NOSH Bootcamp Winter 2021: Best Practices for Changing Grocery Industry Logistics, Sponsored by Zipline Logistics

Speaker 1 [00:04] Thank you for taking the time to watch this presentation today. You won't regret it. Today we're going to talk about the massive opportunities for beverage brands through the lens of logistics performance. We're going to talk about the highlight highlighting the opportunity to expand top line revenue, the opportunity to expand gross margin, and the path you can take to capitalize on those opportunities while improving your operating efficiency and strengthening your relationships with their retail distribution partners. But first, a little about me. 13 years ago, the opportunity my partners and I saw was in a 3PL marketplace that was built to match the highest paying freight with the lowest cost capacity possible in order to maximize profitability on every transaction at any cost. Even then, before OTIP and 2 hour home delivery, it was clear that the same trucks and drivers that move scrap metal and roll paper shouldn't generally be the same ones bringing sparkling water to Kroger or electronics to Best Buy. There's a strata of service quality and communication that are starkly different when you serve groceries, seesaw, and big box retail than they are for generalized industrial sectors. Neither the shipper nor the capacity provider is very well served in the type of prevalent commoditized service model that existed before Zipline. And where Zipline really differs from the rest of the 3PL space is that we really are the only non-asset based logistics solutions provider in North America that was built from the ground up just to serve consumer packaged goods brands. The community we've built and continue to build is a community of CPG professionals. It may sound cheesy, but we like to say that we aren't a 3PL that specializes in consumer packaged goods, but a consumer packaged goods company that specializes in logistics. That's why we invest in our community through organizations like that Net Nosh, New Hope, Specialty Foods Association, and the like. As a top 103PL, we have the scale to meet our clients' needs cost effectively while still delivering world-class service through specialization. That service mark Zipline proudly achieves the highest net promoter score in our industry. The average NPS score for 3PLs is an abysmal 13, where Zipline scores a 74 across our shipper, consignee, and carrier community. I'm not telling you all this just because I want you to call us tomorrow, but because I hope that our market position and strategy validation lends credibility to what I'm about to deliver to you. So that's it about us. From here, we'll dive into what you came here to learn. Quick agenda for this presentation. We'll talk about the dynamics of, of CPG and retail pre-COVID, how those dynamics changed and accelerated during COVID, and what the future looks like in a post-COVID world between CPG's retailers, what opportunities lie in wait, and what you can do to capitalize on it. To frame this whole conversation up, we'll start by overviewing the retailer and supplier dynamics that were already driving evolution in the CPG space before COVID turned the world upside down. For years I've heard from brands or seen posts on LinkedIn about chargebacks and non-compliance fines in terms of these costs just being another profit driver for retailers. I think it's important to understand how much more there is to that picture. So we'll walk through what this dynamic looked like pre-COVID, then discuss how COVID changed and accelerated the prevalence of these dynamics, and then again dive into the best ways to capitalize on the opportunities presented by them. Over the past decade, we've witnessed an incredibly diverse array of new products and brands, finding national go to market opportunities as innovative production, packaging and distribution models allow what used to be niche categories to expand beyond specialty marketplaces. The entire CPG sector continues to revolutionize behind more values-driven consumer generation. The push towards natural, sustainable, organic, fair trade, and myriad other purchasing values has opened the door for smaller CPGs to move in and expand within these demographics and capture growing market share. Those upstart CPGs captured $22 billion in sales in categories dominated by CPGs in just the five years preceding 2016 and have continued to make waves, increasing their market share by almost 20% in each of the last two. In response, big CPGs have been reshaping much of their growth and go to market strategies away from the cost-centric universe that prevailed during their decades of shelf space domination. Today's big CPG retains a significant acquisition staff, you know, a venture capital arm, an incubator of some kind, and a renewed emphasis on innovation within the aforementioned consumer value sets. As momentum is built behind category disruptors. Venture capital money is poured into the space behind new Challenger brands and expanding product launches by established credible disruptors. When I say established credible disruptors, I'm referring to brands like RX Bar moving into hot cereal or Kodiak cakes moving into baked snacks, behaving a lot like their big CPG competitors