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The last two years brought many distinct economic swings: Pandemic, supply chain challenges, inflation, inventory glut. The effects of these aren’t playing out in isolation. Rather, they are overlapping.
While the conversation is currently focused on inflation and a potential downturn in consumer spending, it’s worth remembering that supply chain constraints are still present for consumer goods companies, even though the bottlenecks of 2021 are no longer as prevalent. Reports of shortages have continued, with products ranging from baby formula to tampons to sri racha hot sauce becoming more difficult to find in recent months.
Hershey recently delivered the latest sign that the supply struggles aren't completely over: The company warned that it won’t be able to deliver enough Halloween candy to meet demand.
Public company earnings calls to recap the second quarter offered insights into what’s going on behind the scenes.
Disruptions still present
For apparel company Skechers, delays remain present in Asia, where the pandemic continues to affect business operations.
“We continued to experience challenges from shipment delays, particularly in Asia as a result of COVID-related countermeasures to domestic processing congestion in our distribution centers and those of our customers,” said CFO John Vandemore.
Supply chain issues affect the future as much as they do the present, as goods are ordered months in advance to arrive for specific seasons. So it's a factor as the company looks toward the rest of the year, as well.
“Our supply chain and logistics teams are working diligently to ensure our products are delivered to our customers and stores and ultimately reach our consumers as quickly and efficiently as possible," Vandemore continued. "However, we do expect supply chain disruptions to continue to constrain our ability to fully meet consumer demand and to drive distribution inefficiencies throughout the balance of the year.”
Still, there are signs of improvement.
“Relative to the last time we updated you, we're starting to see the level of supply chain disruption ease, albeit nowhere near the pre-pandemic normal,” said Matt Puckett, CFO of VF Corp., the apparel company that owns Vans, The North Face and Dickies.
Puckett offered commentary on the steps that move goods from production to retail.
“In terms of logistics, we're seeing improved transit times across the water, reflecting a slight ease in congestion and shortened dwell times in port,” Puckett said. “This is leading to overall better predictability and reliability. From a cost standpoint, there is some abatement in spot rates, both ocean and air, albeit these remain high relative to historic levels.”
A whole new level
According to Nestle CFO François-Xavier Roger, the supply chain challenges for the food company are coming on three levels: Capacity, transportation and access to raw materials. Finding trucks and drivers was particularly "tense" in the second quarter, Roger said, while the war in Ukraine led to difficulty in obtaining raw materials.
“This has been a year of extraordinary supply chain challenges and input cost inflation,” said Mark Schneider, CEO of Nestle. “The situation was difficult before, but the war in Ukraine brought this to a whole new and unforeseen level, in particular for the food industry.”
Supply chain is one of the reasons Columbia Sportswear is taking a more conservative approach to its outlook for the rest of the year.
"Supply chain challenges remain elevated and are anticipated to continue throughout the rest of the year," CEO Tim Boyle said. "We have worked to mitigate supply chain constraints by taking orders earlier from our retail partners and placing orders earlier with our factory partners."
As-yet-unsolved labor negotiations in West Coast ports and continuing pandemic restrictions in China are among the factors playing into the company's considerations.
Hershey, which makes Reese’s, KitKat and Twizzlers alongside its eponymous chocolate products, offered a view into how supply chain issues have shifted over the last two years.
“Where we are now, I would say early on it was some of the basic logistics issues largely driven by labor, and as we've evolved, I'd say we're now starting to see bigger concerns relative to scarcity of ingredients needing to leverage different suppliers at higher cost and price points in order to secure production,” said Michele Buck, CEO of Hershey.
The war in Ukraine has led to issues sourcing raw materials, and natural gas disruptions in Europe, Buck said.
Combined with capacity constraints, this is leading to a shortage that may leave some trick-or-treat bags lighter this year.
When it comes to Halloween and holiday candy, “We will not be able to fully meet consumer demand,” Buck said. The company makes every day and seasonal candy using the same production line. When it made decisions about what to make in the spring, it identified a need to improve the every day inventory, which took precedent over the seasonal candy.
“We have a strategy of prioritizing everyday on-shelf availability,” Buck told analysts, adding that the company is still expecting single-digit growth through the fourth-quarter holidays.
“It was a tough decision to balance that with the seasons, but we thought that was really important.”
Trending in Operations
Retail media networks must drive sales incrementality, a new report from the Association of National Advertisers states.
Retail media networks are creating a new layer to the relationship between brands and retailers, and a new report indicates that brands in particular are still navigating the growing pains.
The last two years brought fast growth of retail media networks, as retailers recognized the value of providing advertising opportunities through ecommerce marketplaces that grew rapidly during the pandemic, and the value of the first-party data they possessed in a world where third-party cookies and IDFA are becoming less valuable tools. For a historically low-margin business like retail, digital advertising also presents an opportunity for a high-margin business line of 50-70%.
Brands have proven to be eager adopters as they sought new ways to reach customers in this environment, as well. According to eMarketer, ad revenue from retail media networks will reach $52 billion in 2023 and $61 billion in 2024. Over the next two years, retail media will account for one in five digital ad dollars spent by marketers. The spend is only expected to grow. According to a survey from the Association of National Advertisers (ANA), 73% of brands said they expect to be spending somewhat or significantly more on retail media in the future than they do today.
However, this proliferation has also created “more marketing decisionmaking complexity for advertisers,” ANA CEO Bob Liodice said in a new report.
The need to navigate multiple networks and still-developing tools to maximize the opportunity presented by retail media is leading to a multitude of approaches. Layer on top of that the fact that brands are both selling goods and advertising through retailers, and it’s clear the landscape is being reshaped.
A recent report from the Association of National Advertisers uncovered the areas where fault lines may emerge under the surface:
- Reluctant buyers: 88% believe they are somewhat or heavily influenced by retailers to buy advertising on retail media networks.
- A multitude of players: 56% said they are currently working with five or more different retail media networks.
- Differing goals: Two-thirds of respondents see driving conversion as the most important investment. Only 12% indicated the most important objective was “to invest for future brand growth,” and 7% cited “to drive awareness.”
The results underscore key areas where relationships between brands and retailers can be strengthened.
Sales vs. growth. Retail media must be able to drive both conversions of a single sale in the lower funnel, and brand equity growth in the mid- to upper-funnel.
As one respondent put it, "The jury is still out on if the RMNs are truly driving sales incrementality."
This also has implications for how a brand is budgeting retail media. Some brands are shifting dollars from shopper marketing, brand marketing, and trade spending, which could put the emphasis on short-term sales. But as another respondent put it, "There is concern that while attribution shows RMNs are driving brand sales, they are not necessarily driving brand growth. This is especially concerning where incremental RMN spending is being sourced from brand building budgets."
Standard measurement. Brands want to see an improvement in transparency in measurement. They also want results to be measured in the same ways across platforms. Further, brands believe retail media networks are not fully optimized for their KPIs.
This all leaves room for retailers to show they truly understand what brands are seeking from retail media, and show how they are delivering, all while reducing complexity.
As the report put it, “The next phase of growth for RMNs and value creation for brands will be through RMNs assuming shared responsibility with advertisers for driving brand growth, and demonstrating the ability of their platforms to drive incrementality and positive ROAS for brands. In other words, the next stage of growth will be driven by results versus relationships.”