, perhaps, presented a more urgent threat to Walmart, Kroger, Albertson's, Publix, Ahold, and other current industry leaders.

Then last week Amazon announced its intention to purchase Whole Foods for $13.7 billion. Whole Foods is a top-ten grocery retailer.  According to the consulting firm Cowen, an Amazon-Whole Foods combo would become the fifth largest grocery retailer by sales-volume behind Walmart, Kroger, Costco, and Albertson's/Safeway.

The combination of Amazon and Whole Foods strikes me as a brilliant move. Both are especially well-positioned with affluent urbanites.  Amazon needs some way to scale its grocery operations. Whole Foods needs to re-brand itself from "Whole Dollar" into something affordable, accessible, and sensible.

By the end of this year Amazon could have more than 400 forward operating bases for urban grocery delivery and pickup and a much expanded grocery supply chain. Whole Foods will -- if the deal is done -- have a privileged place on the Amazon platform where millions of consumers are already habituated to perceive comparative value on price, customization, and convenience.

I assume the Amazon team is having serious talks with United Natural Foods, the largest Whole Foods supplier.  Investors have initially assumed the merger is bad news for UNFI. There might well be some pinched margins, but there is also a huge upside if greater density and volume of demand results from the combination.

Despite the initial disclaimers, don't be surprised if Walmart makes a rival offer to the Whole Foods board.  Given the potential of the competitive threat, it is just due diligence to consider how to stop this powerful new competitor from forming.

But for Walmart the real threat from Amazon is less about battling for share in every metro market and much more a matter of fundamental strategy. Walmart roared out of Arkansas to become the world's largest private enterprise by organizing supply to maximize profits. It was a great strategy well-executed.  Amazon aims to facilitate, empower, and essentially "own" digital demand. Two very different worldviews. Is one right and the other wrong?

Let's go back to Indianapolis, home to 860,000 people, the fifteenth most populous city in the United States. The metro area has about 2 million residents.  Today there are two Whole Foods: one on the north side of the city-proper, the other in an affluent northern suburb.  Amazon Fresh already operates in the city.  The metro area hosts four Amazon fulfillment centers, with related transportation support from UPS, USPS, Fedex and others. Very significant capacity.

There are more than a dozen Walmart Supercenters or Neighborhood Markets in the Indianapolis metro area.  Kroger has even more retail outlets in the area.  Both operate huge webs of supply in every direction with all the attendant distribution infrastructure. The next Whole Foods is in the outer suburbs of Chicago. For groceries in particular, Kroger and Walmart have enormous advantages in volume and density -- with fundamental implications for pricing.

As noted above, Kroger is the market leader by a considerable margin.  In Indianapolis, Kroger has gone head-to-head with Walmart and thrived. Arguably it did this by recognizing it needed to improve where Walmart was most threatening and then differentiating itself with consumers.

Consumer behavior is increasingly connected to digital activity.  Demand is increasingly informed, stimulated, expressed, and fulfilled through socio-technical networks.  We have come a long-ways from the digital scanner as an inventory tool.  The smart phone and related social media have created network-flows that can suddenly self-organize in unexpected velocities.  Catch the wave and beauty abounds.  Failing to see the wave building can get you killed.

Amazon owns a huge proportion of online sales (making big waves).  It gave online more and better attention earlier.  As an enterprise, it is native to the net and is enjoying founder privileges.  Kroger and Walmart need to improve their network (not just digital) strategy (and execution) and integrate online services with their off-line advantages.  They know this.

But these legacy leaders are a bit like long-time mussel diggers who are now being expected to also host surfing expeditions.  It is -- especially in transition -- an awkward functional, strategic, and conceptual mix.  Attitudes and worldviews adapted to one activity are not always optimal for the other activity.

In 2016 Amazon generated revenues of about $136 billion, Kroger generated $115.3 billion, Walmart recorded $485.9 billion.  None need to  go the way of Marsh.  Each can be profitably serving millions of customers in 2027.  But... to avoid the fate of Marsh, A&P,  and many more, the current leaders need to recognize and embrace the emerging realities of their time and place.

In another ten years this sector will be barely recognizable.  It is and will still be about supply and demand, but the focus of attention is shifting -- quickly -- from a 5000 year-old stare at supply to youthful fascination -- and constant discoveries -- regarding the networking of demand.

+++

This is my first post in eight weeks.  It has been a extraordinary Spring season for supply and demand networks.  Several factors long under development are converging.  The summer will be at least as busy.  For my own benefit -- as well as yours -- I hope to use this space to collect the emerging narrative. But given the pace of other work I don't expect to add much to the narrative for the next few months.

Various and sundry offered with no comment, but before I forget entirely:

Link to good report by The Economist Intelligence Unit on current industry attitudes and expectations regarding supply chains.

