Chain reaction. Forces shaping the retail supply chain today

Transcription

1 Chain reaction Forces shaping the retail supply chain today

2 Contents 3 Executive summary 5 The supply chain today 6 Brexit bites 10 Forces shaping the supply chain 14 Changing seasons 16 Shifting geographies 18 The fulfilment challenge 20 The ethical dimension 22 Strategies for success 24 Case study: John Lewis 26 About the author This report was composed from two pieces of research conducted by Conlumino for Barclays. The majority of the report was produced from pre-eu referendum research and a post EU referendum survey was conducted for the Brexit bites. All content has been researched, developed and produced by Conlumino at the request of Barclays for the purpose of this report. All charts, data and statistics featured in this report are the product of this research. All rights reserved. 2 of 26

3 Executive summary Ensuring a cost-effective supply chain is a key challenge for retailers in the face of changing consumer behaviour. The supply chain is clearly critical to business performance in a competitive retail marketplace. So it s no surprise that our survey of retailers reveals that protecting profit margins is their top supply chain priority. This is followed closely by ensuring stability and maintaining a good reputation on ethical issues. There is certainly room for improvement in their supply chains, according to our respondents. Close to two thirds (63%) say their supply chains are not very or not at all cost-effective, while a majority believe they could be more efficient and nimble. The scale of the impact retailers expect the referendum result to have on their supply chains gives a mixed picture. Although half (52%) think that their business is unprepared for Brexit, a small majority (56%) actually think that Brexit will have no real impact (41%) or a positive impact (15%) on their supply chain. Changing shopping patterns Hard-to-predict demand is another key force for change, driven by more unusual weather patterns, the increased frequency and intensity of seasonal promotions and other changes in shopping habits. More erratic weather, in particular, is making it increasingly difficult for retailers to meet customer needs. In addition, the use of multiple touchpoints and channels by consumers is increasing the complexity of supply chains. Average distance from home people have travelled to shop over the years Miles for each year, shop includes researching, browsing and buying miles 42.1 miles 49.1 miles Our research shows that consumers travel an average of 6,281 miles* while shopping online each year and they expect ever-faster delivery and a wider range of delivery options. Coping with delivery of online orders from overseas is a major supply chain challenge. Despite the prevalence of online shopping, many of our retailer respondents say they are still getting to grips with the impact of online on their operations *Conlumino research miles 6,281 miles 3 of 26

4 With increased competition for a share of consumer spending from other leisure pursuits, consumers become savvier, expecting a steady flow of new retail products and experiences to keep them coming back. Survey respondents highlight the increasing importance of reacting to trends, with 81% of fashion retailers, for example, saying that fashion cycles have become faster; most believe this will accelerate in the future. Buying British Buying fashion goods made in Britain is fairly important to most of the consumers in our survey and a majority (53%) of retailers say it is now easier to manufacture products in the UK. However, most retailers in our survey say the cost of bringing production back to the UK is prohibitive and only about a third say that they have actually done so. Despite higher costs, our post-referendum survey shows that the UK is now expected to benefit from a renewed focus as a sourcing destination, with a third (32.4%) of retailers surveyed expecting to increase their domestic purchasing activity. How prepared is your business for Brexit regarding supply chain? Prepared As prepared as we can be More delivery options Retailers are increasing the number of delivery and collection options for their customers and plan to add more over the next few years. While consumers say they want these extra options, there is considerable reluctance to pay for them, with the majority of shoppers (64%) saying that delivery charges are already too high. Our survey highlights lack of flexibility of delivery times and poor reliability as consumers main criticisms. Click-and-collect services from retail stores, which can provide a lower-cost alternative to delivery, tend to be rated more favourably by consumers and are increasingly important to shoppers and retailers alike, according to respondents. Our post-referendum survey results suggest that, broadly speaking, retailers appear more likely to take a hit on margins or absorb higher costs by streamlining the supply chain or making savings elsewhere than to pass on higher costs to customers % 35.3 % Unprepared 51.5 % Ethical priorities Our survey shows that minimising environmental impacts and meeting corporate social responsibility targets are key issues influencing retailers and this is likely to continue in the future. Consumers and retailers generally agree on the ethical concerns they care most about: child labour, the impact on local communities and working conditions are the top issues for both retailers and consumers, followed by factors like pollution and climate change. Younger consumers tend to be more concerned about ethical issues than older age groups and also more sceptical about retailers ethical policies. Despite this, consumers admit that their shopping behaviour is not always driven by these ethical concerns. For example, nearly two thirds (61%) say that they tend to forget about ethical treatment of workers when buying products. While our retailer survey shows that respondents generally acknowledge the limited impact of ethical concerns on actual buying patterns, they have nevertheless almost all taken, or plan to take, some form of ethical action over their supply chains. However, many admit that the length of the supply chain can limit their control over these issues. Ian Gilmartin Head of Retail and Wholesale Corporate Banking Barclays 4 of 26