while leveraging the values credibility that they built with their original product assortments. Competition for shelf space has grown stiffer every year. Carbonated beverage space is a perfect place to walk through the category evolution we've seen over the past decade. As consumers started to focus on natural ingredients, seemingly out of nowhere, LaCroix established this dominant shelf position in the beverage aisle, taking space from Coca-Cola and Pepsi and KDP and the like with their naturally flavored sparkling water. As consumers evolves their understanding of words like natural, new entrants like Spind Drift and Nixie capture some of LaCroix's shelf space with cleaner labels, more natural ingredients like real fruit. Meanwhile, Pepsi and Coca-Cola pour investment into their own sparkling water entrance to attempt to recapture their lost ground. In just a few short years, the carbonated beverage aisle has gained a new entrant, which turned into multiple competing new entrants and is now evolved into an entire category within the category of brands that meet a whole range of different buyer value sets from low sugar and vitamin enhanced to sustainable packaging. Well, COVID and all of its disruptions really added to the opportunity landscape for CPG brands is a massive reprioritization by retailers that put on-time fulfillment and well-stocked shelves front and center. I think out of stocks really moved into the mainstream consciousness during the pandemic and quarantine, but our retail partners have been working to correct them for decades. Our retail and grocery partners have always operated in a highly competitive space where driving new and repeat foot traffic and click traffic means being reliable to carry all the staples their community of shoppers needs while providing access to exciting new brands and product lines that fit their evolving taste in purchasing them. As big box stores and Amazon continue to compete with one another and push into more traditional grocery and specialty marketplaces, the consequences of out of stock products have never been more severe. Even before the quarantine, shoppers were experiencing out of stocks on 1 in 3 store visits, costing retailers nearly $1 trillion annually across the globe, with portions of that revenue moving to other competing retailers, including Amazon, who attributed 24% of their retail revenue in 2018 to that exact scenario. You can imagine this dynamic is a big part of why 73% of retail buyers we surveyed said they've ended supplier relationships over failure to meet fulfillment compliance and why we see retailers continually tightening the screws on their suppliers to prevent out of stock products. The one thing that retailer behavior makes really clear is that they see big risk and big long-term opportunity in controlling that stocks. Whether it's through a home delivery infrastructure or a click and pick hybrid shopping model, shoppers have been steadily increasing their retail e-commerce interactions as well, and that's driving increased product velocity and the need for resilient inventories as online orders are increasingly fulfilled through omnichannel approaches, through combinations of distribution centers, brick and mortar retail stores, and customer pickup locations. These trends continue to up the ante for supplier logistics operations as retailers and distributors balance the need to have the right products on hand while controlling inventory costs. That's why we've seen programs like Walmart's MABD tighten from 4 days to 2 days in the early parts of this decade, then tighten further to 1 day, then evolve into on time in full with a 75% OTI goal to now 98% on-time and full OTIP goal. It's also why we've seen every mid-major and major retailer distributor ramp up their scorecarding, their out of stock reporting, and their nonfulfillment penalties over the same time frame. Because at the end of the day, out of stocks add up to loss and foot and click tracker. So buyers have very little patience for brands that can't get their products on the shelf. The pressure that retailers are under is real. And so is the opportunity that this pressure creates for up and coming CPG brands that want to capture increased shelf space. The massive opportunity in front of CPG brands isn't exclusively driven by consumer evolution but also by the failure of brands of all sizes to properly invest in customer logistics strategies that prioritize fulfillment compliance to retailers and distributors. When I say all sizes, I mean all sizes. This slide from the Food Marketing Institute and Boston Consulting Group paints the picture really clearly. Even before COVID, the largest CPGs in North America were only hitting 85% on time and full across their retail networks. And they were outperforming the overall supplier average of the 70% reported by retailers. That is not good. In these pandemics, as the pandemic disruptions continued, their on-time performance slid even further to 77%. More than likely, the overall average slid even further into the sixties, and it didn't budge even as their spend on transportation and logistics increased by over 35%. With non-compliant delivery being the primary driver of out of stocks, those late fees and penalties were definitely a hit to gross margin for