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Archive for the ‘Operations Strategy’ Category

More on shifting shopping habits and how firms are responding. Specifically, we are again looking at the growth of online grocery sales. The Financial Times has a really nice story examining why the pandemic hasn’t necessarily been a boon for supermarkets (Why supermarkets are struggling to profit from the online grocery boom, Jul 22). On the one hand, stay at home orders have limited the options for dining out; that should be a good thing for supermarkets. On the other, those orders and general pandemic concerns have made people nervous about going to the store. That has led to a boom in online orders either for delivery or for pick up. According to the article, it took 20 years for online sales to account for 7% of UK sales. That percentage jumped to 13% in two months. The problem is that online sales are just not as profitable.

Sainsbury’s chief executive Simon Roberts summed the situation up, saying Covid-19 was “moving sales out of our most profitable convenience channel and driving a huge step-up in online grocery participation, our least profitable channel”.

For some numbers to back up that statement, checkout this eye candy:Screen Shot 2020-08-06 at 10.24.33 AM

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Screenshot 2020-06-27 16.13.04A recurring theme in how the pandemic has changed operations has been that firms are limiting variety. If a firm is having a hard time keeping up with demand surges and shifts, then a basic step is to drop the low runners and focus on the products most in demand. Now the Wall Street Journal has some data on just how significant the impact has been (Why the American Consumer Has Fewer Choices—Maybe for Good, June 27). The graph above shows compares several weeks in May and June this year with the same span last year. The average across all categories is down 7.3%.

There is a similar story at restaurants, where firms have limited their menus to simplify operations,

Screenshot 2020-06-27 16.13.45

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One of my favorite examples I have learned from doing this blog is Chronodrive, a French chain specializing in pick up groceries. Specializing in the sense that this is all that they do. It makes for a nice example since it allows for a contrast between a firm that has tailored all of its operations for one niche against conventional supermarkets that have tried tacking on pick up or delivery onto standard stores.

Of course, in the current environment, lots of firms have had to tack on pick up or delivery options onto their existing stores. To paraphrase Don Rumsfeld, sometimes you have to serve customers with the processes you have, not the processes you might want or wish to have at a later time. But will pick up — some form of click and collect — have legs?

The Wall Street Journal reports that for both restaurants and grocery stores, pick up has been a good business and has been holding up even as states have reopened (Pickup Gains Ground Over Delivery, June 25).

Pickup grocery sales were up 81% in the week ended June 13 from the start of this year, according to Nielsen, while delivery sales rose 33% in that time. At restaurants, carryout accounted for 42% of orders by dollars in May, according to data from research firm NPD Group Inc., compared with a 13% share of sales for delivery. Carryout has maintained its share of restaurant sales since dining rooms began to reopen in May, NPD said, while drive-through and delivery have lost some ground to dine-in orders.

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Two stories today. Both revolve around operating strategies that complicate adapting to the pandemic. One’s about IKEA, the other is about sex toys. Yes, sex toys. We have almost 900 posts on this blog and I think we have never discussed the supply chain for vibrators. But I also never expected The Old Gray Lady to run a story titled “Sellers of Sex Toys Capitalized on All That Alone Time” (Jun 7).

The article starts with the not too surprising revelation that sales of sex toys have spiked during the pandemic but the benefits have been uneven across retailers.

But while big, corporate sex toy retailers seem to have thrived, the same can’t necessarily be said for brick-and-mortar sex shops. As consumers rush to buy sex toys from websites, businesses that usually rely on foot traffic and interpersonal connections with customers are suffering.

Sid Azmi, 37, the owner of Please, a store in Brooklyn that’s been open for roughly six years, explained that despite having an accompanying online shop, she can’t compete with bigger online retailers.

Ms. Azmi said that small businesses often charge more for sex toys: They don’t get bulk-buying discounts from distributors, and they can’t afford to have huge sales on their products. Customers are usually willing to pay more, she said, because of the friendly service and education stores like Please can offer.

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The Financial Times has an interesting set of articles on how the ongoing pandemic impacts supply chains (Trade Secrets: Supply Chain Disruption). These hit on things like toilet paper, firms pivoting to new markets or switching from a business-to-business focus to serving retail customers. The one I want to highlight deals with how any fragility exposed by the pandemic will impact supply chain strategy going forward (Be wary of scapegoating ‘just-in-time’ supply chains, May 27) that links to a post that Gady wrote a few weeks ago.

Here is the gist of the article:

A lot of intellectual momentum is building behind the idea that the Covid-19 pandemic has revealed the foolishness of corporate executives in extending their supply chains without properly assessing the risks. Companies have been thinking of “just-in-time” when they need to be thinking about “just-in-case”. …

The reality is complex, and — a crucial point — differs with each industry. Some, like the car industry, have such sophisticated supply chains involving thousands of different components, some manufactured to extremely low tolerance, that diversifying into different suppliers is totally impractical through effort and cost. Sure, you will have a more resilient supply chain, but you’ll also go bust before the next pandemic arrives.