Helpful analysis of garment (fashion) supply and demand chain.

Both volumes -- and costs -- are increasing for UPS, and probably other delivery players.

From May 2017, answering the question: why Amazon is eating the world?

A round-up of stories on e-Fulfillment

Good piece in the Wall Street Journal addressing how Walmart is deploying price competition to hold and grow its share of the grocery market.  One excerpt:

The world's biggest retailer is investing heavily to lower prices in its U.S. stores, the company's executives say, as competition heats up against Amazon.com and European deep discounters Aldi and Lidl.  Walmart is spending to beat competitor's prices and test strategic price drops, mostly on food and household goods sold at Walmart stores in the Southeast and the Midwest...

The story suggests that the intensity of grocery competition is a major element in the price deflation experienced for food-at-home.  In 2016 prices fell by 1.3 percent, according to the Labor Department.

In interviews with Recode (above), Reuters and others, Marc Lore the head of Walmart's ecommerce operation has announced the company will further discount prices for products purchased online and picked up at a store.  According to Reuters:

Online orders picked up in store already qualify for no shipping charges since the retailer saves on shipping fees. The latest discounts come on top of that. For example, a Vizio 70-inch 4K Ultra HD television priced at $1,698 for store pick up will qualify for an additional discount of $50... Lore said Wal-Mart is able to offer these discounts as it is able to eliminate delivery costs by leveraging its fleet of more than 6,700 trucks to deliver products from warehouses to stores.

According to the Washington Post:

Pickup not only allows retailers to save on shipping costs, but by bringing the shopper into the store, it provides a chance to entice them to spend more money. Kohl’s, for example, said last year that for every $100 a customer spends on store pickup, they buy, on average, $25 worth of additional goods when they come to retrieve the order.

This is a discount that reflects a real supply chain cost-savings for Walmart.  It is also a cost savings that Walmart's physical network allows, not available to Amazon or other purely online and less omnipresent retailers.

The pickup discount does not help Walmart with time-sensitive, affluent urban consumers that Amazon Prime has been so effective capturing.

Jana Partners, an activist investor, has accumulated a nine-percent stake in Whole Foods. It is pushing for major reforms, including -- it is reported -- significantly increasing in-house procurement and distribution.

Currently Whole Foods self-manages much of its coffee, bakery, seafood, and other perishables, while contracting with United Natural Foods for dry goods and frozen. According to several media reports, Jana is focused on reducing the grocery retailer's dependence on its wholesaler/distributor.

Suggests to me that Jana doesn't know much about grocery. Whole Foods operates fewer than 500 stores. That's really not much market leverage. The cost -- financial and strategic -- of establishing the procurement and distribution capacity would be significant... and that this would actually create any comparative advantage seems very unlikely... more likely producing disadvantages.

For more see: New York Times, Reuters, and CNBC.

Much more interesting -- at least to me -- are rumors that Amazon has been looking to purchase Whole Foods.  There's a play worth trying to work out on the chalk-board.

Good overview of retail trends from Bloomberg.  One extract:

There could be 8,640 store closings in 2017.... That would be higher than the 2008 peak of about 6,200. 

Retail defaults are contributing to the trend. Payless is closing 400 stores as part of a bankruptcy plan announced on Tuesday. The mammoth chain had roughly 4,000 locations and 22,000 employees -- more than it needs to handle sluggish demand. 

HHGregg Inc., Gordmans Stores Inc. and Gander Mountain Co. all entered bankruptcy this year. RadioShack, meanwhile, filed for Chapter 11 for the second time in two years.

Other companies are plowing ahead with store closures outside of bankruptcy court. Sears Holdings Corp., Macy’s Inc. and J.C. Penney Co. are shutting hundreds of locations combined, reeling from an especially punishing slump in the department-store industry.

Meanwhile, Dollar General reported a 14 percent sales increase and plans to open 1000 new stores.  Business Insider headlined the news as, "Dollar General is Defying the Retail Apocalypse."

The Material Handling Institute has released Version 2.0 of their Material Handling and Logistics Roadmap.  The document considers what the supply chain might look like in 2030. This builds on the very well-received first version released in 2014.

Here are a few factoids the authors listed under "What's Changed Lately":
.
•   Manufacturing output has returned to prerecession levels with 1.5 million fewer workers.

•   Artificial intelligence is starting to reshape work in the supply chain.

•   Blockchain is no longer just for BitCoin or fintech. Walmart is testing it in the supply chain to add structure to its processes.

•   In the fall of 2016, fast-fashion leader Zara went from a winter coat concept to delivering it to stores in just 25 days. Eleven of those days were spent manufacturing 18,000 coats.

