Editor’s note: This story is part of an ongoing series diving into the opportunities and challenges supply chains face in 2023. Read the rest of the series here.

Many of the constraints to supply that caused headaches in 2021 and into 2022 have eased, for reasons good and bad. (Good: Capacity rebounded. Bad: Demand slumped.)

But shortages haven't disappeared completely. Specific circumstances — from geopolitical and environmental turmoil to localized demand surges and more — are leading to stockouts of some goods.

“The macro conditions around Ukraine, climate [and] China are not changing significantly,” Simon Geale, EVP of procurement at the consultancy Proxima, said. “They're all dragging on.”

While the war in Ukraine has pressured commodities including some food staples, the continued concentration of production in China for numerous industries has also created a whole menu of risks that companies are still managing. China has rolled back its strict COVID-19 protocols and is grappling with a surge in case numbers, but the country could soon rebound economically and spark a new demand rush.

“While China is starting to open up, there's still a big backlog from the length of time they were shut down and turning things on and off again,” Ron Scalzo, senior managing director with FTI Consulting, said. “That's affecting everybody.”

Here’s a look at the goods that could give procurement officers a headache in the coming year.

Food

Last year’s invasion of Ukraine by Russia caused several commodities to spike in prices amid concerns about their supply.

Those troubles remain, though fears of disruptions to wheat have eased after Ukraine’s harvest was larger than expected. At the same time, environmental challenges elsewhere in the world are straining the supply of other important crops, including vegetables.

“The drought in California definitely had an impact on lettuce and tomato crops,” Scalzo said, noting also that recent floods in the state could have additional impact down the line.

Dole COO Johan Linden told analysts in November that the fresh fruit and vegetable producer was seeing “complete crop failure” in key commodities.

“This goes across the whole industry, where almost 30% to 40% of all the iceberg and romaine have failed and that is due to an extreme heat that we had in the beginning or late summer [and] beginning of the fall, followed by rain,” Linden said then.

Against that backdrop, buyers are managing inflated prices and tight supplies. Chick-fil-A, for instance, told customers that “some items may be unavailable or prepared differently” and Subway said it would temporarily use less lettuce in its sandwiches.

Eggs have also come under strain as avian flu has laid waste to flocks and driven up costs for farmers. Market prices per dozen eggs at the end of 2022 were up nearly fivefold from last January, according to USDA data. The term “eggflation” has, for better or worse, entered use.

“You can probably find eggs, but the prices have tripled in some cases,” Scalzo said.

Dine Brands Global CEO John Peyton complained in November that business expenses were falling more slowly at its IHOP chain compared to Applebee’s because “IHOP’s costs remain inflated due to the stubborn cost of eggs” as well as the war in Ukraine’s effect on grain prices, which feed into pancake batter.

Denny’s Corp. CFO Robert Verostek told analysts in August that commodity inflation had reached “unprecedented levels,” which included eggs along with pork, beef, dairy, poultry and other foods.

As often happens, tight supplies can translate into a boon for suppliers. In late December, Cal-Maine Foods, which calls itself the largest producer and distributor of fresh shell eggs in the U.S., logged a 110% spike in net sales and record profits, driven by highest-ever egg prices.

Lithium and other EV components

With electric vehicles seen as key to a global energy transition and decarbonization, demand has been on the rise for key commodities used in battery production and other green engineering components. The Inflation Reduction Act, which included incentives for EVs, is expected to raise demand yet further in the years to come.

Prices for lithium — a crucial material to making batteries — have soared with global consumption rising 33% in 2021 compared to 2020, according to the U.S. Geological Survey.

Lithium hydroxide prices were up 156% YoY in December, according to S&P Global Commodity Insights. The consultancy BCG noted in an August report that the price of lithium has increased ten times over in the past two years. High prices are likely to persist as chronic shortages loom, according to BCG.

“Costs are going up, demand is going up, supply is tight,” Geale said.

EV makers are feeling the pain. Tesla’s costs are likely to rise after a lithium supplier amended their agreement to peg the EV maker’s lithium costs to market prices, rather than at fixed prices as in their past agreement.

“[I]n electric vehicles, things like battery-grade lithium are still crazy expensive,” Tesla CEO Elon Musk said in October.

Supplies of other important materials for battery production are also under strain. Graphite, one of the primary components in the anodes of lithium ion batteries, has faced pressure as demand rises, with expanding shortfalls predicted over the next decade.

Shortage fears have also risen around cobalt, which was included in a Government Accountability Office report last year as a critical material for advanced technologies with high supply chain risks due to the U.S.’s reliance on imports.

Pharmaceuticals

“Tripledemic” is another recent addition to the lexicon, describing parallel spikes in various respiratory illnesses that hit the world’s population of children hard this year. The trend has pressured demand and supply for medicines common for children during the cold and flu season.

Stories abound of empty shelves and desperate parents. In December, drugstore giants CVS and Walgreens began limiting sales of over-the-counter children’s fever relievers including acetaminophen and ibuprofen. Walgreens said at the time that sales caps were meant to “prevent excess purchasing behavior” amid demand surges.

