Friday, June 30, 2017

Retail Lives - At A Discount

2017 research from IHL Group about store closings.

Research from IHL Group detailing store closings in 2017.

It would be easy to proclaim the end of days for retail stores. But amid the decimation of household names like Sears and RadioShack, one retail sector is expanding: discount stores.
According to IHL Group, so far this year the closure of 5,321 stores has been announced, a 218% increase over 2016. The biggest losers have been RadioShack and Payless, with 1,000 and 512 closings, respectively. Other big chains shedding triple-digit numbers of locations include Gymboree, Rue 21, Sears and Kmart, and J.C. Penney.
Mall-based retailers have been struggling amid the expansion of online commerce, and it looks like the fight is nowhere near over. Earlier this month, Credit Suisse predicted that 20%-25% of American malls could close over the next five years.
“It’s an example of fundamental transformation and an example of what happens when retailers don’t stay in contact with their core customers,” says Jeff Roster, Vice President of Retail Strategy at IHL Group.

But hope remains – for some. Amid the quicker drumbeat of bankruptcy filings and closure announcements, store openings are rising as well this year. have been up 53% year to year, with Major chains have announced the opening of 3,262 locations since the start of 2017, according to IHL, a 53% increase over last year. Discounters dominate the top of the table, with Dollar General announcing the opening of 1,290 locations while Dollar Tree announced 650 openings.

Research from IHL Group detailing 2017 retail store openings.

Dollar General already had more stores across the country than any other retailer.
Food is the unifying theme for the expansion of dollar store discounters. The leading dollar store chains have thrived over the past few years by expanding their food selections, turning into more of a one-stop shop. With food at the forefront, customers have more of a reason to make more frequent visits.
Aldi, the discount German grocer specializing in private-label food staples and household items, is adding 400 stores by the end of 2018 to its current count of 1,600. With its German arch-competitor Lidl opening up its first U.S. locations earlier this month, Aldi announced a $3.4 billion plan to open another 500 stores by the end of 2022, on top of a $1.6 billion effort unveiled in February to remodel and expand about 1,300 of its existing stores with a more upscale look to enable it to better compete higher up the food chain with the likes of Whole Foods.
Elsewhere in the discount realm, TJX has been an anomaly in the apparel retail sector, with 111 new store openings announced this year and robust net income of $2.3 billion for 2016.
The owner of T.J. Maxx and Marshalls has thrived by rapidly refreshing a limited assortment with prices 20% to 60% lower than other retailers. At a time when department store chains are struggling to define to shoppers why they should come to the store rather than shop online, TJX makes the vast majority of its profits at its approximately 3,800 physical locations, with same-store sales rising for 33 straight quarters, according to the Wall Street Journal.

“Power is increasingly in the hands of the brands,” writes Christian Buss, director of softlines and retail analyst at Credit Suisse, in his initiation note on the sector. “We believe brand differentiation will help set apart (retailers) who are looking to attract consumers.”

Is your culture what you think it is?

Ron Williams ,

Shutterstock

In my career, there have been many things I am fortunate enough to be proud of. Yet one of the things I feel most strongly about is the culture we created during the ten years I was at Aetna, and its enduring impact. In my experience, it is the leader – the CEO – who plays the crucial role in creating and “owning” an organization’s culture, setting the tone, and executing on that consistently. We know a culture doesn’t just happen; it is the result of what you do every day.
I believe in the power of a positive, high-performance culture, which begins with strong ethical values at the core. When I was at Aetna, we worked to create the culture and values with input from our then ~40,000 employees. We felt having employee insights early and often in the process was critical to our long-term success.

The single most important business reason to create a positive high-performance culture is the level and value of information leaders obtain when people are willing to discuss issues and problems. We know failures happen. When they occur, the leader needs to know what happened and what to do. In a negative culture people may try to cover mistakes and problems, and that undermines any real shot at performance improvement. In a positive and supportive culture, people will be more open to having fact-based discussions about problems, thereby allowing leaders to address those issues head on. As I have said many times, people are much more interested in meeting expectations than demands.
Your corporate culture: is it what you think it is?
I was at Aetna during a time of massive change. We were losing $1 million per day on average, and rapidly losing the confidence of members, customers, brokers and investors. Doctors were furious with us. We had also lost the support of our employees. We soon learned that they were demoralized and beaten down because of the poor performance of the company, the strained relationships with our constituents and the constant negativity in the media. Many of our employees were embarrassed to work for Aetna. We could not be successful in rebuilding the company without employees who were engaged and committed to the company’s success. Employees were our most important assets on our path to rebuilding. My job, and the job of the entire leadership team, was to re-engage the employees. Part of that came from working to fix the company so that we could see performance improvements. But we also needed to understand what led to this dysfunctional state.

Something I realized early on in my career: if you ask a leadership team what the culture of a company is, you will get an answer. But the real answer is how the company’s employees answer that question. The CEO’s responsibility is to get alignment between those two answers.
We began a series of activities to communicate with employees, including educating them on the reality of our business and its substantial challenges. We also asked for their input. Working with an outside firm, we developed a survey that was distributed to the entire employee population. And we found that our employees had a lot to say. The first year we conducted the voluntary survey we achieved close to a 90% response rate. We also talked to our employees through focus groups and we took what they told us and created company values, which reflected the beliefs of employees at all levels of the company. We reinforced the legitimacy of the values by using them every single day, but also by incorporating survey action items within our business plans each year. Over time, our management team members were held accountable for improvement on survey action items, and their compensation was tied to their performance related to these survey action items.
We probed a number of areas in the survey, but as just one example, we asked whether employees believed that the company was acting in accordance with its values, and whether in fact their own department and their own leader was. We placed a high value on leadership capability, and for performance evaluations of leaders, it was weighted as important as their business results.
The surveys, among other programs, became a regular part of how we communicated about culture and values, as well as a marker for how and whether our employees felt the same as we did about our culture.
Setting the right tone at the top is key. Consistency makes it work.
Much of a leader’s responsibility in creating a positive high-performance culture is setting the right tone, and acting on it consistently. That day-to-day execution – the tenor and tone – really makes the difference. With one deviation – one exasperating meeting – the CEO can legitimize bad behavior.