5 The supply chain today Retailers highlight the need for more cost-effective supply chains to help protect profit margins. Protecting profit margins is the number one priority for 64% of retailers, according to our survey, underlining the perennial challenge of maintaining cost-effectiveness. While the views of our respondents on the supply chain are mixed, it s clear that retailers are far from giving themselves a clean bill of health. Nearly two thirds of respondents say their supply chains are not very or not at all cost-effective, while a majority also say they could be more efficient and nimble. Looking ahead Taking action Given the various supply chain challenges identified in this report, it is not surprising that the vast majority of retailers say they are taking some form of action. Most commonly this involves working more closely with suppliers to find cost savings and efficiency gains 60% of our retailer respondents say this will be an area of future focus. Collaboration with suppliers to identify efficiencies will clearly be a key challenge for the sector going forward. One recent trend has seen retailers adjusting trading terms to take control of goods closer to the point of manufacture. This allows them to better control freight costs, which has been particularly advantageous with falling oil prices. Some retailers are also investing in fulfilment centres in the UK and overseas to lower distribution costs. This investment in the supply chain creates efficiencies that can be passed on to increasingly demanding consumers. Besides maintaining margins, our pre-referendum survey research shows that top priorities for the year ahead include ensuring stability (60%), closely followed by protecting ethical reputation (57%). Also mentioned as goals for 2016 are quality control (41%), speed of supply (38%) and foreign exchange rates (32%). However, the post-referendum survey suggests slight shifts in these priorities, with FX rates becoming the top concern ahead of labour costs, streamlining supply chain and import costs. Forecasting and predicting erratic demand is a factor that impacts on all retailers. Our research shows this is particularly true of food and drink retailers, who rate it as the second most important issue after protecting profit levels. Food sector respondents also identify the importance of transparency and traceability in the supply chain and minimising wastage and loss as key issues. How would you describe your supply chain? Not at all Not very Somewhat Very Completely ROBUST 8% 10% 61% 16% 5% NIMBLE 11% 39% 41% 6% 3% COST- EFFECTIVE 25% 38% 22% 9% 6% EFFICIENT 14% 44% 31% 10% 1% TIME- SENSITIVE 9% 32% 28% 19% 12% 5 of 26

6 Brexit bites Concerns over the post-referendum economy could transform retailers approach to supply chain management. Our survey conducted following the recent EU referendum result suggests that Brexit has not found favour with retailers. How will the following aspects of your supply chain be impacted by Brexit? POSITIVE NEGATIVE NEUTRAL An unexpected result Finding enough labour for supply chain operations 7.4% 64.7% 27.9% The result of the referendum appears to have come as a surprise to lots of people and retailers are no exception. Even though over a third of those surveyed after the referendum (35.3%) say their supply chain processes are as prepared as they can be at the present time, over half of the respondents (51.5%) feel their supply chains are unprepared for Brexit. Only a small minority (13.2%) believe they are fully ready for separation from the European Union (EU), suggesting that the sector, as with most other businesses in the domestic markets, is waiting for clarity as to the long-term consequences of the result. Finding the right quality of staff for supply chain operations Cost of importing goods Cost of exporting goods Complexity of imports and exports Managing foreign exchange rates Speed of the supply chain Dealing with administration and red tape 4.4% 2.9% 30.9% 13.2% 2.9% 11.8% 27.9% 55.9% 69.1% 20.6% 27.9% 80.9% 16.2% 45.6% 39.7% 27.9% 48.5% 58.8% 16.2% 72.1% 26.5% Over half of those surveyed after the referendum say their supply chains are unprepared for Brexit. The overall attitude is one of caution. Less than a fifth (14.7%) expect Brexit to be positive for their supply chain while, in comparison, almost half (44.1%) anticipate a negative impact. Selling products overseas However, not everyone is so pessimistic and many have a neutral attitude towards Brexit. A significant proportion (41.2%) expect Brexit to have no real effect, while almost a third (29.4%) believe it will have only a slightly negative impact. The high proportion of neutral responses suggests that at least some retailers have mitigation plans already in place, with uncertainty the biggest current concern. 17.6% 42.6% 39.7% 6 of 26

7 What will you be reviewing or acting on in light of the vote to leave the European Union (%)? Hedging currency 70.6 Moving manufacturing capacity to different geographies 13.2 Changing suppliers 30.9 Sourcing from different countries 27.9 Relocating parts of your supply chain operation 16.2 Setting up separate UK and European supply chains 11.8 Reassessing product mixes and product ranges 17.6 Closing down existing selling operations in Europe 1.5 Opening new selling operations in Europe 10.3 Streamlining and cutting supply chain costs None of these Foreign Exchange (FX) effect According to our post-brexit survey, the most immediate concerns are focused around currency, with 81% of retailers expressing negative sentiment over management of FX rates. While depreciation of sterling has been one of the more immediate effects of the referendum result, this could also have a longer-term impact. Many retailers are likely to be reasonably well-hedged going into next year, meaning that the real consequences could be seen from mid-2017 onwards. Hedging currency is therefore unsurprisingly the top priority for our respondents post-referendum, with 71% highlighting it as an action for immediate review. However, while a cheaper sterling will inevitably have a major effect on many retailers, particularly against the US dollar and the euro, it may not be all doom and gloom for the sector. Currency volatility will have a very different impact on each retailer, depending on their circumstances. Those that are heavily reliant on imports will no doubt be looking to exploit opportunities to market their products more widely in new markets, while major exporters with a largely domestic supply chain could benefit from currency movements in the shorter term. 7 of 26