A form of amoxicillin used to make liquid doses for children also reached an “acute shortage,” according to the Food and Drug Administration in November. The agency said then that the supply shortfalls could “lead to potentially serious or life-threatening situations in particular in the pediatric population” as the respiratory illness season peaked.

The FDA has been working for more than a decade to combat pharmaceutical shortages. With many common medicines, the margins are thin, leaving little incentive for producers to build up excess capacity or stock.

In the case of amoxicillin, capacity is difficult and expensive to ramp up due to lack of flexibility in the equipment and processes used to make the drug.

“There’s not a short-term capacity answer for this,” John Gray, a professor of operations with Ohio State University’s Fisher College of Business, told Supply Chain Dive in December.

Also in short supply is the drug known by the brand name Adderall, used to treat attention deficit hyperactivity disorder, or ADHD. The FDA issued a shortage notice for the drug in October, noting that manufacturer Teva is “is experiencing ongoing intermittent manufacturing delays.” Supplies of other ADHD drugs are also reported to be under strain.

Semiconductors

The global chip micro shortage will enter its fourth year in 2023 after multiple disruptions stemming directly or indirectly from the pandemic.

Semiconductor constraints have caused headaches and delays for multiple industries. Supply is increasing for some chips, and 2023 could be the year when, finally, most of the industry stabilizes.

Reduced demand amid a global economic slowdown has lessened the pressure on supply. TSMC CEO C.C. Wei said in the company’s fourth-quarter earnings call, “As customers and the supply chain continue to take action, we forecast a semiconductor supply chain inventory, while reduced sharply through first half 2023, to rebalance to a healthier level.”

Chokepoints remain, though. As Kazunari Kumakura, chief officer of Toyota Motor Corp’s purchasing group put it in November: “[I]n some semiconductors, the supply is getting better and in other semiconductors the chips remains in short supply.”

As with lithium, the U.S. government is trying to boost domestic chip production. In August, President Joe Biden signed legislation that included billions of dollars in subsidies to boost U.S. chip manufacturing with a 25% federal tax credit for companies investing in semiconductor production.

Walmart completed more than 6,000 drone deliveries in 2022, according to a company announcement Thursday.

The achievement follows the company’s rapid expansion of the transportation method's availability. Walmart now has 36 U.S. stores with drone delivery hubs, which are operated by DroneUp, Flytrex and Zipline. The stores are located in seven states — Arizona, Arkansas, Florida, North Carolina, Texas, Utah and Virginia.

The retailer still has a long way to go to reach its goal of 1 million packages delivered by drone annually. Still, it is encouraged by the positive response from customers and looks forward to making more progress in 2023, Vik Gopalakrishnan, Walmart U.S. vice president of innovation and automation, said in a statement.

Walmart and its partners currently offer up to 20,000 items available for drone delivery, according to a company fact sheet. Customers' favorite items delivered by drone include Great Value Cookies and Cream Ice Cream, rotisserie chicken and Bounty Paper Towels.

Despite weight and range limitations, drone delivery offers the speed necessary to effectively deliver a temperature-sensitive item like ice cream, as it takes 30 minutes or less for a drone to deliver after an order is placed, per Walmart.

“I’m incredibly proud of our team for creating the largest drone delivery footprint of any U.S. retailer and providing customers with an incredibly fast – and innovative – option for delivery," Gopalakrishnan said.

Walmart said in previous announcements on rollouts in Arizona, Florida and Texas that customers within one mile of participating stores are eligible to use the service.

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By BlueGrace Logistics

The global supply chain has been stressed by things like COVID-19, inflation, labor shortages, overwhelmed ports stranding cargo ships offshore, increased reliance on China, and the war in Ukraine. This has led businesses to reconsider their trade and manufacturing practices.

Two strategies for retail manufacturers that have become more common to hear about are nearshoring and friendshoring. What are these practices, how do they differ, and what could it mean to adapt them to your retail business plans?

What is Nearshoring?

Nearshoring is the act of relocating business operations to a nearby country, commonly with a shared border. An increasing number of companies are investing in plans to relocate closer to their target markets. So it’s not surprising that the Trade in Transition 2023 global report found that nearshoring has increased by 8 percent since 2021. And McKinsey and Company reported that some manufacturers, especially in the apparel industry, are employing nearshoring and automation to boost profitability and their competitive stance online.

Benefits of Nearshoring

Nearshoring has its advantages.

This approach can:

• Ensure faster speed to market and shorter transit time to customers from manufacturers.
• Reduce or eliminate import tariffs on goods and reduce shipping costs.
• Enable collaboration through real-time communication within similar time zones. This allows for more agile and efficient operations and is possible in areas where reliable communication infrastructure and internet connections are available.
• Offer affordable labor and shipping costs and reduce the need to attain scarce shipping containers and long port delays.
• Provide better control of your supply chain by being in closer proximity to you and your customers. So, you can more easily visit the facility and monitor operations.

Challenges of Nearshoring

Although nearshoring can be beneficial, it can be costly and time-consuming to implement since you are relocating operations to a different geographic location. Employing this strategy can potentially increase the cost to manufacture the product, leading to increased product costs or decreased profits.