A way to reinforce the tone at the top is for the CEO to be clear on his or her expectations of their leadership team. While the CEO drives the culture, they can’t do it alone. The leadership team needs to be actively engaged in and supporting the culture, and the employees need to believe that their leaders are committed to the culture.
Another critical element in setting the tone is handling performance management. However the CEO models and communicates his or her expectations is how people will be held accountable. When conducting a business review in a setting with other executives watching, if results clearly committed to were not achieved, how does the CEO react and respond?

The CEO’s challenge is to signal that failure to achieve business goals is a serious offense for which people will be held responsible, but not at the expense of the person’s character. An example might be, “You missed the goal, you’re not a bad person but you didn’t do what you said. Let’s talk about what we could have done differently, or what we need to do differently going forward.” These are teachable moments, and not just for the person or team most closely involved. Everyone listening will learn both more about the specific issue at hand, but also what accountability means at their company, and how it will be handled when things don’t go as planned.
Understanding the role of the Board in leading from the top.
Since the responsibility for fostering a positive high-performance culture is the CEO’s, that creates a critical responsibility for the Board: to identify a CEO candidate with the right skills, values, and “touch,” and to work with the incumbent to make sure that all those qualities are appropriately deployed. Directors should be mindful of the elements of CEO performance that bear on culture.
The challenge for the Board is that Directors do not spend time with the executive in a routine operating environment – it’s not their job. Yet they must figure out whether the CEO is behaving consistently with the company’s values and its espoused culture, and whether he or she is doing so consistently.
In my experience, there are a few ways for the Board to develop those necessary insights. One is through interaction with other senior leaders rather than solely with the CEO. A second, and in my mind critical element is getting access to metrics. A well-conceived and well-constructed employee survey can be extremely valuable. It can open a window on employees’ cultural and emotional health, and reveal their perspective on the values of the organization. The survey allows Directors to determine whether what they think they see in the CEO and leadership team matches what the organization is experiencing. There may be times for the Board to act on this information – whether by articulating goals, making clear demands, or making a change, to ensure the long-term success of the enterprise.

Ultimately, a high-performance culture is about accountability, and performance is the focus. There may be consequences and breakage, and some people will be let go. In a positive, high-performance culture there should be clarity about what is important for success among all involved, from leaders to the front line. In the best cases, there also is a shared understanding of values and behavior. A positive culture is a high-information culture, and that is a good recipe for strong company performance and employee success.

JUNE 29, 2017

From Boston to Los Angeles, “mixed use” development, combining residential and commercial properties, is on the rise. The benefits that have been cited for colocating housing and retail establishments include reduced travel distances, more-pedestrian-friendly neighborhoods, and stronger local character. Recent research suggests another important potential benefit: Retail establishments may play an important role in crime prevention.
In our research, we examined the effect on crime of temporarily shuttering two types of retail businesses: medical marijuana dispensaries (MMDs) and restaurants. Why study dispensaries? In 2010 Los Angeles initiated a mass closing of two-thirds of the dispensaries in the city. The fact that the closings were based on a very arbitrary registration process that took place several years prior allowed us to use the closings as a natural experiment to estimate the causal impact of MMDs on crime.
Surprisingly, we discovered that the closures were associated with a significant increase in crime in the blocks immediately surrounding a closed dispensary, compared with the blocks around dispensaries allowed to remain open. Our results demonstrated that the dispensaries were not the crime magnets that they were often described as, but instead reduced crime in their immediate vicinity. And when breaking down the effect by types of crime, we found that the increases in crime after dispensary closures were driven by the types of crime most plausibly deterred by bystanders: property crime and theft from vehicles.
But our interest was in the effect of retail businesses on crime in general, not just in what happens when MMDs closed. We wondered: Would we observe the same dynamic in another retail context?
We then examined the impact of temporary restaurant closures by the Los Angeles County Department of Public Health for public health code violations. When a health inspector finds a violation that poses an imminent health hazard, the inspector immediately shuts down the restaurant. The restaurant must remain closed until a subsequent follow-up inspection confirms that the situation has been resolved. When we examined crime patterns around these closures, we found essentially the same pattern as we did with MMDs: The area immediately around a closed restaurant experienced an increase in property crime and theft from vehicles, relative to areas around restaurants that were either recently reopened or about to be closed. Furthermore, this increase in crime disappeared as soon as the restaurant reopened.
Given the differences in the nature of these establishments and the reason for and timing of their closures, we were left wondering what common factor might drive the similarity in results. One key factor common to retail establishments, whether MMDs or restaurants, is that they generate foot traffic. And with foot traffic comes informal surveillance.
As Jane Jacobs described in her groundbreaking 1961 work, The Death and Life of Great American Cities, people provide a natural form of incidental surveillance that can increase public safety. This idea, which Jacobs called “eyes upon the street,” has proven enormously influential, and is now a cornerstone of modern urban planning. But while it seems intuitive that criminals may be less likely to commit some forms of dark-alley crimes in front of an audience, the relationship between retail businesses and crime is more complex. Not only are retail customers (and the shops they frequent) potential crime targets, but they may also be perpetrators of crime. For that reason, the impact of retail business on crime is theoretically ambiguous — it could go either way — and until now there’s been virtually no rigorous empirical evidence.
We were able to probe this relationship in the context of restaurant and dispensary closures, offering new insights into the received wisdom. Specifically, to test whether a reduction in eyes upon the street could be the common crime-generating mechanism behind our results, we collected “walk scores” for each establishment in our sample. Walk scores are a measure of an area’s walkability as determined by the number of nearby restaurants, coffee shops, grocery stores, and other features that generate foot traffic. A business with a high walk score is located near many other businesses. Thus the closure of a business in a high-walk-score area should have a very limited impact on local foot traffic. On the other hand, the closure of a business in a low-walk-score area should have a proportionally large impact on total foot traffic. If our results were driven by eyes upon the street, we should find that, all else equal, crime is negatively related to walk scores. This is indeed the pattern we found: The increase in crime associated with business closures was stronger in neighborhoods with less walkability and fewer other businesses around.
A quick, back-of-the-envelope cost calculation using our results and crime costs from a 2010 study suggests that an open retail business provides over $30,000 a year in social benefit just in terms of larcenies prevented — something to keep in mind the next time you are deciding how much to tip at your favorite local restaurant, coffee shop, or bakery. It’s something urban planners should keep in mind as well when zoning neighborhoods. Retail businesses draw customers, and in doing so, lower crime.