•   There is a shift among retailers from inventory stock to inventory flow. The shift to flow is possible because of interconnectedness, bandwidth and technology.

•   Warehouses are much more sophisticated and likely in the not too distant future to rely on robotic automation.

•   Brick-and-mortar stores are now viewed as small distribution centers to react to Amazon. At the end of 2016, Target shipped orders from 1,000 stores, up from 460 just a year earlier.

•   Amazon accounted for 28% of all e-commerce at the end of 2016.

•   In the 2016 holiday season, Amazon accounted for nearly 40% of all retail e-commerce. Its closest competitor was Best Buy at 4%. Walmart was almost 3%.

• The e-commerce retail cost structure is still challenged by free shipping. Now, returns have become a major challenge to e-commerce success.

•   The final mile is ever more complex. Even Dunkin’ Donuts feels it, launching curbside pickup for coffee.

Read more of the review -- and especially their predictions -- by downloading the full report.

I participated in MHI's Trenton Roundtable that contributed to development of the Roadmap.

The Amazon River, photo by NASA

According to Bloomberg, sometime in May Amazon will host several of the biggest providers of consumer-packaged-goods at a three-day event designed to "persuade them that it's time to start shipping products directly to online shoppers and bypass chains..." (Recode has a great piece putting the May event in broader context, including a similar Walmart summit in February.)

The invitations are being sent out even as serious questions percolate regarding the sustainability of the current direct-to-consumer distribution model. DCVelocity reports, that "free" shipping has cut deep into the margins of both retailers and distributors, so deep that some major players are announcing significant changes in their game-plans.

Memphis, Tenn.-based FedEx and its chief rival, Atlanta-based UPS Inc., have had enough. They recognize it is impossible to turn their backs on business-to-consumer (B2C) volumes given their growing relevance, and they are reconfiguring their networks to handle the business more cost-effectively. At the same time, though, the giants are signaling to retailers that they should begin accepting compensatory rates, or they should find another carrier.

And... earlier today UPS announced expanded Saturday deliveries.

The US Census Bureau estimates that in the last quarter of 2016 e-commerce accounted for 8.3 percent of overall retail sales. This is widely considered a conservative estimate. Clearly in some specific retail sectors online is at par or better with in-store sales. Writing at pymnts.com, Karen Webster notes, "Books, office supplies, apparel and sporting goods show online sales that approach 30, 40 and even 60 percent for those same categories in retail sales." Music has been so decimated, it is no longer even mentioned.

The big retail sector that has probably been most resistant to online purchasing is grocery. But both online and offline, the competition is heating up. Walmart, the number one grocer in the United States, is rapidly deploying a click-and-collect capability. (Amazon is experimenting with a similar service.) Number two, Kroger, is "testing sensor-laden interactive shelves that detect shoppers in the aisles via their smartphones to offer them personal pricing and product suggestions as they walk along." German grocers Aldi and Lidl are making a big push for US market-share.

 According to reporting by Bloomberg, Amazon intends to be among the top five US grocers by 2025.

That would require more than $30 billion in annual food and beverage spending through its sites, up from $8.7 billion — including Amazon Fresh and all other food and drink sales — in 2016, according to Cowen & Co. Reaching that milestone would require a new wave of store and warehouse investments around the country, costing billions of dollars. That’s an existential change for Amazon, which initially stayed away from perishable goods and has mostly avoided the overhead of physical stores since it started in 1994.

Notice the report's focus on supply.  Big challenge, no doubt.

But Amazon has never given priority to supply. Instead it is tightly organized around owning -- and fulfilling -- demand.  Walmart destroyed Sears (and others) with state-of-the-art supply chain management.  Inditex has driven extraordinary growth with profoundly innovative and effective supply chain management.

Not Amazon.  Whenever possible Amazon has outsourced distribution. Amazon wants to be the platform where others sell and then supply. It will distribute when it must. But Amazon wants to own the demand signal. Jeremy Hanks explains, "Amazon only focuses on directly selling and fulfilling high-demand products and leaves long-tail merchandise for its independent sellers to fulfill. In its electronic category, for example, Amazon only sells 7 percent of the products while the remaining 93 percent are sold by third-party merchants..."

Earlier today (Tuesday, April 4) BMO Capital Markets advised its clients that Amazon's stock price could see a forty percent increase in coming months, largely on the strength of its "sponsored products" advertising program.  As the Amazon website explains,

Amazon Sponsored Products is an easy way for you to advertise your listings. Ads appear right where customers will see them, such as the first page of search results or product detail pages. You place bids on relevant keywords, and if your bid wins and your ad matches the search, it gets displayed to shoppers. These targeted ads can bring your products to a new audience and help you maximize your sales.