What is Friendshoring?

Friendshoring is a term coined by the White House and Treasury Secretary Janet Yellen who spoke about friendshoring during her visit to Toronto last June. The practice of friendshoring shifts to suppliers in countries perceived as politically and economically safe or low-risk to avoid or minimize supply chain disruptions due to geopolitical issues.

The US government has already started to redirect its sourcing for components and raw materials to “friendly” countries with shared values to increase domestic production. And, Apple has also implemented friendshoring by taking steps to relocate some of its iPhone production to India from China. (link)

Benefits of Friendshoring

The perks of relocating operations to allied territories enable you to maintain close relationships with trade partners and more closely monitor operations.

This strategy can also help you build a more resilient supply chain.

Challenges of Friendshoring

Friendshoring has its issues. Identifying “friends” in such a complex and continually evolving geopolitical environment can be challenging. And the World Trade Organization predicted that a split in global trading into Eastern and Western could potentially result in a 5 percent drop in G.D.P. Plus, there is a chance that shifting to politically favorable partners could make your products more costly.

One consideration is that shifting from an established partnership to a new one, regardless of the reason, carries quality, reliability, and overall performance risks.

Another consideration is that shifting from an established partnership to a new one, regardless of the reason, carries quality, reliability, and overall performance risks. The transition period requires active management to ensure the old supplier, receiving less or maybe no future business from you, continues to perform as you ramp up your new supplier. Plus, there is always the possibility that a competitor could take up with the supplier you are transitioning from, threatening the availability of materials from that source.

Weigh Your Options

Nearshoring and friendshoring aren’t for everyone. If your supply chain is working well with your current global partners, it may not be time to make any changes at this point.

But, if you have been experiencing frequent disruptions in manufacturing and transportation, these may be viable options to consider.

Amazon plans to expand its same-day delivery service by growing its specialized fulfillment center footprint.

But the sped-up option could come with added fees, according to a report from the Wall Street Journal. The company's decision to lean into ultrafast delivery comes as Amazon’s record-breaking pandemic-era sales declined. Amazon executives on an earnings call earlier this month said expanding one-day delivery is a priority. They echoed that sentiment in a statement Monday.

“We’re always exploring ways to bring our customers new levels of convenience and delivery options that work best for them," Sam Hockenberry, Amazon's director of same-day sites said in a statement provided to Retail Dive. “Same-Day Delivery is one of the latest innovations that offer Prime members access to hundreds of thousands of items, delivered within hours. We've heard great feedback from customers and also continue to see new customers trialing the service, with more than a million and half customers trying Same-Day Delivery for the first time, every month.”

For Amazon’s retail customers, this means the possibility of choosing from 100,000 SKUs for delivery within hours, according to Marc Wulfraat, president of MWPVL International, a global supply chain and logistics firm. “Amazon’s approach is basically a five-hour service level which is enabled by building a combination mini fulfillment center and delivery station under one roof which they call a sub-same day delivery station of which there are 46 currently active in the USA,” Wulfraat said in comments emailed to Retail Dive.

Amazon’s net sales increased 9% to $514 billion in 2022, up from $469.8 billion year over year. Operating income decreased to $12.2 billion in 2022, compared with $24.9 billion in 2021. Amazon reported a net loss of $2.7 billion in 2022 compared to net income of $33.4 billion in 2021.

CEO Andy Jassy said fast delivery helped drive customer demand in Amazon’s retail business in the fourth quarter and for the year. On the Q4 earnings call, Amazon CFO Brian Olsavsky said the company was working "to get our speed of delivery up to get more one-day shipments" and that that would "be well received by Prime members." 

The sub-same day facilities enable Amazon to deliver its top 100,000 SKUs to customers within a 60-minute radius of drive time, Wulfraat said. These facilities are much smaller than a typical Amazon fulfillment center and are designed specifically to prepare products for immediate delivery.

Here’s how Amazon’s approach works, according to Wulfraat: orders are picked within 15 to 30 minutes of receipt. They’re packed and sent down a conveyer to the Amazon Flex driver’s car, and the Flex driver then makes the deliveries over a four-hour block of time. 

Amazon has 1,285 active distribution facilities in the U.S. that together represent over 409 million square feet of logistics space, according to MWPVL. Amazon also has an additional 231 facilities planned in the US. If all those facilities open, Amazon will gain 82 million more square feet of fulfillment-related space.

Wulfraat said larger cities like Chicago and Los Angeles will need several sub-same-day facilities. Cities with around 1 million people will likely need only one of these delivery stations. Amazon plans to build or operate 150 SSD facilities over the next several years according to the company’s analysis. “Once done they will have the larger cities covered with a same-day 5-hour service level full stop.”

But Wulfraat notes that this level of service comes at a cost.

“The business model is predicated on extensive use of gig workers who do not have benefits and therefore are a much cheaper labor force than the retailer’s labor resources,” Wulfraat said. “The question is whether or not state governments will legislate against the use of this labor at some time in the future which would truly shift the playing field. California will be most likely the first to make this move.”