Tom Y. Chang is an Assistant professor of Finance and Business Economics, USC Marshall School of Business.

Mireille Jacobson is an associate professor and the Director of the Center for Health Care Management and Policy at the Paul Merage School of Business, University of California Irvine.

Walgreens CEO Not Worried About Amazon Just Yet

Bruce Japsen ,

The nation’s largest drugstore chain doesn’t expect to see online retailer Amazon jump into the pharmacy business anytime soon, given the complexity of the prescription and healthcare industry.
Responding to recent reports that Amazon is looking to get into the pharmacy business, Walgreens CEO Stefano Pessina seemed to caution about any such new rival. He made his comments about the online retail giant the same day Walgreens Boots Alliance WBA -0.54% said it would buy 2,186 Rite Aid RAD -8.65% stores for $5.2 billion to become an even bigger brick-and-mortar drugstore chain.

“Honestly, I don’t believe that Amazon will be interested in the near future...in this market,” Walgreens CEO Pessina told analysts Thursday on the company’s third-quarter earnings call. “They have so many opportunities around the world in many other categories, which are much, much simpler than healthcare, which is very regulated business.”

To be sure, Amazon less than two weeks ago announced plans to spend $13.7 billion to buy brick-and-mortar grocery chain Whole Foods Market WFM +0.01%, which operates in a seemingly less complicated environment than healthcare.
Any competition from Amazon comes at a time Walgreens and CVS Health CVS -0.24% are forming closer ties with government and private health insurers and employers looking at better ways to coordinate the delivery of medical care.

The trend in healthcare is toward value-based models and population health that require pharmacies to have relationships with doctors and other providers in the community that have existed for decades. And it’s the physicians in the health plan networks who write the prescriptions that Amazon would need to become a pharmacy growth story.

“They are a good team and a very rational team…[but] this will not be their priority,” Pessina said of Amazon management.

Some argue Amazon could make some inroads by getting into mail-order pharmacy. Walgreens made no comment on any potential Amazon could have in any aspect of the pharmacy business, but wouldn’t rule out a future partnership.

“We could find our goal in the new environment and we wouldn’t exclude to partner with them,” Walgreens' Pessina added. “We wouldn’t exclude to analyze the new situation of the market and to find our place adapting ourselves.”

Thursday, June 29, 2017

2017 State of Logistics Report

Accelerating into UncertaintyAccelerating into Uncertainty

The 28th annual Council of Supply Chain Management Professionals (CSCMP) State of Logistics Report reveals an industry buffeted by crosswinds as the pace of change accelerates, a state of affairs we refer to as Accelerating into Uncertainty. The data and analysis in this report offers useful insights to help shippers and carriers plan their business strategy for 2017 and beyond.

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The global economy emerged from a sluggish 2016 poised for faster growth. The International Monetary Fund predicted 3.5 percent worldwide growth in 2017, and burgeoning consumer and business confidence augured well for logistics demand across a range of sectors.

Expectations collided with reality early this year, when US GDP rose an underwhelming 1.2 percent in the first quarter—ahead of last year’s 0.8 percent but only the fourth-fastest first quarter in the last six years. The disconnect was the latest unsettling discrepancy between soft indicators of sentiment and hard data on actual economic activity.

The conflicting signals leave shippers and logistics providers with little clarity on economic fundamentals for the remainder of 2017. Further complicating the outlook are variables such as currency exchange levels, interest rates, and political trends. Against that uncertain backdrop, executives must make vital decisions about capacity, pricing, technology deployment, and strategy.

Along with lackluster economic growth last year came the first decline in USBL since 2009 (see figure 1). United States business logistics costs (USBLC) dropped 1.5 percent in 2016 after rising at a 4.6 percent compound annual rate from 2010 to 2015. Costs fell across all three USBLC components: transportation, inventory, and other costs. The declines reflect overcapacity, slack volumes, and rate pressures in several sectors, even as demand and prices rose in others.

Notably, overall spending on logistics dropped despite a rise in energy prices. This marks the second straight year in which the two have moved in opposite directions, indicating energy prices are no longer the primary factor in logistics costs. We suggested last year that consumers have become the driving force behind logistics spending, and this year’s results confirm the powerful impact of rising consumer demand for e-commerce deliveries.

While overall transportation costs fell 0.7 percent last year, spending on package delivery services jumped 10 percent. Parcel and express delivery has surpassed railroads as the second-largest logistics sector behind motor freight. Meanwhile, energy-sensitive pipelines and railroads saw rates and volumes stall or drop as oil prices remained at historically low levels despite the upturn in 2016.

Cross-currents also affected inventory carrying costs last year. Storage expenditures rose 1.8 percent and are now as important as the financial carrying cost of inventory. Until last year, storage costs grew at a compound annual rate of 4.7 percent. Nevertheless, a 54-basis-point drop in weighted average cost of capital pulled down overall inventory carrying costs by 3.17 percent.

After modest progress in 2015, logistics efficiency posted a sharper improvement last year. USBLC dropped 34 basis points as a percentage of nominal GDP, reaching levels not seen since the great recession of 2009–2010 (see figure 2).