those big CPGs, but nowhere near as harsh a hit as their lost sales from out of stocks. An important point that this slide highlights is that you can't buy your way into logistics performance. You can only strategize your way into logistics. Now with all that I've just laid out in mind, take a step back and look at the opportunity presented by the CPG and retailer dynamics that have been accelerated by COVID. We have a massive upward momentum for CPG entrance. New product launches from emerging CPG disruptors and competing launches from established big CPGs, getting trial from increasing wallet share of consumers with evolving values, and an almost industry-wide failure to meet delivery performance needed by retailers and distributors. We have retailers and distributors reacting to empty shelf space by increasing penalties and visibility of out of stocks and increasing the number of suppliers in each category to stay ahead in their competitive market landscape. Add to that the fact that over 50% of buyers oversee 6 or more brands within their one category. You have a pretty clear view to the potential return on logistics investment that is achievable with a great customer logistics strategy. In the next few slides we'll discuss the CPG Marketplace horizon and its relationship with the logistics marketplace, along with some high level numbers that underline the reason. We want you to stop looking at logistics as a cost center and start looking at logistics as an investment that can deliver you not only better retailer relationships and operational efficiency, but a real hard dollar return. As you can see from the top chart above, the consumer hasn't slowed down in any meaningful way. The average consumer continues to hold a healthy balance sheet, and the resurgence of COVID and the Delta variant continues to drive out outside share of their spend on consumer goods in lieu of experiences. Meanwhile, inventory to sales ratios remain near generational lows. Further, as visualized by the bottom chart, that consumer demand and low inventory dynamic continues to drive demand for logistics and transportation services at volumes never before seen for this length of time. There is no prediction of relief in the logistics marketplace in the next two quarters, and the most optimistic of predictions only offers a slight demand deflation in the second half of 2022. You have a long runway of opportunity for both the demand side and the logistics execution side. Now, as a reminder when looking at this chart, logistics failure is the primary cause of out of stocks, and there is not a close second. We recently engaged with the fast growing beverage brand and the VP of operations said to me, when I walk through my grocery store and I see empty shelf space gaps in the beverage aisle, I think that shelf space can be mine, and I'm going to do everything I can. To take it. That's the attitude every leader in this industry should be approaching the current climate. The numbers in this chart are extrapolated from IRI, which tracks in-stock levels at leading US grocery, big box, club stores, and pharmacy overlaid against total domestic annual sales for the beverage industry. In carbonated beverage alone, there was $390 million in lost sales last week. That $390 million represents the opportunity to win over new consumers by keeping your committed shelf space stock when your competitor did not. And an opportunity to an expanded shelf space when your retail partners need to fill gaps left behind by non-performers. This is a top line revenue opportunity that you gain through the competitive advantage of simply being capable of meeting your retail and distribution partner's fulfillment expectation. Remember, 73% of CPG retail buyers stated they have stopped working with suppliers over failure to meet fulfillment expectations. That shelf space is yours. Now look at an even more direct opportunity for you in this market or any market. The opportunity for expanded margin. Remember, retailers report that the average on time and full performance of their suppliers was in the mid-70s before COVID, and that failure to deliver on time is the primary cause of out of stocks. Out of stocks are a direct hit to your margin. You ordered the raw materials. You ordered the packaging supplies, you paid the labor and the manufacturing costs, you inventoried the product, and you even shipped the product more than likely. You just didn't get it there on time when your retailer needed it there to have it on the shelf to meet plans. So if you're a brand that's selling through retail, you have a million dollars in revenue. The difference between hitting the average performance of retail suppliers, 77%. And hitting the performance of retail buyers expect 95% or better is $81,000 of pure margin. That's about as much money as a brand with a million dollars in revenue should expect to spend on logistics overall, as most retail brands allocate between 8 and 10% of total cost to logistics. So again, start looking at logistics as an area of investment. This brand is going to spend $90,000 on logistics to get $346,000 in margin. That same $90,000 could deliver $427,000 in margin with the right strategy and the right partners. Stop spending, start investing, demand a return. All this increasing