The targeted ads can, of course, be integrated with Amazon's one-click ordering application... everyone wins.  Especially Amazon which becomes the ubiquitous intermediary

More seamless -- even seductive -- is Alexa, Amazon's personal assistance technology.  Alexa is designed for others -- outside Amazon -- to develop new "skills". Amazon technology provides the interface -- brokers the deal, we might say -- but others deliver the product.

Amazon pulls consumers toward it by understanding and shaping the consumer experience.  Once Amazon receives the consumer's pull signal -- and its cut of the transaction -- the company is just as happy to leave to others the problems of pushing the product.

I do not know much about gods; but I think that the river
Is a strong brown god... conveyor of commerce...
The problem once solved, the brown god is almost forgotten...
Unhonoured, unpropitiated
By worshipers of the machine, but waiting, watching and
     waiting...
The river is in us, the sea is all about us...

T.S. Eliot, The Dry Salvages (with apologies)

According to Colliers International Group:

The supply chain renaissance being driven by e-commerce continues to push retailers, wholesalers and third-party logistics companies into newer and larger fulfillment centers in core markets throughout North America. In 2016, robust demand created record levels of development, which is now in equilibrium with absorption and providing a healthy amount of options for occupiers. In 2017, robust development will likely keep vacant inventory in line with the current rate, which will, in turn, slow the growth of effective rents for the foreseeable future and provide prospective tenants with more options at a stabilized cost. On the heels of the all-time-low 5.3% capitalization rate (cap rate) in 2016, we expect low cap rates to continue in 2017 thanks to the popularity of industrial big-box product with domestic and international investors.  

With key demand drivers intact, we expect that strong big-box fundamentals will continue in 2017. It’s clear that e-commerce will endure as a driving force of the industrial real estate market for years to come. Yet in many ways, such as supply chain management, e-commerce is still in its infancy and there is still plenty of room for even greater impact on the industrial market.

According to the company, for the fourth quarter of 2016 Walmart:

Total revenue was $130.9 billion, an increase of 1.0%. Excluding currency , total revenue was $133.6 billion, an increase of 3.0%. Walmart U.S. comp sales increased 1.8%, driven by a traffic increase of 1.4%. Neighborhood Market comps increased approximately 5.3%. E-commerce growth at Walmart U.S. was strong as sales and GMV increased 29.0% and 36.1%, respectively, including Jet.com and online grocery.

Growth is good.  Starting with something as huge and mature as Walmart, one percent growth is quite good.  A double-digit GMV increase -- Gross Merchandise Value -- is very good.  GMV usually does not include discounts, costs involved and returns of products.  So.. don't read "net sales".

I want to see more detail.  But this seems to reinforce other outputs that suggest the Jet.com purchase may be paying off.

UPDATE:  After looking at more detail, what stands out is an 8 percent drop in profits compared to the same quarter one year earlier.  Several commentators and news reports characterize this as "investing" in price differentiation.  Investors seemed to agree rewarding the company with a 3 percent surge in the stock price.

A February 27 report by Reuters gives more detail on how Walmart is "investing in price":

Spot checks by Reuters on a basket of grocery items sold by competing Aldi and Wal-Mart stores in five Iowa and Illinois cities showed Wal-Mart's bid to lower prices is already taking hold. Wal-Mart consistently offered lower prices versus Aldi, an improvement over recent analyst estimates that Wal-Mart's prices have been as much as 20 percent higher than Aldi on many grocery staples... 

The big box retailer also held meetings last week in Bentonville, Arkansas with food and consumer products vendors, including Procter & Gamble (PG.N), Unilever PLC (ULVR.L), Conagra Brands Inc (CAG.N), and demanded they reduce the cost they charge the retailer by 15 percent, sources said. 

Wal-Mart also said it expects suppliers to help the company beat rivals on head-to-head pricing 80 percent of the time, these vendor sources said. The wide-ranging meeting with suppliers - where Wal-Mart discussed other topics - was also attended by Johnson & Johnson (JNJ.N) and Kraft Heinz Co (KHC.O), among others, sources told Reuters. The consumer goods companies did not respond to Reuters requests seeking comment. 

These Wal-Mart moves signal a new front in the price war for U.S. shoppers, as the pioneer of everyday low pricing seeks to regain its competitive pricing advantage in traditional retailing.

 Optimizing volume-with-price can shave profit-margins, but preserves market-share and net revenues.

According to Reuters:

Wal-Mart Stores Inc for the first time will combine its own buying for products sold at its stores with purchases it makes for its website, sources said, a significant move to stamp out duplicate efforts as it consolidates buying operations to better fight Amazon.com... Wal-Mart has told some vendors it is seeking to make the buying process more efficient for itself and vendors, and improve coordination between its buying teams. It also wants to apply its bricks-and-mortar expertise in securing the lowest possible prices to its e-commerce business, according to the vendors,

Basically Wal-Mart will stop placing separate orders for online and offline channels.  There will be one Wal-Mart buy.