During 2016, a few common trends drove the action across various logistics sectors. Overcapacity and rate pressures fueled cost-cutting and consolidation, particularly among motor carriers and ocean freight companies. Cutting-edge technologies brought new efficiencies to sectors such as warehousing, parcel delivery, and motor freight. Along with technological advances came new business models in third-party logistics (3PL), freight forwarding, and rail, among others. Parcel carriers and warehouses capitalized on surging e-commerce volumes to raise rates and continued reconfiguring their networks to meet consumer expectations for faster delivery.

Looking ahead, 2017 could be a pivotal year for logistics. Demand patterns are shifting, technological advances are altering industry economics, and new competitors are challenging old business models. This year could bring significant moves that reshape individual sectors and even the industry as a whole. Major business combinations, large-scale shifts in distribution flows, deep capacity cuts, massive infrastructure investments—anything is possible.

As company leaders weigh options in a fast-changing business environment, they also face increasing political risk. Rising protectionist sentiment around the world threatens to constrict global trade flows, the lifeblood of logistics. Trump won the US presidency with a mixed message of tax relief, regulatory reform, and trade restrictions. His agenda could cut both ways for logistics, and it’s still not clear which Trump proposals will become law.

Beyond 2017, logistics is moving toward a fully digital, connected, and flexible supply chain optimized for e-commerce and last-mile, last-minute delivery. The next-generation supply chain will enhance fulfillment capabilities and drive efficiencies through technologies ranging from big data and predictive analytics to artificial intelligence and robotics. Inevitably, winners and losers will emerge as companies that make the right technology investments and strategic choices outperform others. The industry must also reckon with the social cost of rapid technological evolution as automation tempers employment growth or eliminates hundreds of thousands of traditional jobs in warehouses, trucking, and other sectors.

We foresee four potential scenarios for logistics in coming years. We call the first plain sailing, as regulatory constraints recede, global trade flourishes, and technology improves efficiency. Under a choppy waters scenario, new policies favoring US manufacturing force shippers and logistics companies to adapt, spurring faster adoption of technologies. A stemming the tide scenario brings tighter regulations that increase operating expenses and accelerate investment in cost-saving technologies. The worst case puts logistics in the doldrums as regulatory costs rise and tough economic conditions deter technology investments.

Although some scenarios may seem more likely than others, successful companies will prepare to thrive under all four.

Air Transport: Fight for nations skies intensifies

BY JON ROSS |SATURDAY, JUNE 24, 2017

Three months.That’s how long Congress has to debate and pass a reauthorization bill for the Federal Aviation Administration (FAA). And while federal lawmakers have been holding panels debating myriad topics that will be included in the final text, and legislators from all corners of the government have been weighing in on airline topics of the day, it isn’t a lot of time to hammer out the finer points of such an important piece of legislation.
The Senate Committee on Commerce, Science and Transportation held a hearing in early June to focus on exactly that topic, and to get to the bottom of President Donald Trump’s recent proposal to privatize the air traffic control sector.
In the hearing’s opening remarks, Sen. Bill Nelson, D-Fla., ranking member of the committee, first said that any bill will likely require bipartisan support, noting that the last reauthorization from 2016 sailed through the Senate on a 95-to-3 vote. After highlighting the accomplishments of that bill—namely aviation consumer protections and FAA certification changes—he lamented that it was “thwarted” in the House as representatives sought to remove air traffic control functions from the administration.

“We currently have the safest air traffic control system in the world. Why risk that by handing it over to an untested, unproven entity and give away billions of dollars in government assets?” - Sen. Bill Nelson, D-Fla.

Of course, this provision ultimately didn’t make it into the final bill, but the calls for air traffic control privatization have only grown louder this year.
So the quest to privatize the nation’s air traffic system is certainly nothing new, but this time around, the idea is picking up more steam than ever before. It certainly helps that Trump is getting behind the shift in the FAA’s priorities, but the issue is still stirring intense debate and heated arguments on both sides.
“I am opposed to air traffic control privatization—no matter what form it might take,” Nelson said in his opening statement. “We currently have the safest air traffic control system in the world. Why risk that by handing the whole thing over to an untested, unproven entity? And why give away billions of dollars in government assets to an entity that will be governed in large part by the airlines?”
Nelson said some Republicans he’s talked with are also against privatization—that the change isn’t a clear-cut, partisan issue—because they think it doesn’t make any sense. He also said the discussion is distracting Congress from the FAA reauthorization issues that truly matter.
In testimony before the committee, Transportation Secretary Elaine Chao argued in favor of privatizing the nation’s air traffic control system because of the need for added flexibility, the ability to respond to new challenges that arise and increased pressures on the system.
According to Chao, separating air traffic control duties from the FAA would allow the agency to focus on oversight and safety, as well as streamline approvals, eliminating government bureaucracy and allowing the system to integrate new technologies and respond to challenges in real time.
Her statements echoed the vision of Sen. John Thune, R-S.D., chairman of the committee, which he laid out after Trump released a set of principles for the domestic air traffic control system.
“The Federal Aviation Administration’s effort to improve air travel safety and efficiency by modernizing air traffic control has been hindered by bureaucratic obstacles and poor planning,” he said. “While we’ve spent billions on upgrades, independent assessments have warned that the promised benefits for the flying public may never be realized if we continue on under the status quo.”
During the hearing, Thune said privatization is needed because, among other reasons, “outside auditors have dinged the government’s performance on delivering safety and efficiency upgrades, prompting a debate as to the best path forward to realize those benefits.”
NextGen, the FAA’s quest to modernize domestic aviation infrastructure, has not proceeded according to plan, primarily because of government oversight, Chao said, adding that removing air traffic control from the FAA would help speed along this modernization process.
During all this, the House Transportation and Infrastructure Committee has also been pushing for privatization. The committee’s website has links to editorial board columns in four national papers in favor of the shift and it also released a letter from three former FAA officials supporting the effort.
Russell Chew, Henry Krakowski and David Grizzle, all prior chief operating officers at the agency, wrote to “urge bipartisan support for transformational change of our national air traffic control system,” calling President Trump’s privatization outline “bold action” that is needed to keep aviation technology from becoming further outdated.
Right now, the only certainty is that nothing is certain. In a reaction to the privatization drumbeat, Democrats in the House have introduced the Aviation Funding Stability Act, which would move the debate away from privatization.
“If we truly want to fix the real problems facing the FAA today, the solution is simple: Congress can and should pass targeted reforms,” the bill’s lead sponsor, Rep. Peter DeFazio, D-Ore., said. “I urge my Republican colleagues to reject air traffic control privatization, and support our proposal for real, achievable modernization and reform.”

