The customer doesn’t think of it that way…

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The grocery market is changing and both retailers and their suppliers are having to move quickly to keep up, says Malory Davies.

I want us to stop talking about digital and physical retail as if they’re two separate things. The customer doesn’t think of it that way, and we can’t either. Customers just want us to solve their everyday problems with an easy, seamless shopping experience.”

A lot of people in retail are starting to think this way. The significance of this particular statement is that it comes from Doug McMillon, president and CEO of the world’s biggest retailer – Wal-Mart Stores Inc.

Logistics & Supply Chain

This article first appeared in Logistics & Supply Chain, Autumn 2015.

His speech, to 14,000 Wal-Mart associates and shareholders at the company’s annual meeting in Fayetteville, Arkansas, put particular emphasis on the role of supply chain in developing the strategy.

“We have strong competitors, but they don’t have what we do. They don’t have you – two million associates who want make a difference. Think about the map of our locations. No one else has that incredible network around the world,” he said.

“Now, think about our supply chain and experienced logistics team. I get excited about what our technology team is now capable of. As we add new capabilities and join these unique assets together effectively, we’re going to have something special.”

“We’re approaching this work with both urgency and determination. We’re moving fast to exceed our customers’ expectations, while making purposeful choices that will position us for the long haul. This is a turning point in our story, and the investments we’re making today will set the stage for strong and sustainable growth.”

However, it would be a mistake to think that Wal-Mart is losing sight of the basics. Its second quarter results released in August highlight not just the competitive nature of the grocery business in the US, but also how the retailer is focusing on inventory management as part of its response.

In the US, Walmart reported a 4.8 per cent rise in revenue to $74 billion in the second quarter but operating income was down by 8.2 per cent to £4.8 billion.

And Greg Foran, president & CEO of Walmart US, pointed out that it was meeting its goal to grow inventory more slowly than sales.

The company has been investing in operational improvements. “In the second quarter, we began an overhaul of our inventory management systems, routines and schedules,” said Foran.

In the second quarter, total inventory grew slower than the rate of sales, at 2.2 per cent. Comparable store inventory declined by 2.4 per cent versus last year.

“The majority of this improvement came from decisions we made regarding replenishment strategies whereby we strategically moved inventory for certain items upstream from our store back rooms to our distribution centres,” said Foran.

“Additionally, we continued our focus on clearing our back rooms of excess inventory, improving operational efficiency in the stores. These actions, along with better management of seasonal inventory and reducing modular changes and feature shipments to the stores, allowed us to reduce comparable store inventory, while improving both in-stock levels and sales.”

It’s not just in the US that the major supermarket chains are having to face up to significant challenges. In the UK, the large grocery chains are struggling to come to terms with the growth of the discounters, the growth of online shopping and the move from huge stores towards convenience shopping.

You could almost hear the sigh of relief among financial analysts last month when they saw Tesco’s first quarter results – there was clear evidence that the decline in like-for-like sales was being turned around.

New chief executive Dave Lewis highlighted the point, saying: “While the market is still challenging and volatility is likely to remain a feature of short-term performance, these first quarter results represent another step in the right direction.”


At the same time there is a strong desire among retailers to improve collaboration in the supply chain to improve inventory management. A study of senior managers in retailers and manufacturers sponsored by E2open found that there is a sustained demand for better inventory management collaboration. Among those surveyed, nearly one-third reported collaborating “poorly” or “not very well” with trading partners.

Not only that, more than half reported that their business cannot share daily forecast information, and some 36 per cent reckoned their organisations have too much cash tied up in inventory.

It found that while there is increased interest in vendor managed inventory, companies face challenges in actually establishing such programmes.

One third of total respondents rated their visibility levels between “average” and “none”. Only 26 per cent rated their visibility into current inventory levels as “great”.

One initiative to tackle hidden operating costs, delays and process inefficiencies in the inbound grocery supply chain has been launched by GS1, the data standards organisation. The Perfect Order initiative is also intended to address the need to create a seamless shopping experience.

The initial stage of the Perfect Order programme, which has just started, will include the development and adoption of a set of industry agreed standards for inbound logistics, ensuring that the retailers’ service requirements are met in full.

This part of the programme will involve a joint industry workgroup, made up of both grocery retailers and suppliers including Bakkovar, Boots, Coca-Cola Enterprises, Mondelez, Morrison’s, Nestle, Procter & Gamble, Tesco, Turners of Soham and Unilever.

It anticipates a range of benefits including better utilisation of vehicles, a less customised and more direct goods receiving process for suppliers, and ultimately better product availability for shoppers.

Simon Mardle, logistics and change management at Tesco, said: “The GS1 UK Perfect Order programme helps support Tesco’s passion for putting the customer at the heart of everything we do. To help achieve this, it’s key we work with our suppliers in new and different ways and help to make ways of working simpler and easier for all of us.”

Over the next three years, the Perfect Order programme will evolve into a full set of industry agreed harmonised ways of working which, with the commitment of all parties involved, make for a simpler inbound logistics process and also create the opportunity to generate significant savings.

However, the relationships between retailers and their suppliers have been certainly been affected by the tough market conditions. Malcolm Johnstone, president of the Food Storage & Distribution Federation, told members at the organisation’s annual lunch that major tensions within the established food retail giants facing up to discount retailers have created significant stress in the supply chain.


In fact, Begbies Traynor in its Red Flag Alert study found that during the second quarter of 2015, the UK food and beverage manufacturers, which include many of the food suppliers and farmers that supply the major UK headquartered supermarkets, witnessed the highest year on year increase in ‘significant’ distress of all sectors monitored, rising 54 per cent, with 1,622 companies now struggling to make ends meet; up from 1,052 at the same stage last year.

It said: “Within this sector, 1,436 SME food suppliers are bearing the brunt of the supermarkets’ drastic turnaround strategies and the new savage landscape in the UK retail food industry, representing 89 per cent of all struggling companies within this sector.”

Julie Palmer, retail expert at Begbies Traynor, said: “The supermarkets have managed to successfully rebase their own models by reducing product ranges, moving away from bulk-buy offers and squeezing supplier margins still further, while failing to clean up their act on late payments, taking more than a month longer than agreed terms to settle debts with suppliers.

“Some are even looking into launching their own food manufacturing facilities to give them even tighter control over costs and the ability to offer still more aggressive pricing – signalling yet another nightmare scenario on the horizon for the UK food supply chain,” she said.

It the light of some of these issues, it might seem strange to report that the grocery market is growing. In fact, the IGD expects the value of the world’s grocery market to increase by a third over the next five years, reaching $11.8 trillion by 2020.

And it forecasts that UK grocery sales growth will accelerate from 1.7 per cent in 2015 to reach 2.7 per cent a year by 2010.

In total the IGD expects the market to rise 13 per cent to be worth £200.6 billion by 2020.

Online, discount and convenience sectors will be the drivers of growth – particularly online which the IGD forecasts will growth by 93 per cent to more than 17 billion over the period. But sales through hypermarkets and superstores will decline by 2.9 per cent to £69.6bn over the five year period.

While these growth forecasts are generally positive, they also highlight the changing nature of the retail market and that in itself will lead to more stress on the supply chain.

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