Big move. Smart move. Internal procurement-channels will be tough to rewire.  Important to long-term competitiveness.  Crucial to any really integrated omni-channel strategy.  Until now it has been mostly online and offline parallels.

Monday the CIPS Supply Chain Risk Index -- reviewing calendar year 2016 -- concluded, "A combination of economic nationalism, rebounding commodity prices and the growth of a burgeoning Chinese middle class is making long international supply chains a more risky prospect..."

John Glen, a contributor to the CIPS report, said,

Re-shoring supply chains will be an increasingly attractive prospect in the months to come. But, these are uncertain times for supply chain managers and there is no quick fix for the months ahead.It is more important than ever for supply chain managers to listen to their suppliers, develop closer relationships with them and to monitor any changes, so they can react quickly and ensure their supply chains remain resilient.

Many supply and demand networks are complex adaptive systems. High velocity demand tends to drive rapid adaptation and related emergence of complexity.

In many markets demand is increasingly time-sensitive.  A more agile supply network may quickly displace others... at least for a time.  Doing so again and again over time can totally transform the competitive landscape.  Apple Music?  Amazon? Uber? What's next?

Over the last thirty-plus years many supply chains have dispersed over long distances. This has allowed complicated products -- computers, phones, and more -- to benefit from widely distributed comparative advantages: assembling the best-of-the-best or least-costly-pieces depending on strategy.

Less complicated products -- clothing, for example -- have also sought piece-making advantages. But what worked when corporate buyers could plan and procure for "next season" is fast becoming a disadvantage. In the last quarter of 2016 Zara moved a winter coat concept to delivery in just 25 days. Eleven of those days were spent manufacturing 18,000 coats.

One way that fast-fashion and other high-velocity competitors are looking to enhance their agility is by relocating more of their supply chain components closer to more of their customers.  It is worth noting that whether this results in reshoring or offshoring depends on where consumer demand is growing.

The Reshoring Initiative emphasizes data positive for US sourcing: "The combined reshoring and related FDI trends continued strong in 2015, adding 68,000 jobs and bringing the total number of manufacturing jobs brought from offshore to over 249,000 since the manufacturing employment low of 2010."

A.T. Kearney is not convinced and sees offshoring as by far the more significant economic force.

But whatever the market-trends of the last decade, President Trump has communicated he will give top priority to reshoring, promising to reverse a generation-long trend.

In late January, Peter Navarro, director of the new White House National Trade Council, told The Financial Times, “It does the American economy no long-term good to only keep the big box factories where we are now assembling ‘American’ products that are composed primarily of foreign components,” he told the Financial Times. “We need to manufacture those components in a robust domestic supply chain that will spur job and wage growth.”

Responding to Navarro, the conservative columnist George Will explains (complains):

Americans streaming movies from Netflix (based in Los Gatos, Calif.) erase American jobs in movie theaters and DVD rental stores. Americans buying books from Seattle-based Amazon have caused many American bookstores to do what Borders’ (400 stores, 11,000 employees) did: disappear. Americans using San Francisco-based Uber are destroying many taxi drivers’ jobs. Evidently our protectors in the administration must believe this: The destruction of American jobs because Americans buy goods or services of some American companies rather than those of other American companies is benign. But the destruction of American jobs because Americans buy goods or services of foreign companies is intolerable.

Navarro has argued that externalities -- such as tax policy, currency values, regulatory constraints, and misbehavior by trading partners -- have distorted the comparative advantage of close-to-consumer supply chains.  Will seems to argue that aspects of consumer demand -- price-sensitivity, innovation, quality -- are perpetual sources of disruption, even the core of an innately chaotic system.

I perceive it depends on the specific product and the nature of demand for that specific product. Where and when demand is more volatile, less price-sensitive and  higher velocity, the costs of staying physically close to consumers will often generate comparative advantages.  Reverse characteristics will drive production to the lowest common denominator... wherever it can be found and delivered-from with reasonable assurance.  Demand decides.  But demand is highly variable.

According to CBRE and DCVelocity:

Driven by booming e-commerce sales volumes, developers are building an increasing number of mega-warehouses spanning 1 million square feet and above, with the Philadelphia and eastern Pennsylvania area leading the way, according to a report released (February 2) by real estate and logistics services company CBRE Inc.... From 2010 to 2016, 117 such facilities were built, for a total of 141.2 million square feet. By contrast, 99 facilities were built between 2003 and 2009, according to CBRE. The trend shows no sign of slowing: 29 more facilities are currently under construction, the report said. The key factor driving the trend is the need to house the sheer density of products flowing through online retail channels. As a result, e-commerce places much larger demands on warehouse space compared with other types of logistics operations. E-commerce users typically need two to three times the amount of warehouse and distribution space that traditional users do, because online fulfillment requires more inventory, labor, and automation.

