Memo: Supply and Demand

Today, it is hard to buy: lumber, stone, a sectional sofa, a dress shirt, yoga pants, basketball shoes, or luggage. Even the most sophisticated retailers are struggling, now imagine the nascent brands. The current struggle is an opportunity to reinforce our back office supply chain and logistics strategies.

We evangelize the marketers and not the logistics and supply chain leaders. In the world of CPG and DTC, many assumed demand generation was the difficult assignment. But today, so many will fail to reach their potential because they have much less to sell. Or because they can no longer mitigate shipping costs. There’s simply no supply and each day sees rising demand.

The world’s supply chains were already in a precarious state before the pandemic. Now, after a period of extreme disruption, manufacturers can’t meet demand, resulting in a chain reaction of delays and out-of-stock products. While out-of-stock inventory can signal high demand and appeal for a brand, eventually the allure runs out when there’s no back supply.

And as customers in the US embark on revenge shopping that shows no signs of slowing down (back-to-school shopping is expected to amount to $33 billion, according to Deloitte), the supply chain will continue to be strained and products will continue to be unavailable. Take a recent article on The Strategist as proof of how pronounced this situation is: The machinations of the global supply chain, when operating right, should be invisible to the average end consumer. The Strategist, a consumer shopping title, published a piece last Friday guiding customers on how to shop right now despite a shortage of availability for high-demand products and incredibly long lead times. The world is reopening, people want to buy. Right now, supply isn’t meeting demand and logistics costs are eating into margins.

S&P Global published a report analyzing what’s happening in the global supply chain, finding that retailers are trying to fix this problem by increasing imports:

Retailers have certainly attempted to keep up with demand growth. U.S. seaborne imports of consumer discretionary goods in May increased 88.2% year over year and by 32.9% compared with 2019, led by shipments of home furnishings and household appliances.

Yet, the increased level of imports has not been enough to support sales on the basis of falling inventory-to-sales ratios. Materials are still in short supply like aluminum and lumber. An increase in imports means there’s a bottleneck, slowing and delaying shipments into the US. And as the New York Times reported in June about a long-standing supply chain solution known as “Just In Time manufacturing”, where manufacturers receive components, materials and other parts only as they need them in order to minimize costs of overhead. The practice started in automotive production and rippled to other categories including fashion and food. That short-term solution has led to a period of extreme underpreparedness:

Still, the shortages raise questions about whether some companies have been too aggressive in harvesting savings by slashing inventory, leaving them unprepared for whatever trouble inevitably emerges.

To get out of this, retail supply chains will need to find both short-term solutions as well as rethink dependency on complex supply chains. Brands will invest heavily in flexible processes that can account for moments when things don’t run as planned. For now, expect delays.

By Web Smith 

Member Brief: Peloton’s Diffusion

Keep your eyes on Peloton as 2021 comes to a close. When cycling instructor Alex Toussaint shouts through the screen, people listen. There is one of his motivational quips that Peloton’s management should have followed:

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Memo: Understanding DTC Backlash

The New Yorker article was on the “illusion of the millennial aesthetic” and it appears that there is reckoning. According to industry operator and analyst Nate Poulin, venture capitalists have invested roughly $22 billion into DTC brands and the total liquidity, thus far, has been about $25 billion. Of that $22 billion invested, many were into brands that were meant to “disrupt the industry.” These were modern brands positioned for the upwardly mobile: beautifully designed, quietly sourced, and well-packaged. It was an aura of excess that propelled design houses to position DTC brands as products for H.E.N.R.Y. But what happens when the consumer falls on hard times? For much of America’s workforce, the past 15 months were just that. And many of life’s luxuries were traded for the steady, the essential, and the trusted. DTC brands, for the most part, are not that.

The question writer Kyle Chayka raises is around whether or not we actually need all this brand disruption, and if the new crop of millennial brands prioritized aesthetic and marketing over functionality. The DTC backlash has begun. I have an opinion as to why:

According to Chayka, Great Jones is one example of the dysfunction of DTC and how a crop of colorways that look good on Instagram can cover a much more troubled company behind the scenes. Other brands either don’t stand up to the quality test or are so overtly “millennial” that they impose: an unnamed brand selling bath towels failed to stand up to more reliable brands, while Away suitcases feel like an embarrassing relic, he writes. Away, however, is an example of a company that has returned to the forefront. Today, it resembles more “orange” than “green.” As the company near’s IPO, it moves towards the bottom of the hierarchy – even if the products remain elevated. Their most recent advertisement was well-received.

On whether or not the millennial brands will stick around, the problem is boiled down to functionality and reliability:

Perhaps it will fade out when customers learn that a compelling narrative is not the same thing as the integrity of a product or of the business selling it. We’ve seen many times before how the growth-at-all-costs startup mentality can backfire.

Reliability has been an incredibly important feature in what we buy over the past year-plus, which brought about anxiety and uncertainty. In more difficult times, legacy brands become the preferred purchase. There’s something to be said about consistency and quality in the middle of a pandemic. Despite spending a lot of time on our phones, being served Instagram ads for new brands and products, the standbys won out. The millennial DTC brands represent a certain amount of excess that falls out of fashion during a crisis. In times of recession or duress, customers flock to brands that feel like necessities. That has meant good news for the old guard, the standbys that might blend in on a Target shelf but are reliable in their quality.

For DTC brands, the next step of growth will be proving themselves as essentials, not just aesthetic excess for a specific cohort of customers that, when put up against a wall, may not prove so loyal. I believe that the faster they prove essential, the less likely these stories will dominate the narrative. And this year will see a number of brands that were once “nascent” become members of the old guard.

By Web Smith | Art: Christina Williams | Editor: Hilary Milnes