Meanwhile, retail rivals Walmart and Target are also enhancing their super-fast delivery options. Target said recently that it plans to spend $100 million on a next-day delivery initiative. Target, however, is developing an in-house sortation center network to deliver packages efficiently in larger metro markets. And Walmart is also using in-house resources for last-mile delivery from stores to consumers, Wulfraat said.

“All of the competitors in this space use an approach whereby a gig worker is a valet shopper that goes into the store, shops the order and makes the delivery – which is a high-priced approach to providing the convenience – but the primary way to enable 2-hour (or less) delivery service level,” Wulfraat said.

In contrast, Wulfraat said it does not appear Amazon intends to offer a two-hour level of service “to the best of my knowledge but the future is a big place so who knows if this is on the planning table as a logistics service offering that could be provided to other retailers.”

Other retailers will likely partner with existing third-party providers like Instacart, DoorDash and Shipt to offer speedy same day delivery service said Wulfraat because “ it is too costly to develop one’s own in-house capabilities unless there is a significant package volume being moved this way so it will be better for most firms to outsource.”

 

For many companies, an unexpected bill for $400 million would be a crucible, if not the beginning of a tailspin. For Walmart, the world's largest company by revenue, it was a mere speed bump.

That figure, $400 million, was what the company spent on supply chain costs above management's original estimates for the fourth quarter of 2021, which ultimately yielded some $3.6 billion in net income. 

For the two legacy, mass merchant giants Walmart and Target, a year of unprecedented supply chain turmoil raised costs and posed some challenges, to be sure. But their scale and vast financial resources allowed them to absorb that disruption.

Their ability to stock shelves kept Walmart and Target's sales growth strong — piled on top of surging growth for both in 2020 — and in large part helped them to offset the cost of getting goods into the country and to their stores.

Both retailers have a fine line to walk on prices, which have spiked throughout the economy with supply chain costs. To differing degrees, Walmart and Target rely on value in their brand promises to customers, to make themselves destinations. Yet they are operating in inflationary times, watching their costs increase while competitors hike prices and struggle to stock their own shelves. 

RBC Capital Markets analyst Steven Shemesh said in a February note, ahead of Walmart's earnings release, that the retail giant was among the "better positioned to offset cost pressures."

That is thanks in no small measure to financial firepower. "At this point, it's well understood that Walmart has elected to eat a portion of supplier price increases to maintain low prices for customers," Shemesh said. 

At the same time, Walmart and Target also pulled back on discounts and sales for customers, which also helped their bottom lines. The industry's struggles to stock inventory during Q4 and 2021 more generally makes it that much easier for everyone to pullback on sales promotions.

Walmart's gross margin rate increased by a "healthy" 54 basis points in Q4, which reflects "primarily price management resulting from cost increases in mix," Walmart Chief Financial Officer Brett Biggs said in the company's February earnings call. In other words, the company did nudge prices up to manage its own rising costs.

In a world of rising prices, though, a price decrease is a competitive edge. Walmart has the deep pockets and the leverage with suppliers to do it, even now. Walmart CEO Doug McMillon during the call said that it was "working closely with our suppliers to manage inflation, finding a few places where we can roll back prices."

For Walmart, price itself may not be as important as "price gaps" — the difference in price tags between Walmart and its competitors. 

"We're constantly monitoring our share, our price gaps to competitors," said John Furner, chief of Walmart U.S. "And we'll continue to do that as we move forward. And then what we're seeing right now is not only gaps that we're proud of that are valuable for our customers, but we're also seeing the opportunity to increase some of our rollbacks in stores."

And while Walmart tried to navigate its pricing to maintain customer perceptions of value, its inventory position provided another differentiator. "Going into the period, some competitors appeared tight on inventory, but Walmart seemed well positioned," said analysts with MKM Partners in a note just ahead of the retailer's earnings announcement, noting that the retailer's inventory was up 11% year over year at the beginning of the period. 

As with pricing, Walmart's deep pockets helped in that regard. It famously chartered ships and made many other moves, large and small, to ensure it was stocked for the holidays.

Walmart has also taken a few pages out of rival Amazon's playbook and developed a few side hustles that during the quarter and year helped buffer its bottom line from supply and freight cost increases. Its advertising business passed $2 billion dollars, while its membership revenue (which includes both its Sam's Club and Walmart+ memberships) added billions more. 

The retailer has also launched third-party fulfillment and delivery services it is selling to other retailers and brands. Walmart Fulfillment Services grew 500% in 2021, as the company looks to increase the seller base to its online marketplace while also giving those sellers a reason to spend advertising dollars with the company. 

Target, meanwhile, was similarly able to use its size and scale to grow its sales and navigate supply chain turmoil. The retailer's comps rose 8.9% in the fourth quarter and 12.7% during the 2021 fiscal year. And even as it absorbed higher freight, supply chain and merchandise costs, its operating profit and margin rate grew thanks to higher sales. 

Target also navigated the cost increases through its merchandising mix, presumably emphasizing higher-margin goods, and held back on customer promotions. But while the retailer is willing to slow its discounts, it appears hesitant to raise prices more than needed. 