Does this suggest increasing concentration -- or actually the opposite?  Is the supply chain system becoming more diversified and distributed as it adapts to e-commerce?  If so, is this a transitional or long-term system permutation?

According to the company, Kellogg's

... will begin to exit its Direct Store Delivery (DSD) network in the second quarter, transitioning the DSD-distributed portion of the company's U.S. Snacks business to the warehouse model already used by Pringles and the rest of its North American business. The new model will be transformational for Kellogg, reducing complexity and cost structure while driving growth and profitability for the company and its retail partners.

According to the Wall Street Journal the shift will involve closing thirty-nine US distribution centers.  Kellogg's products will be shipped to -- and then distributed from -- customer distribution centers.

The decision comes even as some food sector firms have indicated an interest in more DSD, in order to reduce both direct costs and elapsed time-to-consumer.  But many of these DSD innovations focus on either fresh product or high velocity product (ideally both), not the slower moving shelf-stable snack business.

In October I noted IBM and Walmart had begun an experiment to use Blockchain for supply chain management of pork in China. In November they began a US pilot where one packaged produce item is being piloted through the distributed ledger technology.  This morning a reporter contacted me -- a bit breathlessly -- about a rumor that Walmart has moved all fresh produce onto Blockchain.  I don't think so.  Not yet.  I think IBM PR resurfaced the November pilot and it is being misread and misheard.  But... right now I consider Blockchain-type tools to be the best bet for developing total transparency for demand and supply networks by tying payment to participation in the distributed ledger.

Last year I talked to several big grocery distributors serving dense urban areas in the United States.  I wondered what might be available to deliver to survivors of a catastrophic event: lets say a 7.0 plus earthquake followed by a long-term grid outage.

I was surprised.  Much more is on-hand than I had guessed.

Individual companies are understandably cautious with detailed information regarding volumes.  But above is what three big providers in a top-five urban area told me they had on-hand for a bit more than 2000 shelf-stable products (e.g. canned tuna, peanut butter, ramen).

The "projected ounces needed" is what the nearby principal jurisdiction estimated would be needed per day to serve 300,000 survivors.

So... not all of the shelf-stable products will survive the extreme event and 300,000 could be a serious under-estimate of need.  But still, 600 million ounces is a good start.

Until discovering this mother-lode of shelf-stable products close-at-hand, the local jurisdiction did not see how all the king's horses and all the king's men could ever secure that many calories in time.

Now the worry has shifted some from content to movement.  While the grocery distributors say the stuff will be available, they are not at all confident regarding their own ability to distribute, deliver, and allocate. Neither is the public sector.  But at least the problem is now better targeted.

All of this in more is given detailed attention in a new report: The Role of Groceries in Responding to Catastrophes.

Last week ICIC, a research and advisory group focusing on inner cities, released a new report on urban food systems.  It is a valuable and important report.  Its importance emerges both from its findings and from those most likely to read it.  Its value, in my judgment, is the potential to advance a meaningful dialogue between private and public sectors.

Among the ICIC findings:

The comparative analysis of food systems in Los Angeles, New Orleans and New York City finds both shared vulnerabilities and unique weaknesses that are a function of differences in each city’s food system and their exposure to different natural disaster risks. 

None of the cities were exposed to significant food processing vulnerabilities. Because of the global nature of the food system, a very small share of total food consumed in a city is processed and packaged locally. For example, if a major earthquake hit Los Angeles, some food processing plants would likely be damaged, but they are largely food exporters. The food consumed in Los Angeles, as is the case in most cities, is sourced from food processing plants across the country and world. 

All three cities face food distribution vulnerabilities because of the location of some warehouse supplier facilities in “at risk” areas. Los Angeles faces the greatest risk, with the vast majority of its warehouse suppliers subject to earthquake damage. In New Orleans and New York City, only local warehouse suppliers are at risk, creating greater risks for smaller grocery and corner stores, which rely more on local warehouse suppliers for their food supplies.

The ICIC report was developed with support from the Rockefeller Foundation's 100 Resilient Cities Initiative.  It is especially written for Chief Resilience Officers and their public sector colleagues. This is an important audience that heretofore has typically not given much attention to supply chain resilience.  It is immensely helpful to bring the issue forward.

Every engagement with reality is reductionist.  Reality is too profuse to be concisely captured.  It is now a mere cliche to note that our view of reality depends on where we are standing and our related angle of observation.