Amazon’s Whole Foods Deal Adds Pressure on Grocery Services to Deliver

The impact of the e-commerce giant’s Whole Foods deal on online grocery services is still unclear, but one thing is certain: Competition is heating up. From Instacart to Peapod, firms are racing to gain a larger share of the fast-growing market.

By
Heather Haddon and
Julie Jargon
Even before Amazon.com Inc. put a supermarket chain in its cart, U.S. grocery delivery services were racing to grab hold of new regions, spending millions to gain a larger share of the fast-growing market.
Now, with the e-commerce giant planning to buy Whole Foods Market Inc. for $13.7 billion, giving it a large foothold in the food retail industry, the stakes are all the higher for companies such as Instacart Inc., Peapod LLC, Shipt Inc. and FreshDirect LLC to deliver not only fresh food—but continued growth.
Midwestern grocery chain Schnucks Markets Inc. is expected Thursday to announce its partnership with Instacart for online delivery will extend to most of its 100 stores by next month. Ahold Delhaize’s Peapod is expanding its push into New York City, a key market, after spending more than $94 million on a warehouse in Jersey City, N.J., in 2014.
Shipt, which delivers food orders for retailers including Costco Wholesale Corp. , Meijer Inc. and Whole Foods, intends to almost double its markets by next year, from 51 to 100. Founder Bill Smith says the company’s expansion is targeting suburban customers in less saturated regions like the South and the Midwest to gain an edge.
The largest U.S. food sellers, Wal-Mart Stores Inc. and Kroger Co. , meanwhile, are testing delivery services using Uber Technologies Inc. and Lyft Inc.
It isn’t clear whether Amazon acquiring Whole Foods will remake grocery shopping in much the same way the company has changed book-buying.
Concentrated in cities and surrounding suburbs, grocery delivery is still a small business, accounting for less than 2% of last year’s $715 billion in food-retail sales, according to food-services research and consulting firm Technomic Inc. Amazon already makes up more than half of online food orders through its Fresh, Prime and Prime Now services.
Seventy percent of respondents to a survey by supply chain consulting company AlixPartners LLP last year said they had no intention of having groceries delivered. Grace Herrera, a 59-year-old caregiver in California, said she’d rather spend time shopping than pay extra for delivery. “I have time to go to the store,” she said.
Margins also remain an issue. Razor-thin to begin with, they’ve dropped in recent years as falling food costs sparked a price war. And in the online world, the learning curve for how to sell fresh foods has created an added drain.
Ocado Group PLC, the biggest online grocer in the U.K. and one of the few public ones, posted its first full year of profits in its fiscal year ending in November 2014 and averages transaction sizes of $140 per order, compared with $32 for the typical brick-and-mortar supermarket, according to Barclays Capital Inc. But about 30% of Ocado’s fresh produce is wasted daily, a drag on margins and far worse than a traditional grocer’s average of 3%, the firm found.

Still, delivery is one of the fastest-growing segments of an otherwise sluggish supermarket sector. Online sales of consumables grew by 21% in 2015 over the previous year, according to the Willard Bishop grocery consulting firm.
The planned partnership between Amazon and Whole Foods is a new challenge for delivery services vying for that growth, said Bill Bishop, co-founder of Brick Meets Click, an e-commerce grocery consulting firm. Whole Foods’ 466 stores could serve as mini-distribution centers in densely populated, affluent areas; Amazon, which has demonstrated a willingness to forgo profits for years to build up market share, could use its e-commerce prowess to cut the specialty grocer’s prices to near those of its competitors.
“This gives them another way to drive up penetration in grocery purchasing and ultimately delivery,” Mr. Bishop said.
Peapod executives say that being owned by a large retailer like Netherlands-based Ahold Delhaize allows the delivery service to bargain with suppliers for lower prices. They add that Peapod is profitable in markets where it has operated for at least a decade.

A Peapod truck makes deliveries in New York’s Chelsea neighborhood in December. The Ahold Delhaize subsidiary is expanding its push into the city after spending more than $94 million on warehouse in New Jersey in 2014.Photo: Richard B. Levine/ZUMA Press
“We are the original online grocers and have outlasted many of the competitors who have come and gone,” said Jennifer Carr-Smith, chief executive of the Skokie, Ill.,-based company, which was founded in 1989 and took its first orders by fax.
FreshDirect didn’t respond to requests for comment.
Brick-and-mortar supermarkets are wrestling with whether to invest in their own delivery services, cede profits to startups or risk losing more business to Amazon. For grocers who use Amazon Prime to deliver to their customers, the Whole Foods deal presents a particular challenge.
Natural health-food chain Sprouts Farmers Markets Inc. will continue to use Prime to deliver groceries for now, said Bradley Lukow, chief financial officer for the Phoenix-based company. “We’ll make the determination going forward if we want to make any changes,” he said at an industry conference last week.
Schnucks chief marketing officer Andrew Nadin said the grocery chain was planning to expand its partnership with Instacart even before Amazon set out to buy Whole Foods.
“We’ve never tried to out-Wal-Mart Wal-Mart. We won’t try to out-Amazon Amazon,” he said.
Instacart, founded by a former Amazon engineer, aims to be able to deliver to 80% of U.S. households next year, up from 69% today. In addition to stores like Wegmans Food Market Inc. and Target Corp. , Instacart currently handles deliveries for Whole Foods. Analysts expect that to end.
Instacart wouldn’t comment on its partnership with Whole Foods.
“Amazon is here,” said Nilam Ganenthiran, Instacart’s chief business officer. “Grocery retail is going to have to respond.”