8 Cost consequences Retailers might be worried about potential supply chain cost increases in the wake of a UK departure from the EU but, according to the latest survey, the results may be less severe than expected. The majority of retailers surveyed (58.8%) expect that the costs of supply chain management will remain the same or increase slightly, while nearly 15% see a positive impact from Brexit in bringing their supply chain costs down. In comparison, however, over two thirds (69.1%) of retailers believe that Brexit could have a negative impact on their import costs. A similar proportion (64.7%) are worried about finding adequate labour of suitable quality for their supply chain operations, possibly resulting in higher recruitment and human resources costs. How will you respond to the cost changes? Streamline the supply chain to mitigate cost increases 69.1% Renegotiate terms with suppliers to reduce fees/costs 38.2% Absorb the cost increases internally and take a hit on margins 52.9% Make savings elsewhere to offset the cost increases 64.7% Over two thirds of retailers believe that Brexit could have a negative impact on their import costs. Even though 42% of respondents think that selling products overseas may become more of a challenge, possibly due to the uncertainty around free trade with the EU, a third of respondents (30.9%) expect export costs to fall, bringing opportunities for higher margins from overseas markets. Increase the price of products for customers 30.9% Increase delivery and fulfilment costs to customers 35.3% Outsource some aspects of the supply chain to save money 19.21% 8 of 26

9 Spreading the impact In the current climate of uncertainty, most retailers appear keen to absorb the cost impact, rather than passing it on to their consumers. A significant majority (76.5%) plan to streamline their supply chains, and over half (52.9%) of retailers surveyed expect to take a hit on margins by absorbing cost increases themselves. Only 30.9% say they plan to increase product prices, while a similar number (35.3%) say they might consider increasing delivery and fulfilment costs for customers. A notable majority (64.7%) instead hope to spread the cost impact and make savings elsewhere to offset higher costs. The key here is risk management and mitigation, and companies should be carefully considering their next move. Location, location, location As retailers seek to mitigate the impact of Brexit, a new evaluation of supplier location and purchasing activity is likely. Around a third of retailers (30.9%) say they are thinking of changing their suppliers. Before the referendum, Eastern Europe was a key region of interest for purchasers, with 48% of retailers considering a potential increase in sourcing in this region. In our post- Brexit survey, however, this sentiment has, unsurprisingly, swung the other way, with a sharp drop in interest almost half of respondents (42.6%) expect to see an overall decline in European purchasing activity. India is now looking like the most popular destination, with over 51% of retailers expecting their purchasing activity in the region to increase (compared to 42% before the referendum). Interest in China and Southeast Asia as sourcing destinations for UK retailers has also recently increased. For the UK, our survey suggests that Brexit may also reinforce a trend towards buying British. While production in the UK might be more expensive, a third (32.4%) of retailers now plan to increase their domestic sourcing activity post-brexit. Looking ahead In the longer term, there are of course a wide range of Brexit consequences that retail businesses will need to consider in their forward planning, not least the possibility of reduced overall consumer purchasing power in the event of a wider economic downturn. The likely restrictions on free movement of labour and the possibility of resulting wage inflation will no doubt remain a major concern to UK retailers. These challenges will be compounded by uncertainty over domestic and foreign investment and the likely introduction of new tariffs and legislation. The likely restrictions on free movement of labour and the possibility of resulting wage inflation will no doubt remain a major concern to UK retailers until a clearer picture emerges. However, the possible removal of some barriers to trade with the rest of the world provides opportunities for greater expansion into new markets and higher penetration of existing ones. With new plans for reassessing product operations and streamlining costs in the wake of the referendum result, the changes could even act as a positive catalyst for increased efficiency within the supply chain. 9 of 26

10 Forces shaping the supply chain Online shopping and hard-to-predict consumer demand are having the biggest impact. When retailers are asked about the most important factors impacting their supply chains, both now and in the future, two issues stand out: the unrelenting rise of online shopping and more erratic demand. Impacts on the supply chain: all measures CURRENT IMPACTS All % Most important % FUTURE IMPACTS All % Most important % Online shopping As well as having a direct impact on how supply chains are managed and configured, the continuing rise in online shopping is also creating knock-on issues around handling returns and managing overseas deliveries. Continued rise of online shopping Unpredictability of demand Managing the returns created by online shopping Dealing with spikes caused by seasonal events, e.g. Black Friday Erratic and unpredictable weather Despite the fact that online shopping has now been with us for many years, it is clear that large numbers of retailers are still facing challenges in managing its impact on the back end of their operations. In particular, consumers are demanding faster delivery and more delivery options. The need for food and drink retailers, for example, to deal with individual products as well as bulk loads is increasingly true of other retail sectors. While distribution centres can still be geared up to supply stores in bulk, they are more flexible in breaking up pack sizes so that stores get optimal deliveries. In addition, stores are often now miniwarehouses for online orders. Demands from consumers to improve delivery speed Need to minimse out of stocks in store Minimising environmental impact Increase in number of foreign shoppers requiring overseas delivery Demands from consumers for more delivery options Increase in the number of store types or formats to service Lack of integration of store and online stock systems Managing CSR targets Rise of services like click and collect Need to be more reactive to trends Minimising waste and loss Coping with increased need for personalisation of products Changing costs Government regulation of 26