ICIC stands in the inner city. This is where ICIC has its expertise.  Given this angle, the observations reported are accurate.

I usually stand somewhere much closer to a big distribution center surrounded by trucks and plates of concrete spaghetti connecting my place to the inner city.  I see some other angles.  ICIC invited my contribution to the report.  I am interested -- sometimes surprised -- by how I was "heard".  But I need more time than I've had to constructively outline the differences.

At the FMI mid-winter meeting a new study of digital demand was released.  According to Nielsen, as early as 2025 online could constitute twenty-percent or $100 billion in sales of the US grocery market.  Makes sense to me.  And I have argued, the top competitors for these dollars will have a comparative advantage for every other sort of online retail.

According to Progressive Grocer:

Supply chain services provider McLane Co. Inc. has landed a service agreement with The Kroger Co. to service the grocery giant’s 787 convenience stores located across 18 states, under the Loaf ‘N Jug, Turkey Hill Minit Market, Tom Thumb, Kwik Shop and Quik Stop banners.

In mid-2016 I attended a so-called supply chain thought-leader summit where every other thinker in the room seemed sure that omni-channel marketing would be supported by omni-channel distribution centers.  Instead what I seem to to see is a decentralization and specialization of distribution functions and strategies.... ala this Kroger deal with McLane.

Interim measures? Maybe. But ten-of-millions are being invested in these specialized capacities and capabilities.

According to the Wall Street Journal and other media, Walmart has begun the long-expected cuts to its Bentonville headquarters staff.

Roughly 1000 lay-offs are likely.  The company has explained the cuts in with a focus on a long-term reduction in supply chain and logistics costs.

RetailDIVE quotes and comments:

But the dent in its supply chain ranks could undermine one of Wal-Mart’s core strengths: Its highly efficient brick-and-mortar-based distribution system. And it signals that Wal-Mart sees little growth for its brick-and-mortar operations, Nick Egelanian, president of retail development consultants SiteWorks International, told Retail Dive. 

"Wal-Mart clearly has decided at the board level that their growth prospects as a brick-and-mortar retailer are over — and when you decide that, you move to cut costs," Egelanian said. "They’re a very low-cost operator to start with. There's probably some excess, but this informs me that they don’t think they’re going to grow, because their core strength is their supply chain.

Walmart has also learned that the margin they can make on lower-cost SCM is not a sufficient comparative advantage online.  It is not yet crystal clear, but what could also be happening is a swapping out of old-think SCM talent to make way for new-think SCM talent.

I suppose this has been available for quite awhile, but I just noticed it:  Amazon has a glowing profile of its recent "no check-out" technology for physical stores.  See Amazon Go.

According to the H&M retail group:

... sales including VAT increased by 6 percent in local currencies in December 2016 compared to the same month last year. Converted into SEK (Swedish currency), sales increased by 10 percent. The total number of stores amounted to 4,379 on 31 December 2016 compared to 3,957 on 31 December 2015.

According to Reuters, reporting on H&M:

In November, its growth was roughly unchanged from October at 9 percent, missing expectations for an acceleration on the back of demand for winter clothes. H&M, which has the bulk of sales in Europe, has in the past year blamed several monthly sales misses on unseasonable weather. Like its rivals, H&M has underperformed Inditex, partly because the Zara owner has a supply chain that enables it to react more quickly to shifts in demand, making it less exposed to variations on weather.

Both H&M and Zara (Inditex) are leading purveyors of "fast fashion".  Each move at blinding speeds compared to Macy's or Walmart or almost any others.  But what analysts are now asserting is that while both are fast, the Inditex family is much more agile -- much better at quickly shifting direction -- in response to real-time consumer behavior.

Using information to drive this sort of shift is a key differentiation between supply chain management and logistics.

The National Retail Federation has looked hard at Department of Commerce data for the 2016 holiday season and highlights the following:

• Online and other non-store sales increased 12.6 percent unadjusted year-over-year.
• Sales at clothing and accessories stores increased 2.5 percent unadjusted year-over-year.
• Sales at general merchandise stores decreased 1.5 percent unadjusted year-over-year.
• Electronics and appliances stores’ sales decreased 2.3 percent unadjusted year-over-year.
• Furniture and home furnishings stores’ sales increased 4.8 percent unadjusted year-over-year.
• Sales at building materials and supplies stores increased 4.5 percent unadjusted year-over-year.
• Sporting goods stores’ sales decreased 1.7 percent unadjusted year-over-year. 
• Sales at health and personal care stores increased 6.7 percent unadjusted year-over-year.
• Sales at Department Stores decreased 7.0 percent unadjusted year-over-year.
• Food and beverage stores' sales increased 3.6 percent unadjusted year-over-year.