Has CVS gone too far with its health kick?

11 EXPERT COMMENTS

DISCUSSION

Has CVS gone too far with its health kick?

Photo: CVS Health

Jun 29, 2017

by George Anderson

Three years after removing tobacco and the sales that go with it from its stores, CVS continues to make changes at its pharmacies intended to reinforce its strategic focus on health. The latest steps, according to a Wall Street Journal report, involve repositioning the candy aisle within its stores, delisting sunscreen products with SPF numbers below 15, and delisting foods that contain artificial trans-fats.

Earlier this year, the drugstore chain announced plans to remodel stores with an expanded selection of healthy food options, more informational signage, and “discovery zones” within its stores to help shoppers explore new products and health solutions.

In April, Judy Sansone, chief merchant at CVS, said the remodels were being driven by the chain’s research, which found consumers are “taking a more proactive approach to staying well.”

To date, CVS has remodeled four stores, according to the Journal’s reporting. It plans to have “several hundred” out of 9,700 complete by 2018.

Same-store sales at CVS pharmacies fell 4.7 percent in the first quarter as the drugstore chain sold more generics and filled fewer prescriptions overall. Front-end sales at stores open for more than a year declined 4.9 percent during the same period.

When CVS made the decision to get out of the tobacco retailing business in 2014, management predicted that the company would to take a $2 billion hit. At the time, CEO Larry Merlo said the chain had made the decision because “the sale of tobacco products is inconsistent with our purpose.”

Research released in 2015 by CVS found its anti-tobacco efforts had some positive effects as cigarette smoking decreased slightly in states where it operated. The company also reported an increase in the sale of nicotine patches while the number of visits to its in-store clinics for smoking cessation nearly doubled.

Rival Walgreens has continued selling tobacco products despite pressure from health advocates to follow the lead of CVS. Walgreens announced this morning that it was no longer pursuing its acquisition of Rite Aid. Instead, it has offered $5.2 billion to buy nearly 2,200 stores and other assets from Rite Aid.

The Rise of the Sharing Economy

Impact on the transportation space; In a world of shared assets, changing economics and customer preferences are increasingly driving transportation players not to go it alone. By Ted Choe

June 29, 2017

In only a few short years, the sharing economy has become a ubiquitous concept.
While still in its infancy, the sharing economy has disrupted a number of industries with lightning speed.
Any industry could potentially benefit from, or be disrupted by, the rise of collaborative consumption and the proliferation of asset-sharing models.
However, due to its natural fragmentation and asset intensity, the sharing economy is especially relevant to core transportation companies as well as to heavy users of transportation services.
Changing economics and customer preferences are driving transportation players to not to go it alone
The momentum of the sharing economy is unlikely to dissipate anytime soon.
As a result, core transportation companies and heavy users of transportation services need to learn how to play in a world of shared assets.
The bad news is that mobile technologies and digital platforms are eroding the traditional barrier to entry (i.e., asset ownership) and opening the core transportation industry to a spate of new competitors.
The good news, however, is that these same technologies are also creating new opportunities for forward-thinking incumbents to leverage a shared platform to grow their businesses and enhance their margins.
Core providers connect
Core transportation providers could leverage a network of shared services and assets with a goal of delivering higher value services to companies, while increasing profitability.
These providers could gain greater efficiency and provide better customer service by incorporating a shared platform into their business models. Traditionally, core providers, such as truck leasing companies, either dedicate assets to specific customer accounts or carry planned loads at pre-negotiated rates.
However by utilizing a shared platform, a truck leasing company or other core transportation provider could more effectively market excess capacity across its own customer base or with a broader network. In either case, customers would only lease the base capacity needed to fulfill core demand, while peak demand would be fulfilled by a shared fleet.
Heavy users get "asset right"
Heavy users of transportation services could shift to a shared platform to fulfill certain types of demand, potentially freeing up cash, minimizing vendor lock-in, and keeping prices aligned with the marketplace.
Heavy users of transportation services could become “asset right” by focusing on the core business while effectively using the excess capacity in the broader transportation system.
At present, retailers and other heavy users of transportation services typically invest in transportation assets (e.g., trucks or rail cars) or hire a third-party logistics (3PL) provider to fulfill key needs.
However in the sharing economy, a retailer, or another heavy user of transportation services, could choose to own only those assets that are needed to fulfill core product demand. It would then leverage a shared transportation platform to handle marginal demand. This shift would allow it to divest transportation assets that are used to fulfill seasonal spikes.
Signs of a changing landscape
A scan of the marketplace indicates the transportation ecosystem is evolving and new collaborative opportunities are emerging:
Technology-enabled coordination for regional parcel carriers

One regional carrier could leverage the assets of others to deliver outside of its normal coverage area, effectively employing a shared model
Regional parcel carriers already coordinate to provide a wider coverage area, but as coordination increases through technology-enabled capabilities, this could begin to look like a seamless, national, or even global network

Real-time marketplace for long-haul trucking

A transparent real-time platform for long-haul trucking that seamlessly interfaces with logistics management software could be used to leverage additional truck capacity, especially for less-than-truckload shipments
This idea is already being mobilized by start-ups such as uShip, and as the technology matures it may become a larger part of the transportation portfolio

Application of multimodal technology to the crowd

The reach of the crowd could be extended by coordinating handoffs between carriers at intermediate way points. This could effectively create a multi-regional or national network using a point-to-point delivery model
Coordination of warehouse space would be needed to establish the waypoints and reduce friction in the handoff process

Crowdsourced assets in the core supply chain

Retailers are increasingly turning to the crowd to fulfill deliveries from stores, but as they become more comfortable with the sharing model, they could leverage it to move goods between stores or from distribution centers to store