11 Percentage of the number of different channels and touchpoints used while shopping for clothing Patterns of demand The second key factor impacting the supply chain is the more erratic nature of demand. This is driven by more unpredictable weather, the increased frequency and intensity of seasonal promotions and the more changeable way in which consumers shop. In the food sector, an example of changing shopping habits is how the big weekly shop appears to be falling out of favour among consumers. According to the grocery industry federation, IDG, more than a third of people say they want to shop more frequently, buying little and often at local stores and this presents a major challenge for superstores designed around the traditional weekly shop. Looking to the future, unpredictability of demand is the top issue identified by respondents, suggesting that this is unlikely to ease off over the next few years. The ability of retailers to react to trends and peaks in demand will become an increasingly important supply chain issue, according to our respondents, underlining the importance of effective use of social media, customer feedback and analysis of big data. Food retailers are particularly vulnerable to demand fluctuations and disruptions to supply caused by weather. They are also increasingly using hedging and forward ordering to counter sudden commodity price changes. Ethical factors Our survey shows that minimising environmental impacts and meeting corporate social responsibility targets are also key issues influencing the decisions retailers make, both now and in the future. Consumers have become more conscious of ethical issues in the supply chain and demand more information about the products they buy. Partly in response to concerns about ingredients, food retailers are making their supply chains more traceable in terms of knowing how products move through the chain. However, the weight attached to these factors by respondents perhaps suggests that retailers feel more in control of these issues and can plan, measure and assess them in a way that they can t with, for example, fluctuations in consumer demand ONE TWO THREE FOUR FIVE+ 11 of 26

12 More ways to shop Another force shaping the supply chain is that consumers are now spoiled for choice in terms of how they can shop. Many now use multiple touchpoints and channels when buying products like clothing. Even food retailers report consumers using more non-traditional channels like Amazon. While this has increased flexibility for consumers, it has also increased the complexity of retailers supply chains. Retailers must now be prepared to fulfil products, manage inventory and deal with returns across a number of different channels. This fragmentation has also arguably made understanding the pattern of demand far more difficult. Customers craving newness One consequence of the increased frequency of shopping and the relative ease with which consumers can buy things online is boredom. In our survey of consumers, 55% agree that they often get bored of using the same stores and brands. Customers want more and more, and that puts pressure on the whole supply chain. Our survey suggests that today s consumers are somewhat jaded with their everyday retail experiences and look for new products, brands or experiences to keep them satisfied and engaged. In our survey, two thirds (66%) say they agree it feels great to discover a new brand or product that they like. Percentage of UK consumers buying from foreign retail websites who shopped in each country in 2015 Country % United States 61.7 Ireland 47.5 Canada 30.9 France 27.5 Nordics 20.2 Germany 19.5 Italy 19.5 Japan 13.0 Spain 12.8 China 11.8 India 10.4 South Africa 9.4 Russia 5.0 Percentage for each year This means retailers have to work hard to keep offers and ranges looking fresh and new. In turn, this places more pressure on the supply chain to be quicker and more flexible a particular challenge for larger retailers, compared to smaller, independent competitors. However, in the food sector, busy consumers appear to be putting less value on the range of product choice in favour of a narrower selection of more carefully chosen products. In response, retailers are reducing the number of products creating clarity for their customers, but also improving efficiencies and economies of scale. Global retail options Online shopping has opened up a world of choice to consumers that includes retailers thousands of miles away and brands to which they haven t previously had access. A fifth (20%) of consumers in our survey say they purchased something online from an overseas retailer in the last year. Online shopping has opened up a world of choice to consumers that includes retailers thousands of miles away. Translated into physical distance, the average consumer travelled an average of more than 6,000 miles while shopping last year. This compares with a figure of just 15.6 miles in 1955 and miles in For retailers, this means that supply chains have to cope with delivering products over much longer distances, including from overseas. 12 of 26

13 Our research shows that of the foreign retail websites used by UK consumers, most (62%) are from the US, followed by Ireland and Canada. Language may be the key factor behind these results, given that, as English-speaking countries, these websites are typically most accessible to UK consumers. In the case of Ireland, proximity to the UK may also play a role. Usage of US and Canadian retail websites is also probably boosted by the fact that there are more retailers in those countries that are not physically present in the UK. Distracted consumers Non-retail activities are increasingly competing with retail for consumers disposable income, as evidenced by the fact that growth in spending on services is outstripping that on retail goods. Retail is losing out to a raft of leisure activities: people are eating out more often and spending more on entertainment like cinema, musical events and art exhibitions. Similarly, consumers are travelling more often, mixing short breaks with longer holidays, meaning that retail spending is being diverted towards the travel sector and overseas retailers. People are eating out more often and spending more on entertainment like cinema, musical events and art exhibitions. Consumer price expectations There is, of course, constant consumer pressure for lower prices. Retailers respond to this in part by trying to cut their supply chain costs. In the food sector, our research reveals that most consumers do not believe low prices have made food less safe. A slim majority believe that it has reduced the quality of food. A larger majority believe it has put pressure further down the supply chain on food producers (83%) and, to a lesser extent, suppliers (72%). 83% believe price cuts put pressure on food producers Labour costs Our research shows that rising labour costs are an increasingly important factor in the food sector. This hits food retailers particularly hard because of their complex, time-sensitive and intricate delivery and logistics networks. To counter this, retailers are focusing on labour efficiencies, trying to ensure it is allocated where it is most effective in the supply chain, aided by improved forecasting. Brexit will potentially put more pressure on labour costs, given that retailers have concerns over the supply of labour as well as the quality and suitability. 72% believe price cuts put pressure on food suppliers Spending on subscription services such as Netflix, Apple Music, Spotify and others grew 6.8% last year, while retail s share of consumer spending has slipped from 39% to 31% over the past 10 years.* *Conlumino research. 13 of 26