"We have many levers to combat costs, and price is the one we pull last, not first," Michael Fiddelke, Target chief financial officer, said during a recorded investor meeting in March. "As a result, product costs within our assortment have risen faster than retail's in recent quarters, reflecting this intentional approach and deliberate pacing. We expect this trend to continue, particularly in the first half of this year as we maintain our focus on affordability for our guests."

The retailer, along with Walmart, touted its agile supply chain as the holiday period began and talk of a crisis started filling the news. Target hired en masse for its supply chain, moved containers to bypass the congested Long Beach and Los Angeles ports, increased night pickups, and ran its supply chain operations 24 hours a day, among other things. 

"We have the global scale to keep the product people want and need moving through our pipeline," CEO Brian Cornell said during the investor meeting. 

Yet, Neil Saunders, managing director of GlobalData, pointed to product shortages, including in holiday decorations and sundries, during the period.

Saunders said in emailed comments that some Target shops were "looking spartan towards the end of the period." But Saunders also noted that "with supply chain issues affecting all retailers, Target was not alone in this and given the elevated demand it faced, we believe it handled the holiday period very well."

Despite its namesake, inventory excess isn’t really a problem at Overstock.com. That’s for the simple reason that the online home goods retailer doesn’t hold much of its own product. 

The company pioneered the dropship model back in the early days of internet shopping and today has a network of 2,600 partners that sell through the website. 

In one sense, that has made the company’s model relatively immune to the operational headache of inventory pileups other retailers have contended with. But for Overstock, it’s everyone else’s excess that has been the problem. 

The company’s revenue fell by 30% in 2022, and it lost some of the market share it had gained in the period since the pandemic began, which initially brought a surge in both online and home goods shopping. 

As peers struggled with falling demand and inventory buildups, they have discounted heavily to goods flowing and sales from cratering. And with prices falling, Overstock lost some of its competitive advantage last year. 

“It's created more people playing in our space that really can't afford to play there,” Overstock CEO Jonathan Johnson said in an interview. 

Expensive, slow-moving stock

Overstock might not own most of the inventory it sells through its website, but inventory gluts at its suppliers have a major impact on the retailer’s business. And the movement and pricing of that inventory is not always a simple matter of supply-and-demand economics. Banks and other financial players play a role in the sector’s inventory and sales dynamics. 

Overstock suppliers still have excess inventory bought when stock was expensive to acquire because of supply chain dynamics, Johnson explained. Now inventory is cheaper to bring in, at the same time as consumer demand is falling. But asset-based lenders that use inventory to back loans, and thus tie loan amounts to inventory value, can prevent suppliers from discounting that inventory deeply enough to move it. 

“Sometimes the banks are managing those receivables,” Johnson said. “And banks don't necessarily think like retailers who need cash freed up so they can make more cash. They think, ‘We need the full return on our loans.’” 

The upshot of all that is suppliers in the sector are still working through old inventory more slowly than they and retailers would prefer. 

To Overstock’s advantage, in Johnson’s view, is the company’s strong cash position, which helps it pay on a quicker payment cycle — 15 to 30 days — than suppliers might find elsewhere in the industry. That helps those suppliers turn their inventory into cash and keep their financial backers happy. 

Johnson told analysts in February that the company anticipates the current industry inventory glut to continue at least through the first half of 2023. 

Winning over new suppliers the old fashioned way

As Overstock eyes future growth and tries to win over new suppliers and brands to sell on its website, the company has done something it doesn’t normally do: buy inventory.  

Specifically, the retailer is trying to grow its presence in what it calls giftable home products such as housewares and small appliances. Items, Johnson says, that one finds on shelves of struggling retailer Bed Bath & Beyond, which has been scrambling to avoid bankruptcy in recent months. 

That company’s problems have become famous. Bed Bath & Beyond’s CEO said in January that its inventory cratered in Q4 as suppliers — concerned about the retailer’s financial viability — tightened up terms and pulled back on shipping to the company.

Analysis from DataWeave in January found that Bed Bath & Beyond’s inventory availability plummeted in 2022 beginning in July and worsening through the year, while levels among its peers remained stable. 

As often happens, one retailer’s loss is others’ gain. “We saw an opportunity to go to those suppliers that either weren't getting paid or canceling their contracts [with Bed Bath & Beyond],” Johnson said. 

And so Overstock has been trying to win over new brands, or convince others to increase their depth of product and sales with the retailer. Some wanted assurance that their products would sell on Overstock, so the company took the rare step of purchasing inventory from some brands.

“Some of them we said, ‘Look, we know you may have questions about our model — we’re going to prove it to you; we’re going to buy some [inventory],’” Johnson said. 

Had those brands plugged into Overstock’s dropship system, Johnson argued, they could have sold more, and more quickly, after the retailer cleared through the (admittedly conservative) inventory purchases it made. 

“Frankly, they left money on the table,” Johnson said. “We bought some, and sold out of it.”

