Supply Chain Disruption Q&A: Your Best Insurance Is Flexibility (with a Side of Grit)

In this week’s interview, Matt Hertz, Co-Founder of Second Marathon, discusses what it would take for retailers and brands, of all sizes, to survive the supply chain disruptions from COVID-19.

Throughout the interview, we discuss:

• The notion of supply chain efficiency and its
• The evolving consumer and the increasing purchasing power they have
• Authenticity and grit as essential parts of businesses’ brands
• Why sustainability can’t be thrown by the wayside

The situation keeps evolving #

What kind of impacts have you seen initially from the pandemic when it started in March to now? Are there specific trends, recent developments? What have you noticed?

The environment has changed dramatically for literally every eCommerce brand I know, and anyone who says it hasn't is probably lying.

Already, it feels as if the retail industry—specifically, eCommerce—has accelerated by two-to-three years. The types of volumes they're doing now, the scale that they're doing them at, is what they had forecasted or predicted to be years from now.

Businesses, especially the high-growth D2C businesses, are seeing tremendous growth. We’ve all seen the charts; it looks like a hockey stick. From 2009 to 2019, eCommerce sales grew from 5.6% of total retail sales to 16%. In the last 8 weeks, it’s gone from 16% to 26%. This is totally unprecedented.

As COVID-19 progresses, and the impact it’s having on the industry evolves, I wouldn’t be surprised if eCommerce hits 30-35% of total retail.

How did the supply chain help, or not help?

Right now, when something goes wrong, it's a quadruple whammy. Businesses are now discovering where they are overly reliant in the supply chain and how that’s creating a lot of pain—either in not producing goods quickly enough or over-producing with nowhere to go.

It’s like Murphy's Law—anything that can go wrong, will. And, that’s true in logistics a lot of the time.

How will supply chain design or strategy change?

The textbooks kind of teach you to build contingency or redundancy into your supply chain. I think it's fairly akin to buying an insurance policy. Like, why do you do it? You buy health insurance or flood insurance for a house, in the event that some major catastrophe comes. But in supply chain it’s less common because it doesn’t align with “efficiency”. Because of this, it’s hitting home for a lot of retailers how important it is to build contingency and flexibility in the supply chain.

The pandemic and its cascading effects are unprecedented, but every business is responsible for reducing risk. When you “own” your supply chain, you make the rules. I say it that way because “owning” your supply chain doesn't necessarily mean that you need to be vertically integrated from manufacturing to fulfillment and shipping. Instead, you can own your supply chain by understanding how your supply chain comes together and knowing the breakpoints. From production and manufacturing to warehousing and final-mile delivery, where are your points of risk and resilience? Are they yours or a third-party’s?

When you’re just relying on yourself, it’s much easier to understand where the breakpoints can be. But, most supply chains aren’t vertically integrated—they don’t operate like that. Instead, most D2C businesses rely on dozens of different, third-party providers. From manufacturing to freight forwarding to fulfillment and warehousing to last-mile delivery, it is critical that you know your breakpoints. It’s the only way to ensure that you are as defensible, mobile, and flexible as possible.

Good businesses will survive this #

Should we be concerned about retailers’ survival rates?

Everyone is dealing with disruption, but most businesses that made headway online will survive this, especially the D2C and the legacy retailers. I’ve been spending a lot of time thinking about what happens when—knock on wood—“COVID-21” comes around. Or, what happens when the next black swan event comes. How can supply chain strategies evolve to reduce the risk of any future event will be a really important exercise for businesses that not only want to survive, but excel and stick around for a long time. And, for the most part, I think that is the plan for most businesses.

What about delivery promises? Will those change?

My absolute thinking is that fast delivery will become even more important, in even higher demand. That may seem somewhat ironic given the slow ship times we’re all seeing right now, but as both essential and non-essential goods get back to normal operational levels, delivery promises will only continue to accelerate.

But, in terms of slower delivery times right now, most consumers have a level of compassion. We all know what’s going on, and in a lot of cases we realize how lucky we are that we can even get the goods we need online.

Every step in the supply chain is overwhelmed right now. In some cases, it’s the brand and the products that are in high demand, or it’s third-party logistics providers who are also seeing spikes in order volumes and having to prioritize certain goods over others, or it’s the last-mile carriers like UPS, FedEx, and the Postal Service with the volumes of goods needing to be delivered. So there’s a lot of different areas that are creating delays.

That said, I also believe that Amazon is only getting even stronger than it was pre-COVID. Once its supply chains are back to normal, it is going to continue to press on the gas and get to one-day and even same-day Prime on the majority of goods. Simultaneously, with Amazon continuing to lead the way, the rest of its competitors must catch up.

Options are clear when eCommerce is the only one #

Has COVID-19 altered buying behavior?

A lot of us live on our phones, especially younger generations. We’re incredibly comfortable buying something through Instagram. We don’t need to go through the traditional channels to try new makeup or get the bridesmaid dress. Right now, the only shops open are online. Under those circumstances, more shoppers are willing to try something new. And if it works as promised, there can be fewer trips to the store.

There’s a level of emotional shock to all of this. We are very much indexing our lives to making things as efficient as possible—saving time spent in stores or running any kind of errand. We’re going to see a lot of changes as a result of that shift.

One prediction is that subscription services will grow even faster. It’s been the hot thing for the last decade or so because of companies like Birchbox, and has been a key element of getting shoppers to try new products. But now, there’s even more opportunity to help consumers “set it and forget it”.

If a subscriber can reduce that extra trip to the store, there are obvious efficiencies gained. Companies will start to figure out how to create more subscriptions options, which will both create a level of operational consistency, but also save consumers’ time, and that breeds loyalty.