14 Changing seasons Traditional seasonal patterns are being overtaken by a continual search by consumers for something new. More erratic weather is making it increasingly difficult for retailers to meet consumer needs, according to our survey. More than 60% of consumers agree that retailers stock products that are unsuited to the prevailing weather conditions. This is largely the result of more erratic weather patterns in the UK and is presenting a significant challenge to retailers ability to shift stock, particularly in the fashion sector. Having a wide choice of products is no longer enough to keep consumers satisfied. Our consumer survey reveals that constant change and new trends and products are now important factors in driving shoppers into stores or onto websites and converting them into buyers. Simply having a wide choice of products is no longer enough to keep consumers satisfied. Close to 80% say that what matters to them is that stores stock products that are inspiring and interesting. When it comes to deciding where to shop for clothing, what is important to you? Neutral Retailers increasingly seem to stock products which are unsuitable for the weather I update my wardrobe each season The high street does not reflect the changes in fashion fast enough It is very difficult to find holiday clothes during the winter months It is hard to find the latest trends and designs on the high street 20.5% 18.3% 19.7% 22.9% 13.0% Nearly two thirds (63%) of our consumer survey respondents highlight the importance of seeing something new in stock when they visit a store. Consumers also say it is important they don t see everyone else with the same goods, which may encourage shorter production runs. Agree Disagree 62.6% 38.7% 51.0% 53.2% 47.4% 16.9% 43.0% 29.3% 23.9% 39.6% 14 of 26

15 Retailer response Retailers feedback seems to chime with consumers. For example, in the fashion sector there is growing recognition that traditional seasons are less relevant 81% of retailers note that fashion cycles have become faster, and 87% believe they will speed up still further over the next five years. How strongly do you agree or disagree with the following statements about seasons? (retailers) It s not imagination: the weather is weird now and it s getting worse. Makes it hard to know what stock to commit to. Consumers now demand constant change in the product on the shop floor The costs in fashion supply chains are increasing The majority of fashion retailers agree they need to be more flexible in the type of products they offer, and that constant change of products on the shop floor is now demanded by consumers. More than half say that costs in fashion supply chains are increasing. Seasons are increasingly irrelevant in fashion now Seasons are relevant but we have to be more flexible in terms of the type of product we offer We are producing a lot more collections each year than we used to In addition, retailers need to maintain strong relationships with a diverse group of suppliers to be able to adapt to trends and peaks in demand. Neutral 13% 2% 14% 9% 18% Agree Disagree 42% 93% 47% 73% 54% 45% 5% 39% 18% 28% 15 of 26

16 Shifting geographies Buying British is likely to become more popular post-brexit. Our survey reveals that a majority of consumers say that having fashion and clothing products made in Britain is fairly important to them. Just under half of consumers say they d be willing to pay more for clothing made in Britain; but of those that are willing, the majority would only pay a bit more. A majority of consumers say that having fashion and clothing products made in Britain is fairly important to them. Views on buying British food are less supportive just 30% say they would be willing to pay more for food that is grown, raised or produced in Britain. With consumers being much more price sensitive when purchasing food than fashion, some will tend to opt for the lowest price regardless of the food s origin, although this will obviously vary between food categories. Sourcing in the UK The retailers in our survey acknowledge the potential advantages of tapping into this consumer sentiment, but only if the on-shoring of production back to the UK can be achieved cost-effectively. Manufacturing in the UK is identified by 39% of the retailers in our survey as one of the actions they are currently taking to improve the efficiency of the supply chain. A majority of retailers (53%) also agree it is now easier to manufacture products in the UK, but 65% say that the costs of doing this are prohibitive. Would you be willing to pay more for clothing that is made in Britain? YES, A LOT MORE NOT SURE YES, A BIT MORE 6.7% 39.8% 4.2% While 60% of retailers agree that bringing production closer to home would allow them to be more nimble in responding to changes in demand, just 38% say that they have actually done this. NO 49.3% However, with a UK departure from the EU expected to negatively impact purchasing activity across Europe, retailers are anticipating an inevitable increase in domestic activity. Would you be willing to pay more for food that is grown, raised or produced in Britain? YES, A LOT MORE NOT SURE Further afield YES, A BIT MORE 5.9% 24.5% 9.2% Looking further afield, retailers are aiming to extend the reach of their products more widely across the globe, according to our survey. While initial results suggested that Eastern Europe was a key growth region, our post-referendum survey unsurprisingly indicates that India, China and Southeast Asia are now likely to feature more strongly in supply chains. NO 60.4% 16 of 26