In the story of Bed Bath & Beyond’s bankruptcy, which hit the court docket Sunday after months of speculation, the retailer’s suppliers and supply chain play leading roles. 

The company is in Chapter 11 today partly because it could no longer afford to pay vendors and fully stock its shelves without protection from creditors.

As Bed Bath & Beyond’s recently appointed interim CFO and chief restructuring officer Holly Etlin put it in court papers, the retailer “is simply unable to service its funded debt obligations while simultaneously supplying sufficient inventory to its store locations.”

However, the troubles with suppliers started long before the filing. Etlin, a managing partner with AlixPartners who is frequently tasked with taking on interim executive roles at struggling companies, said that by early 2019 the retailer’s supply chain, along with its product development, was outdated and supported by old systems. 

When the retailer brought in Target veteran Mark Tritton as CEO later that year, the chief went all-in on omnichannel and private label brands.

Those strategies had proved successful for Target. But Etlin said Tritton’s new initiatives “proved too much for Bed Bath & Beyond’s supply chain to handle.”

The private label products had longer production and shipping lead times compared to the national brands with which the retailer, as Etlin put it, “built its reputation and customer base.” And customers weren’t as enthusiastic about the new assortment as hoped. 

Moreover, the pivot to private label led to “changes to previous long-standing vendor relationships,” Etlin said.

Buying shares, losing cash, spooking suppliers

In November 2021, Bed Bath & Beyond announced that it was significantly speeding up a stock buyback program, spending $400 million in cash in the second two quarters of that year to repurchase its own shares.

The buyback blitz, a move to return capital to investors, came just over a month after retailer reported a net loss and 1% decline in comparable sales, a disappointing quarter after a surge in sales and profits earlier in the pandemic as consumers invested in their home spaces. 

Etlin said that the buybacks “caused some concerns amongst its merchandise suppliers, with vendors fearing the Company would not have enough cash on hand to pay them in full, resulting in some vendors scaling back their business with Bed Bath & Beyond.”

Suppliers had every reason to worry about the cash the retailer was spending on its shares. At the end of September 2021 — just prior to the buyback acceleration — the retailer had cash and equivalents amounting $1.1 billion, and liquidity of $2 billion, according to its earnings for that period. By the next June, when Tritton stepped down, both cash and liquidity had each fallen by around $1 billion. 

A vicious cycle took hold. As Bed Bath & Beyond’s finances became ever tighter, the company began slowing payments and trimming orders with suppliers, sending some of them to competitors, according to Etlin.

Wary suppliers pulled back and tightened terms, demanding payment sooner or cash up front, as the company’s new CEO, Sue Gove, said later. Tighter terms crimped the company’s liquidity ever more. Meanwhile, the scaled-back shipments meant fewer products on shelves and significantly lower sales for the company, and thus less and less cash coming in the door. 

By January of 2023, Bed Bath & Beyond consistently trailed competitors Wayfair, Home Depot, Kohl’s and Lowes in inventory availability across major categories, according to an emailed analysis from Dataweave. 

After Bed Bath & Beyond’s inventory levels began a steep decline last summer and bottomed out in February, inventory began ticking back up in February, according to Dataweave. The company made securing cash and inventory a priority, including through a new consignment program, announced a couple weeks before it filed. 

But the last-ditch efforts weren’t enough to save Bed Bath & Beyond. By the time the retailer filed, it decided to wind down its business by closing all its stores and selling off the remaining assets, including its brand property. 

Even with liquidation pending in the coming months, the company still needs the support of its suppliers to do so in an orderly and effective way, and has sought court permission to pay key vendor bills. 

As the company put it in court papers, Bed Bath & Beyond “can ill-afford severe disruption to their flow of Merchandise at this critical juncture.”

At Foot Locker’s investor day last week, the company set its sights on exceeding $10 billion in revenue, which interim CFO Robert Higginbotham described as a “long-term ambition.”

“The path to get us there, again, is to simplify our business, invest in our core assets and capabilities, in order to drive sustainable growth,” Higginbotham said. “And what that means is that 2023 will be a reset year for us as we absorb changes to the business, exit certain businesses, optimize our store footprint and accelerate investments.”

Dubbed “Lace Up,” the new strategy is aimed at resetting Foot Locker’s business by focusing on four priorities: Expanding sneaker culture, refreshing its portfolio, deepening relationships with customers and improving its omnichannel operations. To do so, the retailer will increase its average annual capital expenditure run rate by more than $50 million over the next few years, with an emphasis on investing more in technology.

“Over the last decade, we have invested at a level below the industry benchmark,” Chief Operations Officer Elliott Rodgers said of the retailer’s tech investment. Rodgers noted that tech investment will now be at or above 3% of sales, and capital expenditure in the area will increase by 50% over the next four years. 

“This acceleration will not only be an enabler of growth in our digital channels, but will create a more efficient, nimble and digitally enabled organization,” Rodgers said. “Our digital transformation will create a more agile, modern platform: The improvements will not be limited to technology. They will include improvements to our processes and ways of working.”