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A short follow up on Gad’s post from earlier this week on Uber’s interest in Grubhub. There’s a blogpost on The Margins about pizza arbitrage via Doordash (Doordash and Pizza Arbitrage, May 17) that has gotten some attention this week. In a nutshell, the story concerns a pizza shop run by the author’s friend who discovered that (a) Doordash had posted the shop’s menu and started placing orders without telling the pizzeria and (b) Doordash had posted the wrong prices. Wrong as in Doordash was selling a $24 pie for $16. So if the pizzeria owner were to have an accomplice order ten underpriced pizzas through Doordash, he would quickly pocket an extra $80 relative to selling the same pizzas to a real customer. Since Doordash was doing this on their own, that would be $80 of Doordash’s finest venture capitalist supplied cash.

It’s a fun read and worth checking out if only to enjoy the line “Was this a bit shady? Maybe, but fuck Doordash. Note: I did confirm with my friend that he was okay with me writing this, and we both agreed, fuck Doordash.” But there is also an interesting analysis of whether Doordash and its ilk have a feasible business model.

How did we get to a place where billions of dollars are exchanged in millions of business transactions but there are no winners? My co-host Can and my restaurant friend both defaulted to the notion “delivery is a shitty margin business” when discussing this post. But I don’t think that’s sufficient here. Delivery can work. Just look at a Domino’s stock chart. But, delivery has been carefully built as part of a holistic business model and infrastructure. Maybe that’s the viable model.

After the start of this pandemic, my friend actually launched in-house delivery at one of his restaurants. He said he’s starting to get a sense of the economics and explained he’s starting to get a sense of the volume required per location to make the economics reasonably work. That’s what is so odd to me about third-party delivery platforms. The business of food delivery clearly is not intrinsically a loser. Domino’s figured it out. Every Chinese restaurant in New York City seemed to have it figured out long before any platform came along. My friend is figuring it out.

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The supply disruptions affecting some seemingly basic products have been fairly sustained. While it is now easier than it was at the start of the lockdown to fine, say, toilet paper and tissues. Other items continue to be hard to come by. Articles are regularly appearing offering one explanation or another for why [fill in the blank] still isn’t on the shelf.

Take, for example, disinfectant wipes. These are basically on every list of how to be safe during the pandemic. That led to a burst of buying in February and March and the likes of Clorox and Lysol are still trying to catch up. One consideration here is that in contrast to items like toilet paper wipes were not in every pantry before the crisis hit and they also aren’t that easy to make (Why Clorox Wipes Are Still So Hard to Find, Wall Street Journal, May 7).

Disinfectant wipes can’t be made as readily as hand sanitizer. The process combines fabric wipes with the cleaning solution, and the Environmental Protection Agency has in place criteria for cleaners to be considered effective for use against SARS-CoV-2, the virus that causes Covid-19.

And unlike toilet paper, which is ubiquitous in homes and businesses, only about half of American households stocked disinfectant wipes before the pandemic, Clorox’s Mr. Jacobsen said. That led to an even more dramatic demand spike as current wipe users consumed a much higher volume while new buyers sought them out.

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The ongoing pandemic has created a host of problems for a host of industries and supply chains. Logistics providers have had to scramble as demand for some goods has dried up while demand for other items has surged. On top of that, passenger airlines — which play a large role in international air freight — have been hard hit. How is all that playing out? Check out this video:

 

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It’s been a long time since I’ve written anything on supply chain contracts but a story in the Wall Street Journal caught my eye (Retailers Canceling Apparel Orders Amid Coronavirus Torments Clothes Makers, May 5). Basically it outlines how a shift in the standard contract between retailers and their Asian suppliers has come back to really bite the suppliers.

For reference, think of a retailer or brand in the west who outsources production either directly with a factory or through an agent. The factory incurs the upfront cost of sourcing materials and hiring labor in anticipation of being paid once the goods are delivered. But what happens if the market shifts between the order’s placement and delivery? Like, say, there is a pandemic and no one in North America is buying new jeans.

That’s where the shift in contracting comes in.

Letters of credit, a once-common backstop guaranteeing payment through banks, have faded away in the past decade. Under that payment system, the buyer’s bank committed to pay the supplier once the goods were shipped, ensuring factories were paid without delay or last-minute haggling.

Even in cases of force majeure—when retailers say they can’t pay owing to circumstances beyond their control—banks would generally still be obligated to pay suppliers if the goods had shipped, said Sonja Chapman, a professor of international trade at the Fashion Institute of Technology and longtime apparel-industry executive.

Retailers have moved away from letters of credit, opting instead for an open-account system—essentially an honor system—where factories trust retailers to pay after shipment. Factory owners in Bangladesh said they accepted the shift because they worried that if they didn’t go along, a competitor from India or Latin America would. They also are reluctant to speak up or take legal action because they don’t want to alienate buyers.

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Last week I posted on the challenges Starbucks was having with an increasing number of mobile orders. Now, it seems that the company is going to test a different approach: A location that only takes mobile orders (Starbucks to test mobile order and pay-only store at headquarters, Mar 30, Reuters).

Starbucks’ headquarters has two cafes that serve the more than 5,000 company employees who work there. One of those cafes, which is available only to company employees, is among its top three stores in the United States for mobile ordering.

Mobile orders from the building will be routed to the new store, which will have a large window where customers can pick up drinks and see them being made.

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