pressure to avoid out of stocks from chargebacks and late fees to simply being weeded out of a supplier network validates the need for internal and external logistics stakeholders to have a more integral place at the organizational table. Success in the CPG space in the coming decade is going to rely on your organization aligning, strategizing and taking control of your supply chain today. So let's talk about step one. Understand retail compliance. Get to know your retailer and distributor performance KPIs and scorecards. Again, almost every middle market and above retail and distribution outlet is measuring your performance on the scorecard, and most with some sort of monetary penalty for poor performance that is punitive to lost sales from out of stocks. That penalty could be a chargeback or it could simply be lost shelf space. Both are avoidable if you understand how each retailer's scorecard works and put the work in to build a strategy around. Walking through expectations, opportunities, and consequences built into these snoring programs is a lot of what we spend our time doing for our managed transportation clients and so on. Not only, not only do the penalties differ, but what exactly is being measured can differ pretty widely across different retailers and distributors. Is your target days to fulfill? Is the delivery by a certain day or is it on a certain day? Are you being measured by how long it took you to request a delivery appointment for the due date? These scorecards and policies reflect your retailer or distributor's restocking plan, so if you're going to miss the due date, you should expect to have lost sales. On most scorecards, missing a due date because there weren't appointments available doesn't buy you any grace. It doesn't help you avoid lost sales, and you'll still likely have to pay a penalty. Your retailers and distributors are busier than ever, just like everyone else, it seems like in the consumer packaged goods industry. In the post-COVID reality, if you don't have a strategy to get in front of due dates, you're highly likely to lose ground to someone who does. And unfortunately, CPU relationships don't really shield you from these issues either. Even if you have the time to fight the chargebacks, you don't have a remedy for the lost sales. Second, ask your buyer how you're performing. Your carrier reporting that they were 95% on time to delivery doesn't mean that you were on time to your retailer. It simply means that they, your carrier, hit 95% of their scheduled appointments. It doesn't take into account whether or not that appointment matched up with your retailers must arrive by. Your performance reporting needs to come from either the retailer or you need internal mechanisms and visibility to track must arrive by dates versus confirmed delivery dates. I've heard countless stories over the years from logistics and supply chain leaders that sound like this. We were patting ourselves on the back to our CFO celebrating the $50,000 in transportation costs we saved last quarter, never really realizing that our chief revenue officer was trying to account for $250,000 in lost sales and missed plan. If your sales and logistics teams aren't aligned in allocating this difference into your logistics budget, you may be running right past dollars to catch pennies in pursuit of cheaper freight costs. You're damaging your customer relationships along the way. As we stated earlier, 73% of buyers surveyed have ended supplier relationships over failure to meet fulfillment compliance. They simply don't have the patience for empty shelves. It's also highly unlikely that you're saving enough money chasing cheap trucking and fulfillment logistics rates to make up for what you're losing from out of stocks and chargebacks today. The retail and distribution industry will make absolutely sure that you never do. In fact, many mid-cap and large CPGs we work with are viewing recent compliance tightening announcements as weed-out events, a way to narrow SKU based on customer supply chain strengths. Review your customers fulfillment policies with all stakeholders from sales to operations. Get a clear picture of what's at stake for non-performance, and make that the cornerstone of your procurement strategy. Think beyond customer pickup. You know, as I touched on earlier. It wasn't just consumers looking for comfort that had big box CPGs like General Mills and Pepsi dominating sales during the height of the pandemic. was the fact that at the beginning, those were the brands that were getting their products on the shelf. In fact, across the size spectrum and product array, the brands that emerged unscathed were the ones that maintained control and visibility into their retail into their customer supply chain. With CPU agreements, you lose both of those and so much more. Far too many brands blindly accept the notion that their retailer distributor can get their product, uh, to its destination more cost-effectively than they can, which is often not true on its face. Most retailers and distributors don't want to handle your logistics, and their steep freight allocations reflect that. Further, CPU agreements remove the ability to consolidate orders with other en route destinations and amortize transportation costs across more products. This