Changes include ditching legacy platforms in favor of more scalable architecture, switching to a more agile operating model to increase speed to market, and improving efficiency and flexibility in its supply chain network. The retailer moved from two centralized distribution centers to three regional distribution centers, so that now 95% of customers and Foot Locker stores are within two days of the company’s product.

Improvements to the retailer’s digital channels are also underway. Foot Locker is updating its website with personalized product recommendations, improved search and navigation, better product visuals and in-depth ratings and reviews, according to Peter Scaturro, senior vice president of strategic planning and growth. The retailer will also relaunch its mobile app to “drive energy, commerce and connectivity across our customer base.”

“In 2022, over 80% of our traffic came through mobile,” Scaturro said. “So our customer is telling us how and where they want to engage. It's on us to make sure that experience is immersive, drives loyalty and ultimately connects our customer to the category and the products that they love.”

Right now, Scaturro acknowledged, the retailer is “trailing the broader market” when it comes to digital penetration. 

“We finished 2022 in the high teens, right around 17%, while much of our competitive set are in the 20s, and the broader marketplace is actually double that,” Scaturro said. “So there's a sizable gap for us to fill.”

Foot Locker’s omnichannel shoppers spend more than three times what its single-channel shoppers spend, but they account for just 7% of the retailer’s customer base. 

“Many of our peers are two to three times higher than that,” Scaturro said.

To increase its omnichannel shopper base, the retailer is focused on growing digital sales and engagement. Foot Locker’s goal is to achieve 25% digital sales by 2026, or close to $2.5 billion.

“This is going to be a journey. It's not going to happen in one month or one quarter,” Scaturro said. “It's going to require a multiyear strategic roadmap across our technology and supply chain infrastructure to get us there. But we're confident that we can get there.”

Party City continues to shrink its physical store footprint as part of its ongoing Chapter 11 bankruptcy case.

The retailer is closing nine additional stores after failing to reach agreements with landlords, A&G Real Estate Partners said last week. The party goods retailer filed for Chapter 11 bankruptcy in January and is looking to shed leases as part of its reorganization. The retailer announced 22 stores would close in February and in January asked to be released from 28 other store leases. A&G has so far put 33 Party City stores up for auction. 

As part of the company’s post-bankruptcy plan, Party City said in a regulatory filing that it will seek to go private.

Store leases are now up for auction at locations in Marina, Palmdale and Lodi, California; the Bronx and Staten Island, New York; Noblesville, Indiana; Lancaster, Ohio; Midwest City, Oklahoma; and Walker, Michigan. Bids are due Monday and the auction is set for Friday. The latest locations up for auction range in size from about 10,000 to 21,000 square feet. Some are freestanding, while others are in city streetfront or power center locations.

The company reached $2.35 billion in revenue in 2019. But the pandemic hit Party City hard as most people canceled in-person celebrations, events and gatherings during the early weeks of the global COVID-19 health crisis. The pandemic cost Party City $174 million in EBITDA in 2020, the company said. At the end of 2021, the company said it had $1.4 billion in debt. 

Mandatory store closures as a result of lockdown orders, pandemic-related supply chain disruptions and inflation all “consumed vital liquidity, thus limiting the Company’s ability to adequately fund critical growth initiatives,” the retailer said in an 8-K regulatory filing from earlier this month.

One of those growth initiatives includes the company’s strategy to modernize its stores. As of the regulatory filing, Party City said it had opened or remodeled 186 next-generation stores. These stores feature category store-in-stores, “with a balloon shop and customer engagement center as the epicenter,” the retailer said.

At the time of its Chapter 11 filing, Party City had over 800 company-owned and franchised stores. However, the franchised locations are not part of the bankruptcy proceedings. According to regulatory filings, the company has 770 company-owned locations and 53 franchised locations.

A&G, which specializes in lease optimizations and real estate sales, also said Thursday that Michaels and Five Below acquired five Party City leases in an earlier auction pending bankruptcy court approval. Michaels acquired four leases — in Corpus Christi and Dallas, Texas; Alexandria, Louisiana; and Irondequoit, New York — and Five Below acquired a lease in Alameda, California.

In a March announcement about an earlier round of lease auctions, Andy Graiser, A&G’s co-president, said Party City “is working closely with us to maximize the performance of every location in its store portfolio, with a view toward achieving financial metrics that will best support the go-forward fleet.”

Speaking to investors and analysts on day two of its annual investors meeting, executives reminded their audience that Walmart’s inventory sits within 10 miles of 90% of the U.S. population.

For decades the retail giant has staked its growth and profits on this vast brick-and-mortar network of what is now more than 5,300 locations, including 600 Sam’s Club warehouse stores. Despite the fact that it sees huge potential in e-commerce, and is targeting much of its investment to stoking online sales, that footprint remains crucial to its success.

To the extent that a brick-and-mortar fleet is an advantage, it’s not one available to Amazon, which has a much smaller footprint of much smaller locations, mostly Whole Foods. During Wednesday’s meeting, which was broadcast via video conference, Walmart U.S. CEO John Furner called the company’s stores “the key nodes” in its omnichannel operation.

