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What will be the new normal of retail supply chains?

Right now the world and the retail industry is going through very tumultuous times. The coronavirus is impacting all businesses, changing consumer behavior and disrupting supply chains. But what will happen down the road? Will things go back to normal?

Akuret asked one of our founders, Fredrik Eng Larsson, who is also professor of Operations Management at Stockholm University, to share his thoughts about the ”new normal” of retail supply chains after the corona crisis.

Akuret: How do you think the coronavirus crisis will impact retail supply chains?

Fredrik: Well, in many ways, is the short answer. I think the industry will go through a rough transient phase followed by a new normal. Right now, we are experiencing the transient phase, with severe disruptions on both the demand and the supply side. My colleague Daniel Steeneck was interviewed about this a few weeks ago, and I think he brought up several interesting points. Consumers are changing their behavior and many manufacturing sites and distribution centers are at reduced capacity. This will continue to be a rocky period, probably for a year or so. Supply chains will struggle to adjust capacities and inventories, and a lot of traditional retailers will disappear during this period.

Akuret: What will happen after this transition?

Fredrik: This is of course a very difficult question. I think once things go back to normal, they will go back to a “new” normal. It will be “normal” in the sense that I expect several of the trends that were present before the crisis to continue: online commerce will continue to increase; retailers will continue to struggle with what a store should be; and across the retail industry companies will struggle with how to create the “seamless experience” for consumers – conceptually and logistically. The crisis has forced many consumers to move a large share – if not all -- of their purchases online. Several retailers have reported more than a 100% increase in online sales during the crisis. Although I believe the huge increase is temporary, this forced shift will probably accelerate the general shift in consumption to online channels.

Akuret: And how will the new normal be “new”?

Fredrik: I think it will be “new” in the sense that consumer behavior and industry and government priorities will be different from what they were before the crisis. I am sure preparedness and resilience will receive more attention. Lack of important supplies, panic buying, and shortages of food and medicine have been discussion points across the world. I will not be surprised if governments pass legislation to monitor and ensure sufficient inventories of vital supplies. Such legislation may force grocery and pharmacy retailers to rethink their supply chains in ways we still do not fully grasp.

Akuret: What about other sectors of the retail industry? What resilience measures do you expect from them?

Fredrik: Even in the absence of legislation, retailers will need to adapt to a more uncertain environment. Right now, we see many reports about border crossing issues, and increasingly eroded trust between countries. If this remains a problem in the new normal, retailers will be forced to recalibrate their supply chains to manage the increased supply risk. In the U.K., the increase in supply risk caused by the Brexit vote led to stockpiling across the country. If that reaction is an indicator, I would expect to see more local inventory build up, and more local sourcing, everywhere. Supply chains will become less global.

Akuret: How about consumers?

Fredrik: The demand side will be another source of risk. Coming out of a long period of strange demand patterns, forecasting will remain a challenge for several years. Adding to this, as retailers try to ramp up sales, we should be prepared to see more promotions than in the past. This will create volatility in consumer demand and make supply chain management even more of a challenge. The crux here is that increased demand uncertainty and poorer forecasting tend to drive inventory. At the same time, a tougher economic reality will force many companies to aggressive cost cutting and reductions in inventory to improve liquidity. This will be a very difficult balance for many retailers: how do you keep service levels high and costs low when risks increase? Companies that have the capabilities to reduce and manage these risks well will have a head start once the transition phase is over.

Akuret: Will the retail industry survive?

Fredrik: Yes. But it will be different. Of course, the impact of this crisis will vary dramatically across the industry. Certain retailers are booming right now, while others are failing. Some of those that are booming now will not survive once the demand for bread machines, training weights, canned food and home office supplies revert to normal levels. Some of those that are failing now will rise again, albeit in new forms, as people still need clothes, shoes and many other items.

Right now we are facing a very difficult situation, from a humanitarian perspective as well as from an economic perspective, but economic downturns tend to lead to innovation. I am sure we will see many creative innovations that come out of this once it is all over.


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