17 Financial framework It is important to ensure that a suitable financial framework is in place when considering moving supplier base to a new destination. There are a number of supply chain finance solutions that retailers can use to improve working capital and reduce the additional risks associated with crossborder trade. These solutions can include looking to increase payment terms while at the same time trying to ease the burden that slowing payments have on suppliers. Key considerations also include reducing the risk of stock delivery delays or even complete delivery failure and guarding against adverse currency movements. Trade finance has been an important cross-border instrument for retailers looking to implement a supply chain solution. A growing number of firms are also considering payable-centric bank products, such as trade loans, supplier finance programmes, documentary trade finance and asset-based lending solutions. However, for such a framework to be successful, all parties need to work together to set it up and manage the change from treasury and procurement to suppliers and distributors. Digitisation of these products via new technologies, such as supplier finance platforms, SWIFT and documentary trade platforms, is making business easier for retailers, enabling them to negotiate better payment terms, mitigate goods delivery risks and reduce costs. FX risks and local currency invoicing UK retailers with international supply chains can be exposed to foreign exchange risk. Companies need to be aware of the risks and identify their underlying currency exposures and business vulnerabilities. Even before a contract has been signed, businesses should consider currency exposure and plan to mitigate it. In light of Brexit, in which regions are you considering increasing/decreasing purchasing activity? 20.6 United Kingdom -5 Other Sometimes this exposure may not be immediately apparent as suppliers may not invoice directly in their local currency. For example, many retailers pay suppliers based in China in US dollars, and suppliers in Eastern Europe in sterling. Paying suppliers in non-domestic currency can attract a premium. Suppliers may allocate a buffer in their prices to protect margins against FX risk. Some retailers have managed to negotiate discounts with their suppliers by agreeing to pay in local currency. Better understanding of the embedded FX risks that firms are exposed to can reduce or eliminate the premium built into prices quoted by suppliers. Local currency invoicing increases price transparency in the supply chain. Explicit FX risk is easier to manage and build into overall hedging policy than implicit FX risk, where importers may find that sterling or US dollar prices increase due to suppliers not managing their FX risks effectively, or simply lacking the knowledge and market access of a larger firm. Buyers should be aware of this implicit as well as explicit FX risk, and request dual pricing, where applicable, to gain visibility over the FX rates being applied Latin/South America 11.8 North America 36.8 Africa Europe 50.0 South Asia (India) 35.3 China 27.9 South East Asia (Vietnam/Thailand/ Indonesia) Numbers stated as Net percentage increment. It is important to note, however, that some suppliers are experienced exporters and have developed expertise for international trade. They may prefer to manage their FX risks rather than pass them on. Another consideration is that they may want foreign currency receipts to offset costs, for example a Chinese supplier may have significant US dollar-denominated raw material costs. In either case, better understanding of the embedded FX risks that firms are exposed to can reduce or eliminate the premium built into prices quoted by suppliers. 17 of 26

18 The fulfilment challenge Service improvements and click and collect may help to improve customer satisfaction and manage last mile costs. Retailers are steadily increasing the number of delivery and collection options available to consumers in order to compete successfully. Our research shows that, this year, large retailers will offer an average of seven different delivery options and they plan to add more options over the next few years, reaching an average of 10 delivery options by Meanwhile consumers, particularly younger ones, say they want this greater choice in delivery options, but think that charges are already too high. Delivery issues Responses to our survey reveal that the most common delivery timescale options offered by retailers are three days or more (99%), two to three days (94%) and specific or named-day (87%). Next-day delivery and two-to-three-day delivery timescales are the fastest-growing services. The majority of consumers in our survey said they would be willing to pay more for some sort of improvement or enhancement to the service. The most popular options are faster delivery (59%), Sunday delivery (43%) and specific timeslots (37%). However, it s worth noting that a third of consumers say they are not willing to pay more for any enhancements. While online shopping has boosted growth in retail sales, the majority of retailers say that the amount they charge consumers for delivery does not cover the true costs of handling, packaging and shipping. Average number of delivery and collection options offered by retailers by year As online shopping continues to grow, our survey confirms the likelihood of higher delivery charges in the future. These survey results underline the challenges of reconciling three inter-related factors: customers desire for convenience, the need for retailers to reduce cost of sale and preserve margins; and the ability of logistics operators to respond to these demands and differentiate their services. However, consumers and retailers have different opinions about the price that should be paid for these options. While agreeing that retailers should offer more options, the majority of consumers (64%) say that delivery charges are already too high. Cost is also a major consideration (71.4%) for consumers when it comes to selecting which delivery option to use. The next most important issue is speed of delivery (59.8%) of 26

19 Better rated click and collect Click and collect services from stores tend to be rated more highly by consumers than delivery services. Price is one of the main areas of satisfaction with click and collect, which is unsurprising given that many retailers offer the service for free. Politeness of staff and speed of service are also identified as important factors. Price is one of the main areas of satisfaction with click and collect, which is unsurprising given that many retailers offer the service for free. Delivery is not particularly well rated by consumers Delivery ratings (Percentage of consumers) Speed of service Cost of service Reliability of service Politeness of staff Amount of care taken of your package/parcel Quality of packaging Flexibility to change delivery times or options Amount of information provided Quality of information provided GOOD AVERAGE POOR Our research suggests that further growth in click and collect a much lower-cost service than delivery may be one way for retailers to address last mile costs and meet customers price expectations. In addition to cost savings, collection services also potentially give retailers greater control and more opportunities to provide value-added services in-store. Collection from store generally receives more favourable ratings Speed of service GOOD 49.9 AVERAGE 33.8 POOR 16.3 Feedback from retailers suggests they are already doing this: 69% provide for collection from their own stores two or more days after purchase, while 62% offer the same option from other stores or locations. Our survey of retailers also shows collection the same day, next day and two or more days after purchase are their fastest-growing collection options currently and the highest ranked options they plan to offer in the next two to three years. Collection ratings (Percentage of consumers) Cost of service Reliability of service Politeness of staff Amount of care taken of your package/parcel Quality of packaging Flexibility to change collection times or options Amount of information provided Quality of information provided of 26