“That’s important because we know customers want speed,” he also said. “And we also know that the last mile costs more than the middle mile, and the middle mile is more costly than the first mile. So having 4,700 points of distribution shortens the last mile, lowers delivery time and it lowers costs.”

In the next five years, nearly 90% of Walmart’s capital expenditures will be in “high return areas like e-commerce, supply chain and store investments,” Chief Financial Officer John David Rainey said. Within three years, by the end of its fiscal year 2026, Walmart said it expects about 65% of its stores will have automation capabilities, 55% of its fulfillment center volume will move through automated facilities, and unit cost averages could fall by some 20%.

In recent days Walmart has notified several states of layoffs at many of its e-commerce facilities, which so far top 2,300. Executives Wednesday said they envision hiring more people in the long run, for better jobs at better pay for what will be a bigger, more profitable enterprise.

“Further scaling precisely these types of investments is what will allow us to realize a profit inflection in the next five years,” Rainey also said.

UBS analysts led by Michael Lasser also see it that way, saying that these “improved efficiencies should help it accelerate its flywheel.”

“Importantly, the tech being used can help the co. improve throughput, accuracy, & even reduce backroom labor demands over time,” Lasser said, noting that as much as half of robotically assembled pallets go directly to store floors, allowing human associates to work more efficiently on the store floor. 

Walmart on Tuesday had offered a tour of a fully automated facility in Brooksville, Florida, and Telsey Advisory Group analysts led by Joseph Feldman said they were “impressed by the high level of automation.”

Two robots handled an inbound shipment of some 3,400 packages; sensors and robots separated them before they moved to an automated grid. Meanwhile robots were able to build pallets of 130 cases, versus 75 for manually built ones, per Telsey’s note, which also described robots in storage and picking, and autonomous forklifts that loaded and unloaded.

For this fiscal year, Walmart expects net sales to rise 2.5% to 3.0%, Walmart U.S. comps to rise 2% to 2.5% (excluding fuel sales); Sam’s Club U.S. comps to rise 5% (excluding fuel); and capital expenditures to be flat to last year to “up slightly” year over year. Last year’s capital expenditures reached $16.9 billion.

“We view capital allocation is every dollar having to compete for the best return, and we view our capital expenditures through the lens of return on investment,” Rainey said. “The investments we've made over the last few years in things like store-level technologies and supply chain automation are yielding returns in excess of what we originally contemplated.”

NEW YORK — The pandemic may be mitigated thanks to public health measures like vaccines, inflation may be on the wane and supply chain woes may be easing somewhat. But 2023 is nevertheless set to be defined by uncertainty, according to Michelle Evans, Euromonitor International global lead of retail and digital consumer insights.

The firm released a report on the top 10 global consumer trends, a few of which will especially impact retail, Evans said, speaking at the National Retail Federation’s major industry conference last week.

“The number one was the evolving economic landscape,” she said. “A close second was the ever-evolving, shifting consumer priorities. I do think those two as well as technological advances are probably the most dynamic drivers in place today when we think about consumer trends.”

Artificial intelligence has already emerged as a major theme of the year, but retailers should be wary of downplaying the importance of humans, according to Evans.

“This is all about finding that balance between human versus bot,” she said. “Machines obviously offer more convenience and speed. But really we shouldn't underestimate the power of that emotional connection with a brand. So certainly it comes down to authenticity. I think this is a key word that we see across a lot of these trends.”

Furthermore, while younger consumers may seem wedded to their devices, they are increasingly more selective about when, how often and how they use them, Evans said.

“Where could you automate and where should you automate? Those are two different questions you have to answer,” she said. 

In fact, after years of getting disrupted by technology, retailers face disruption from morphing generational attitudes, according to Evans. Environmental and social issues are important motivators for an increasing number of consumers, especially younger cohorts, which retailers and brands can’t ignore, according to Evans.

“You have to take a stand, but also believe in it,” she said. “Because if you don't come across as authentic, it doesn't matter if you took that stand or not.”

There are also several forces that are leading consumers to hit the brakes on acquiring discretionary goods. While Euromonitor analysts don’t expect a global recession this year, the cost of living continues to sap purchasing power. Last year, three quarters said they won’t increase their overall expenditures, per Euromonitor’s report.

But many consumers are also simply in a different mindset around consumption, after seeing that lower energy use and other cutbacks during the height of the pandemic had a sustainability upside, Evans said. 

“We are moving towards a more cautious and conscious consumer,” she said. “Clearly the economic reality is making consumers more cautious. And as a byproduct of that they're also becoming more conscious.”

Still, the year will also be defined by consumers’ interest in joyful pursuits after dealing with restrictions imposed on them by the pandemic and macroeconomic forces, she also said. The fashion and beauty industries are poised to be direct beneficiaries, as are food and beverage, hospitality and travel, and other service players, she said.

“There's ... basically the ‘Yolo’ trend —‘You only live once,’” she said. “We've been cooped up for so long, one crisis after another, and now you're telling me the economy's in the tank? You know what, I'm gonna still take that trip. So certainly consumers are maybe throwing some caution to the wind and getting out there. And that's where experiential retail and food service stand to benefit.”