UPS uses golf carts

United Parcel Service Inc. uses jumbo jets, hybrid electric vans and, sometimes, drones to deliver nearly 5 billion packages each year. But a push into a less glamorous transportation method -- golf carts -- has touched a nerve with drivers in one of its home bases.
But union leaders, who had opposed the legislation, argue that having the vehicles share the road with cars and trucks puts workers at risk. They also object because at UPS golf cart drivers earn less than traditional truck drivers.
"They're just looking to pay the drivers less at the expense of the safety," said James DeWeese, a member of Teamsters Local 89, which represents UPS drivers in Kentucky.
UPS spokesman Glenn Zaccara said the carts undergo a major face-lift from the ones spotted on fairways. The vehicles will have turn signals, seat belts and a emblem designating it a slow-moving vehicle.
"The safety of our [workers] always comes first and we will not operate in conditions that are determined to be unsafe," Mr. Zaccara said.
UPS, which has its main WorldPort package sorting hub in Louisville and is the state's second-largest employer behind Wal-Mart Stores Inc., lobbied for the law, which passed the Republican-controlled House and Senate by roughly two-to-one margins.
The golf carts, which are modified with a flatbed or pull a trailer containing the packages, will be driven by part-time workers. The carts generally don't go faster than 15 miles per hour and will only be allowed to be operate in residential areas and on public roadways with a posted speed limit of 35 miles per hour or less.
Mr. Zaccara said using golf carts will give UPS more flexibility during the holidays than having to buy new delivery trucks or vans. The electric golf carts can travel between 25 and 40 miles on a single charge, UPS said.
Controlling costs is a major issue at both UPS and FedEx Corp., which have taken steps to optimize driver routes through routing systems, automate more sorting facilities and deliver more packages to drop-off points like stores.
Mr. DeWeese said part-time workers driving golf carts made about $15 an hour, versus a starting rate of $18.75 an hour for Kentucky drivers behind the wheel of a truck or van. Most drivers in Kentucky make the maximum hourly rate of a little more than $35 after four years.
"It's just an eroding of full time employment for people that need it," Democratic State Rep. Rick Nelson said.
Mr. Zaccara said UPS's goal was to find the most efficient way to "process the near double average daily package volume we experience during our peak season" in November and December.
UPS has a number of unique delivery methods to accommodate local quirks, including horse-drawn carriages on Michigan's Mackinac Island and gondolas in Venice, Italy.
In the U.S., the delivery company's national labor contract does allow for golf-cart deliveries. One sentence in the 184-page document states: "Golf cart usage will comply with applicable federal, state and local regulations."
That provision was largely unobjectionable when the contract was ratified in 2013, said Mr. DeWeese, as it was inserted to accommodate deliveries in communities in places like Florida where golf carts are the primary mode of transportation.
The issue comes several months ahead of when the national Teamsters union is expected to begin negotiations with UPS over its next contract. The current version expires July 31, 2018.
Write to Paul Ziobro at Paul.Ziobro@wsj.com

UPS's golf carts will have turn signals, seat belts and a emblem designating them as slow-moving vehicles. "The Latest UPS Delivery Vehicle Isn't a Drone -- It's a Golf Cart," published at 8:15 a.m. ET, incorrectly said they would also be enclosed and heated.

BREAKING: Walgreens pulls the plug on Rite Aid deal

AUTHOR

Daphne Howland @daphnehowland

PUBLISHED

June 29, 2017

Dive Brief:

Walgreens Boots Alliance on Thursday said it has thrown in the towel on the $6.84 billion effort to acquire rival Rite Aid. Walgreens has agreed to pay Rite Aid a termination fee in the amount of $325 million in cash, and the pull-back means the termination of the rivals' divestiture agreement with regional pharmacy Fred's, according to press releases from the companies.
Instead, Walgreens announced a new definitive agreement with Rite Aid under which Walgreens Boots Alliance will purchase 2,186 stores, three distribution centers and related inventory for $5.175 billion in cash, according to a statement. In that deal, Walgreens Boots Alliance will assume related store leases and certain limited store-related liabilities. Rite Aid will have the option, through May 2019 and subject to certain conditions, to become a member of Walgreens Boots Alliance’s group purchasing organization.
Walgreens expects the new transaction to be modestly accretive to its adjusted diluted net earnings per share in the first full year after the initial closing of the new transaction, and expects to realize synergies from the new transaction in excess of $400 million. Most of that will accrue over three years, according to GlobalData Retail Managing Director Neil Saunders.

Dive Insight:

From the beginning, starting in October 2015 when the merger plan was first announced, Walgreens Boots Alliance CEO Stefano Pessina has been adamant about making the deal happen, and the companies have been sweetening the pot in recent months to move along the process. Speaking to analysts in January, Pessina said the company had "no plan B” if the merger were to be scuttled. Later that month, at Walgreens' shareholders meeting, he said the organization was “actively engaged in dialogue with the FTC” and declared, “We’ll do anything we can to support their work.”
Today, “plan B” it is. The acquisition faced intense scrutiny by antitrust officials, and earlier this month it became increasingly clear that one solution from the drugstore rivals — a spinoff of Rite Aid stores to Fred’s — wouldn’t pass muster with them. That deal with Fred’s came as a surprise to some analysts because it wasn’t clear how the smaller pharmacy chain would raise the funds. Without the viability of that deal, there wasn't likely to be enough competition in the drugstore space to ease the FTC's concerns.
Fred’s on Thursday said that, though disappointing, the merger's failure wouldn’t interrupt its expansion strategy. “While the acquisition of additional stores was an opportunity for growth, we always viewed it as a potential outcome that would accelerate our transformation, not define it,” Fred’s CEO Michael Bloom said. “We are as confident as ever that we have a strong team and the right strategy in place to drive long-term growth and profitability, and to enhance value for our shareholders. We are excited about what we have accomplished and are optimistic about the future.”
Rite Aid also sought to emphasize that it will do well by the new agreement. "While we believe that pursuing the merger with WBA was the right thing to do for our investors and customers, this new agreement provides a clear path forward and positions Rite Aid as a strong, independent, multi-regional drugstore chain and pharmacy benefits manager with a compelling footprint in key markets," Rite Aid CEO and Chairman John Standley said in a statement. "The transaction offers clear solutions to assist us in addressing our pharmacy margin challenges and allows us to significantly reduce debt, resulting in a strong balance sheet and improved financial flexibility moving forward."
The new deal with Rite Aid will mean a lot less debt for Walgreens, Moody’s Investors Service noted on Thursday in an email to Retail Dive.
“The new asset purchase agreement to buy 2,186 Rite Aid stores and three Rite Aid distribution centers for $5.175 billion and the $325 million termination fee paid to Rite Aid will not require Walgreens to issue any incremental debt as it has sufficient cash balances to finance the transaction and continues to generate healthy free cash flow,” Moody’s Vice President Mickey Chadha said in an email to Retail Dive. ”Rite Aid intends to use majority of the proceeds to reduce its debt burden and provided the companies gets FTC approval for the new transaction we expect the asset purchases to be consummated over a period of time and completed over a six-month period.”
But GlobalData Retail managing director Neil Saunders slammed the FTC’s involvement in an email to Retail Dive as indicative of “the government's complete lack of understanding of how the retail market works in practice” and the drawn-out process as “a colossal waste of resources and effort.”
“Walgreens has to pay out a $325 million termination fee to Rite Aid, and all parties — including Fred's, which was due to acquire some Rite Aid stores — have invested time and money with very little to show for it,” Saunders said in the email. “When it comes to retail matters, we believe [the FTC] to be both inefficient and ineffective. Its previous decisions, such as the instance that Dollar Tree disposes of Family Dollar stores during acquisition, and that Albertsons-Safeway sells off stores during their merger, have resulted in failure. In both cases, the spin-offs, designed to provide more choice to consumers, went bankrupt and ended up back in the hands of larger players.”
But rival CVS Health, which was set to be dethroned as the nation’s largest drugstore retailer if the merger had proceeded, had reportedly warned the FTC that the Safeway deal actually served as a cautionary tale here.
Financially, the deal is good for Rite Aid, Saunders noted. But it's now a question how the retailer will fare as a much smaller entity. " After the deal, the group will have 2,337 stores, around half the number it has now," he said. "This will be punishing on economies of scale, especially for a company that is already struggling to turn a profit even before interest payments are taken into account. The answer lies in the agreement with Walgreens, which will allow Rite Aid to become a member of Walgreens Boots Alliance's group purchasing organization. In our view, this will be highly beneficial and will allow Rite Aid to improve pharmacy margins drastically."
Walgreens will also make out well under the new tie-up, which, Saunders notes, also will face antitrust scrutiny. "For Walgreens, the deal allows it to boost both the top and bottom lines at a time when growth is harder to come by," he said. "While the deal is not the deal of choice for either Walgreens or Rite Aid it is a good compromise that brings benefits to both parties. Ironically, it is also one that means Rite Aid will effectively become a part of Walgreens network, albeit with a degree of operational and managerial independence. Of course, all of this remains subject to approval and all eyes now turn to the FTC for its decision on this latest move."

Focus On New Ways Of Shopping Keeps Biggest Retailers Big

Posted by Kristen Cloud

Date: June 27, 2017

in: Corporate Store News, Home Page Latest News, National, Operations

Rank	Company	2016 retail sales (000)	Headquarters/U.S. Headquarters	2016 stores
1	Wal-Mart Stores	$362,815,000	Bentonville, Ark.	5284
2	The Kroger Co.	$110,215,000	Cincinnati	3825
3	Costco	$85,778,000	Issaquah, Wash.	497
4	The Home Depot	$85,086,000	Atlanta	1965
5	CVS Caremark	$81,482,000	Woonsocket, R.I.	9769
6	Walgreens Boots Alliance	$79,283,000	Deerfield, Ill.	8053
7	Amazon.com	$77,024,000	Seattle	3
8	Target	$69,495,000	Minneapolis	1802
9	Lowe's Companies	$60,409,000	Mooresville, N.C.	1831
10	Albertsons Companies	$58,696,000	Boise, Idaho	2392

Wednesday, June 28, 2017

Maersk ransomware attack has potential to disrupt 'tens of thousands' of shippers, warns analyst

By Gavin van Marle in Amsterdam

28/06/2017

The cyber attack on Maersk has the potential to throw global container supply chains into chaos, according to Lars Jensen, chief executive of maritime cyber security firm CyberKeel.

Mr Jensen told delegates at the TOC Europe Container Supply Chain conference in Amsterdam today that the attack is likely to spread well beyond Maersk, its terminal operating arm APM Terminals, and its customers.

According to his calculations, Maersk’s shipping lines – Maersk Line itself, Safmarine, Seago, MCC Transport and Sealand – book 3,300 teu every hour, representing some $2.7m in revenue per hour.

At the point of writing that equated to at least some 82,500 teu and revenues of $67.5m – a combination of shipments caught up in ports and on vessels, and likely lost bookings.

“But there are other shipping lines that have boxes on board Maersk vessels – these will not be able to be unloaded; other lines use APM Terminals’ facilities; and even the third party terminals that are unaffected may well have piles of boxes on their facilities that will unable to be cleared,” Mr Jensen said.

The number of shippers affected could amount to the tens of thousands.

One forwarder, however, told The Loadstar that due to the attack he was hopeful of getting space on a Maersk ship next month – at a good rate – that might otherwise have been booked. But another said it was a “serious issue”.

Mr Jensen said the attack illustrated the inherent digital weakness of the shipping industry.

“By no way does this imply that Maersk had insufficient security – if someone wants to hack you they will find a way.

“What it does mean is that shipping needs to build resilience into its digital products- it’s not about building a system and laying a security system over the top, but building security up front when you begin to develop a system, which I’m afraid is likely to cost more,” he said.