20 The ethical dimension Consumers and retailers agree on top ethical concerns but shopping behaviour is not always driven by ethical considerations. When it comes to ethical issues in the supply chain, our research shows that retailers and consumers broadly agree. Of the ethical concerns covered by our survey, child labour is the biggest supply chain worry for retailers, mentioned by 67% of respondents. This is closely followed by causing harm or damage to local communities, working conditions and pollution. By comparison, rates of pay and fair pay are ranked lower. This chimes with the views of consumers: the conditions for, and safety of, workers are the top two rated concerns, followed closely by harm to wildlife and the fair treatment of suppliers. However, some less people-related factors like climate change are still important to both retailers and consumers. Food for thought Looking specifically at the food and drink retail sector, our research shows consumers are most concerned about honesty about ingredients and freshness. Treatment of farmers and fishermen and animal welfare are also on the minds of a majority of our respondents. However, our consumer survey reveals that consumer behaviour is not always driven by ethical considerations. While retailers generally recognise this, they are nonetheless being proactive about taking action over ethical issues, suggesting that this is driven more by good corporate citizenship than by commercial imperatives. This raises some important questions about the way in which retailers communicate with consumers about their ethical credentials. Age is a key factor It is notable that when consumers feedback is broken down by age, the youngest age group, comprising 18 to 24 year olds, is overall more concerned about ethical issues than the oldest age group, 55 years plus. The most marked differences seem to be around environmental concerns. Depletion of resources is ranked 8.1 out of 10 by the younger group, but just 3.9 by the older group. Differences of opinion can also be seen in the results on climate change and pollution. Conditions for, and safety of, workers are the top two rated ethical concerns for consumers, followed closely by harm to wildlife and the fair treatment of suppliers. Percentage of retailers with ethical concerns, and who have taken or plan to take action Factor Ethical concerns % Have taken action % Planning to take action % Child labour Harm or damage to local communities General working conditions Pollution or emissions Treatment of workers Working hours Illegal activity Fraud Poor stewardship of natural resources Slave labour Maintaining quality of products Maintaining CSR targets Fair pay Rates of pay of 26

21 Retailers actions Feedback from retailers demonstrates they are proactive about taking action on ethical issues: almost all have taken or plan to take some form of ethical action over their supply chains. The most common actions taken are around maintaining the quality of products (82%), dealing with pollution or emissions (67%) or maintaining corporate social responsibility targets (66%). Looking ahead at planned actions, fair pay is also high on the agenda, being mentioned by over half of retailers (51%). However, retailers say they have concerns about the level of control they have over their supply chains on ethical issues. This is most likely because their supply chains can be so long that complete control is extremely difficult. Our survey also shows that a greater number of food retailers (39%) feel they have a lot of control over their supply chain than fashion retailers (21%). Impact of ethical concerns on shopping Despite good intentions and some strong views, nearly two thirds of consumers (61%) say that they tend to forget about the ethical treatment of workers when they re buying products. Breaking down responses by age, fewer in the 18 to 24 year old age group agree with this statement (52%) than the 55-and-over group (63%). However, our research still shows that a narrow majority (52%) of consumers of all ages would be willing to pay a little more to ensure supply chains were more ethical. Interestingly, 60% of consumers accept that they are partly to blame for some of the ethical issues because of their desire for lower prices. Slightly unethical If you found out a retailer was slightly unethical in its supply chain, how likely would you be to avoid it and shop elsewhere? Fairly unlikely 44.8% Not really think about it 6.8% Highly unlikely 12.8% Highly likely 12.2% Fairly likely 14.5% Not sure 8.9% Highly unethical If you found out a retailer was highly unethical in its supply chain, how likely would you be to avoid it and shop elsewhere? Fairly unlikely 28.7% Highly likely 19.7% Not sure 8.2% Highly unlikely 9.8% Fairly likely 28.4% Not really think about it Those aged 18 to 24 are the most cynical about retailers, with more of them (67%) saying retailers are becoming worse in the way they behave towards suppliers and people who work in their supply chain than the 55-plus age group (55%). 60% of consumers accept that they are partly to blame for some of the ethical issues because of their desire for lower prices. Changing behaviour Almost two thirds of consumers say they would be unlikely to avoid, or would not think about avoiding, shopping at a retailer that was slightly unethical in its supply chain practices. This figure drops slightly for consumers aged 18 to 24. Unsurprisingly, more consumers say they would be likely to avoid shopping at a retailer that had acted in a highly unethical way. Not only do most consumers in our survey admit they tend to forget about their ethical concerns when shopping, but feedback from retailers shows that they believe that consumer behaviour is not driven by ethical considerations. Asked how much it actually influences consumer behaviour in deciding what to buy and when to shop, 58% of retailers agree with the answer not very much. 5.2% 21 of 26

22 Strategies for success There are a number of considerations that retailers can keep in mind when optimising their supply chains. Use data effectively The use of multiple retail touchpoints has made logistics and supply chains more complex, but they also provide a rich stream of data. Used effectively, this data can be analysed to help predict patterns of demand and streamline planning within the supply chain. Partner up Smaller and medium-sized retailers can piggyback on the supply chains of other providers. This saves the effort and expense of building a supply chain from scratch, especially in a new channel or market. Amazon, for example, allows many suppliers and retailers to deliver and store products in its own warehouses for onward fulfilment, as well as working in partnership with Morrisons and Ocado. Tap into the sharing economy Retailers can make use of the online sharing economy to cope with exceptional demand or pockets of demand that are not large enough to meet traditional supply chains. For example, where same-day delivery is not possible through a business s supply chain, using Uber s courier service may allow it to meet demand cost-effectively. Focus on efficiencies Once retailers have invested in new systems, warehouses and operations, the focus should switch to greater efficiency for example, prioritising deliveries and shipments according to need rather than having a single standard delivery timeframe. Build in transparency and share information Retailers should ensure products are traceable at every step of the supply chain. This allows them to share information with consumers and give them peace of mind about ethical issues. Balance flexibility and rigidity While supply chains need to be robust, at least part of the chain needs to be flexible enough to respond to sudden changes in demand. This means retailers need to be able to scale up and scale down quickly. 22 of 26