How will consumers decide where to shop?

If it’s a commodity, it will depend on which companies have the products and how convenient the delivery promise is to the consumer. Moreso for discretionary spending, deciding where to shop will often come down to brand integrity: Businesses that sell real, quality products and that have an authentic brand that shoppers can trust. Also, a little grit goes a long way. These brands will survive because they will remain attractive to a lot of consumers.

In a lot of ways, we’re seeing some true colors come out because of the disruption COVID has caused. A lot of the mission-driven brands that touted authenticity are being exposed. Customers will remember that. It’s like the Warren Buffett quote, “You only find out who is swimming naked when the tide goes out.”

Also, and I’m not an expert here, but some consumer choices will end up being driven by prevalence—which brands are doing the most effective advertising. With more retail moving online, customer acquisition costs will increase and some won’t be able to afford those increases. Social media lowered the barrier of entry for advertising to consumers, but those costs will increase as volumes do.

In the short-term, what happens to discretionary spending?

Right now, it’s tough with so much uncertainty. But, discretionary spending—those one-off purchases—will continue and they’ll increase as society comes back to life.

Again, those brands that are authentic—that have created a community—will prevail. Trust is a keyword here. An element of trust has always been essential to the buying experience, but it’s multifaceted now. You’re a brand that’s “mission-driven” and “sustainable” and “community-focused”? Show me how.

The onus is on the brands to really demonstrate how they’re mission-driven or the like. Again, authentic. The brands that stick around will be those that sell high-quality products at a fair price with a good story that goes with it.

There’s a brand I know that creates lower-proof spirits. And they kind of check all the boxes: They’ve created a great product with great branding, and now, they’ve collaborated with different restaurants on limited edition t-shirts. The designs are super cool, there’s the scarcity-factor with limited runs on each design, and the proceeds are donated to restaurants that have had to close.

New world, new normal #

What will the new world look like?

eCommerce will continue to be stronger than ever. And, those that have a sincere mission and strong brand appeal will be the clear winners. The pandemic as a supply chain disruption is creating a lot of transparency for consumers. Some transparency is great and strengthens a brand, some of the news we’re hearing was obviously meant to get swept under the rug.

Moving forward, eCommerce will be even more of a beast than it was, right? It's everywhere now. If you're anything like myself—or the millions that have contributed to the 62% increase in retail growth—then your eCommerce uptick has been considerable in the last couple of months.

Everything is going to level out as more businesses reopen, but the growth will maintain itself to a pretty high degree. Even when stores, restaurants, and travel really come back online, eCommerce will sit at a 17-20% share of retail.

Is sustainability more important than ever?

Yes, absolutely. Again, when you think about what consumers care about—authenticity and integrity—environmental sustainability ties right in. We have to care about the damage we’re doing to our planet. Just recently we’ve heard the news about the difference in smog because of the stay-at-home ordinances. That’s memorable.

However, it's really difficult to be this kind of do-good sustainable company if you aren’t profitable—it must start with the financial mission. You cannot do those things if you aren’t making money because, sadly, sustainability isn’t the most cost-effective option.

The other piece of sustainability that I think of often is how the amount of waste is going to accumulate as eCommerce order volumes and percent of total retail sales increases. Especially in packaging.

Think of all the recycling we’re seeing today from the increase in eCommerce orders that we’re getting as we avoid stores. These volumes will soon become the new norm and will only continue to increase. That’s a lot of waste unless cities truly start to recycle and businesses figure out more sustainable packaging options.

If you could look into a crystal ball … ? #

When you look at retail holistically, eCommerce will probably—at the max—plateau around 55-60% of total retail. If that’s the case, we're still only one-third of the way there. And I’m underestimating. Being in the industry, I’m probably biased, but if you take a step back and look at the current state of eCommerce and then imagine it 3-4X-ing in the next 10-15years … what does that even look like?

I'm optimistic. There are a lot of innovations and advancements to be made in the retail and supply chain industries. We’re living through an incredibly difficult situation, but the innovation that results from this time period and the benefits we’ll see are going to be huge. There’s going to be so much change.

In bullet points:

1. Delivery of anything is here to stay. More people have realized the benefits of shopping online. They’ve established a new behavior and many will continue to do so. Every day? Probably not. But more often? Definitely.
   
   
2. Subscription businesses will grow—especially for essential goods and especially among younger shoppers. Subscriptions offer a level of consistency and certainty—giving retailers and brands to stage operations accordingly. It’s also a chance to make shopping incredibly easy for consumers, kind of like what Netflix and iTunes have done. Businesses can save themselves and their consumers more time. It’s a win-win.
   
   
3. If you aren’t selling a commodity, you must create community. Retailers and brands, more than ever before, have to convey to shoppers the value of the brand. For the businesses whose missions have unraveled at the moment of adversity, it will be incredibly difficult to win back the customers they’ve lost. Trust is extremely important.
   
   
4. It's great to be in eCommerce; we are very lucky. The businesses with supply chains that can move goods quickly to customers will win. That requires flexibility in their systems and operations so they can position inventory closer to end consumers so they can be both flexible and efficient.

About Matt Hertz #

Matt has spent his career building, scaling, and managing complex eCommerce supply chain operations. He launched Second Marathon in October 2017 as a way to broadcast what he was doing "in-house": helping brands solve supply chain challenges. Prior to that, Matt began his operations career as part of the founding teams at Rent the Runway and Birchbox. He then joined Shyp as a VP, overseeing relationships with the broader eCommerce ecosystem. Subscribe to Sent Items, his newsletter on eCommerce + logistics: https://bit.ly/2NZvUN7