is an enormous area of opportunity for CPG shippers, especially growing CPG shippers, and it's lost in any CPU arrangement. Even more common issue is what many shippers are going through right now with their CPU customers. When transportation procurement costs rise above the amount allocated in your agreement, you're left holding product and absorbing inventory costs and losing sales while still potentially getting chargebacks. Even in less volatile freight markets, there are implications wrapped up in CPU agreements that extend way beyond the sale price. Not only does CPU allow your retailer to control when or if they pick up your product, which directly affects whether or not you have your shelf space stock, but it also, by proxy gives them influence on your inventory costs and constrains your space and potentially strains your warehouse partner relationships if you use third parties. That inventory and space constraint can have downstream effects on the rest of your shipping and production schedules, causing delays for other customers. By controlling when they pick up your product, they're also influencing your production schedule, which can have downstream effects on your entire operation. All to avoid dealing with what should be the simplest part of the supply chain, delivering finished product to your customers do. Our advice to all of our clients is that CPU should be your last resort. Once you have a clear understanding of the costs and opportunities hidden in your logistics procurement strategy, perform a data-driven network analysis. Only what gets measured gets changed. At Zipline, we developed a shipper intelligence platform to help our clients identify which of our customers are the highest cost to serve, what makes them higher cost. So which of our customers aren't needing minimum order quantities or which customers need updated minimum order quantities because of their ordering patterns? Where are our consolidation? Which LTL providers will serve each customer location the best and at the best cost? What's the optimal production location or warehouse location to fulfill each customer order? For one customer, Zipline was able to identify $1.5 million in savings on a $12 million freight budget just by optimizing fulfillment motivations. There are also habits that span the organization like sales reps saying yes to customers who ask if they can receive their product a couple of days early. You know, all sales reps love to say yes, or a shipping manager that schedules orders to ship as soon as they're ready. That may seem harmless or even intuitive until the costs, both real and opportunity, are measured. A well-managed, data-driven network analysis will illuminate these key metrics and provide the framework for building a logistics strategy that works now and scales economically. Well, it's highly unlikely that you'll hit the optimal, uh, scenario week after week after week without fail. In the end, in the long run, we only hit what we aim at. Now it's time to create a logistics strategy that works. Now that you've identified the opportunity by evaluating your chargebacks and out of stocks loss sales. Re-examined your CPU arrangements and identified operational and sales opportunities within those CPU arrangements. And begun working to develop key performance indicators that you can build your operation's optimal shipping scenario on, complete with MOQs updated, due dates updated, fulfillment locations optimized, production planning and capacity providers optimized that transparently informs decision making across the organization, meets retail compliance, and gives your brand a competitive advantage. Success in today's retail environment relies on 3 key actions. Get your product on the shelf Get your product on the shelf and get your product on the shelf. And a strategy that aligns your organization toward meeting your optimal shipping scenario is how you drive unnecessary costs out of your supply chain while exceeding retail compliance metrics. If I could summarize all 5 practices we just walked through, it's to say that control of your customers supply chain is critical to victory. So by now, hopefully, I've clearly expressed our position that in the beverage space, successfully delivering to specialty D-store and grocery retail and distribution and econ distribution channels requires a holistic strategy looks beyond transactional logistics expenses. Tactics may win battles, but strategy wins wars. The value you'll gain by implementing a holistic customer logistics strategy is transformative. Once you understand your customer scorecards and where the goalposts are for success, Clarify chargeback and out of stock impacts on your forecast revenue. Perform a deep network analysis that informs key performance indicators. Evaluate the cost-benefit of CPU arrangements and use uh key performance indicators to build a logistics strategy that aims at your optimal shipping scenario. You will ace retail compliance. You will improve facility efficiency. You'll minimize planned versus achieved revenue gaps, you'll improve gross margin, and you'll gain a competitive advantage by keeping your committed shelf space. Thanks a lot again for taking the time to join me today. I hope this has been informative, and I hope to hear from you soon.