23 Put at the heart of the business Effective retailers now view the supply chain as the heart of the business and as a means for satisfying consumer demand. Ensure that supply chain colleagues meet and talk with buyers, store managers, customer insight teams and other customer-facing parts of the organisation. Test, test and test again Regular testing of the supply chain with exercises real or simulated is a good way to ensure systems and operations can cope with changes in demand. Think small, not big Traditional supply chains are geared up to think in bulk: multiple units delivered and supplied to a limited number of distribution points. The model has now changed and needs to be able to cope with single units delivered to many distribution points, including to customers at home. Spread risk This can take many forms, including using a range of suppliers so that a retailer is not reliant on a single source for an important product or commodity, or ensuring that a popular item is not delivered from a single distribution centre. The omni-channel supply chain The supply chain no longer ends when a product is delivered to a store. Omni-channel means that stores are often mini-warehouses or distribution points from which products are supplied to other stores or delivered to customers. As such, retailers need a one stock view of the supply chain, giving them visibility of inventory across the entire organisation. 23 of 26

24 Case study: John Lewis In a turbulent era for retail, John Lewis has emerged as one of the sector s success stories. However, its success isn t just down to shiny new stores and a nifty website. Behind the scenes, the company has revolutionised its supply chain. As Terry Murphy, Director of National Distribution Centre Operations at John Lewis, puts it: The supply chain today looks completely different from 10 years ago. Back then, we were having debates about when to move from fiveor six-day store delivery to seven-day. Now that s old news: the debate s about how to become even faster and more flexible. The changing role of their distribution centre John Lewis extensive investment in its supply chain capacity and capabilities has embraced the spirit of omni-channel, with distribution centres now filling the dual role of stocking stores and directly supplying customers. At a time when many individual customer orders are sent to stores for pick-up, this hybrid model makes sense. It has also changed the way in which John Lewis supplies its shops, with many more items picked in single units rather than in bulk. As Terry Murphy explains: Since we were picking single units for customers, we also provided single units for our stores. That reduces the need for shops to have expensive stockroom space. It s also more efficient that way the best place for stock is upstream rather than in store, so it can be diverted to where it needs to go rather than perhaps being stuck at a branch when there could be strong demand in another part of the country. Distribution centres like John Lewis immense Magna Park are also smart; they have the layout of every shop floor in their systems which enables them to intelligently pick for any part of the store and understand how much stock is needed. Consumer demands As much as John Lewis has been willing to invest in its supply chain and, indeed, has profited from it, like other retailers its hand has been forced to some extent by increasingly demanding consumers. People expect things next day or the same day now, says Terry Murphy. That s the norm. We ve had to react to that and we re now a true 24/7 operation. Even so, it can still be difficult to predict demand, especially when events like Black Friday come along. This unpredictability of demand, especially at peak times, is one of the central challenges for modern retail supply chains. No supply chain can be permanently geared up to operate at maximum capacity, so flexibility being able to quickly ramp up and scale back down again is key. When this doesn t happen seamlessly, the results are plain to see, as recent failures of a number of high profile retailers during Black Friday testify. John Lewis, however, coped admirably with the spike in demand over the period. The secret, according to Murphy, lies in planning and testing. We plan extensively. We look at the nuances and we predict demand. Then we ensure we have adequate capacity to cope. That means opening up some extra capacity, bringing in staff from head office and agencies, and doing as much work as we can before the event. 24 of 26

25 That pre-work includes things like pre-packing items, testing the systems and processes, and ensuring that popular products are spread between different distribution centres so that high demand is not concentrated in just one location. Once Black Friday is over, it s tempting to think of the distribution and logistics teams sitting back and relaxing. However, demand generates returns something the teams have to cope with just as demand starts to pick back up again for Cyber Monday and then the Christmas peak. Adapting to change Despite all of the investment and the increased flexibility, one of the ongoing challenges is that demand grows much faster than the capacity that has been added. However, Murphy is optimistic: It s not just about adding more and more, it s about working more effectively with what you already have in order to increase efficiency and deliver on what the shops and customers need. In this respect, John Lewis has already made changes, bringing in charges for low-value click and collect orders, for example. But there is further to go. It s not just about adding more and more, it s about working more effectively with what you already have in order to increase efficiency. For Murphy, personalisation is the key. At the moment all of our click and collect is delivered next day, but not everyone wants that. Some people may visit their local store just once a week, for example. If we know and understand that, we can prioritise better and that enables us to smooth demand and maximise capacity without physically building more warehouses or taking on more people. This connection between the front end of retail, where the customer sits, and the back end, where logistics and distribution sit, is one of the keys to success. It requires much more coordination and communication between departments and arguably puts the supply chain at the heart of the operation. Murphy says that s exactly where it should be: It s one of the most significant parts of the business if a shop gets it wrong, that s bad, but it s affecting only one shop; if the supply chain gets it wrong, then the whole business really suffers. Terry Murphy Director of National Distribution Centre Operations John Lewis 25 of 26