Overall retail sales increased about 4 percent over 2015.  Department Stores  lost big. Online won big.

How about mass customization won big, while something-for-everybody lost big?

According to Amazon:

Today, the company announced that it plans to create an additional 100,000 full-time, full-benefit jobs in the U.S. over the next 18 months. These new job opportunities are for people all across the country and with all types of experience, education and skill levels—from engineers and software developers to those seeking entry-level positions and on-the-job training. Many of the roles will be in new fulfillment centers that have been announced over the past several months and are currently under construction in Texas, California, Florida, New Jersey and many other states across the country.

According to the Seattle Times, also channeling Amazon's self-reporting:

The world’s largest e-commerce retailer said it employed 45,000 robots in some 20 fulfillment centers. That’s a cool 50 percent increase from last year’s holiday season, when the company had some 30,000 robots working alongside 230,000 humans.

Especially in contrast with the recent pull-backs by Macy's, Sears, and to a lesser extent Walmart, the transformation of retail toward e-commerce is accelerating.  It is worth remembering that as recently as 2010 e-commerce constituted barely four percent of the overall retail market.  It is now comfortably over eight percent... with plenty of room for growth.

According to the Singapore Straits Times, Global Logistics Properties (GLP) is seeking potential buyers:

Global Logistic Properties (GLP) said it is in talks about a possible buyout - an announcement that came on a day when the firm requested a trading halt and was queried over a surge in trading activity and its share price.It told the Singapore Exchange (SGX) that "it is in preliminary discussions with various parties in connection with a possible sale of the company".

According to Bloomberg:

The Singapore-based company sent out an information letter to targeted bidders at the end of last month and has asked for first-round offers by early February, according to the people. GLP attracted interest from suitors after announcing a strategic review in December, one of the people said, asking not to be identified because the information is private.

GLP is often identified as the second-largest owner of distribution centers in the United States.  It is the biggest such player in China, Japan, and Brazil.

The Singapore sovereign wealth fund currently owns a significant portion of the company. In December the Chinese sovereign wealth fund evidently made an unsolicited inquiry regarding a potential purchase, prompting the current move to solicit bids.

In both the United States and China the rapid expansion -- and unique operational requirements -- of ecommerce, has prompted a boom in demand for distribution facilities, especially those immediately proximate to dense urban areas.

The forthcoming bids will be a good signal of whether sophisticated investors perceive that demand will continue to exceed supply or if a property bubble is developing. 

According to Munich RE:

A number of devastating earthquakes and powerful storms made 2016 the costliest twelve months for natural catastrophe losses in the last four years. Losses totalled US$ 175bn, a good two-thirds more than in the previous year, and very nearly as high as the figure for 2012 (US$ 180bn). The share of uninsured losses – the so-called protection or insurance gap – remained substantial at around 70%. Almost 30% of the losses, some US$ 50bn, were insured.

• Both overall losses and insured losses were above the inflation-adjusted average for the past ten years (US$ 154bn and 45.1bn respectively).

• Taking very small events out of the equation, 750 relevant loss events such as earthquakes, storms, floods, droughts and heatwaves were recorded in the Munich Re NatCatSERVICE database. That is significantly above the ten-year average of 590.

• Some 8,700 lives were sadly lost as a result of these natural catastrophes, far fewer at least than in 2015 (25,400), yet within the ten-year average (60,600). The past year was thus the year with the fewest fatalities (after 2014, with 8,050 fatalities) in 30 years (1986: 8,600).

• The high number of flood events, including river flooding and flash floods, was exceptional and accounted for 34% of overall losses, compared with an average of 21% over the past ten years.

The World Business Council for Sustainable Development has produced a report and set of recommendations on Building Resilience in Global Supply Chains with a particular focus on climate-related risks.

According to the MasterCard spending index:

U.S. retail sales excluding auto and gas grew 7.9% during the traditional Black Friday to Christmas Eve shopping season. The biggest winners this season were eCommerce and furniture, with double-digit growth, while electronics and men's apparel lagged well behind... eCommerce grew roughly 20% compared to last year. This is not a total surprise, as 70% of U.S. consumers report doing more research online than before...

According to Slice Intelligence, Amazon has dominated the holiday online spending consistently claiming in the mid-forty percent of overall eCommerce revenues.

And there were no systemic supply chain failures given the timing of Christmas and the absence of serious weather impacts involving dense population centers.

JANUARY 5 UPDATE:

Given the overall growth in retail sales, the holiday sales disappointments experienced by Macy's, Sears (and Kmarts) and Kohl's are especially significant.  Sears reports November and December sales were 12-13 percent less than last year. (!)