Retailer Capacity Constraints; Walmart Connect; Amazon Assortment

By Cleveland Admin

Retailers facing growing capacity constraints; Amazon looks well positioned vs. peers:
Our team recently published a report focusing on the growing capacity constraints across retailers which we anticipate will likely drive markdowns and replenishment cuts across categories. Our research points to mounting capacity constraints impacting stores and distribution centers in recent weeks. Capacity issues appear to be driven by a combination of late arriving holiday merchandise, soft early spring seasonal sales (poor weather), and rising inflation causing a modest shift from discretionary to essentials spending. We believe working through elevated inventory levels will be a top priority for retailers over the near-term. Additionally, promotions across channels appear to be heating up with retailers introducing seasonal markdowns 6-8 weeks earlier than a typical year with discounts more than 2x higher. 

This comes at a time when Amazon recently noted its supply chain was overstaffed and had excess capacity highlighting the position of strength the retailer is operating from, and we anticipate Amazon is well positioned as many of its competitors grabble with supply chain challenges. 

To mitigate this capacity issue, we recommend suppliers: 

• Review pre-pandemic inventory turn profiles for your categories vs. what you are seeing today. Forecast what replenishment orders might look like to get to turn levels that are in-line or lower vs. pre-pandemic levels.
• Communicate internally that there may be a need to hold inventory domestically in order to chase at-once demand or to hold orders that are at risk of missing ship windows. Explore what 3PL costs might look like for storage in your categories.
• Discuss drop-shipping and 3P strategies internally as potential ways to circumvent last-minute order reductions over the balance of 2022.
• Budget ad/co-op budgets assuming potential incremental markdown and/or promotional support levels heading into key promotional windows such as July 4th, retailer events vs. Amazon’s Prime Day in mid-July and back-to-school.
• Provide direct support and guidance to your retailer’s inventory/replenishment analyst on seasonality and build inventory plans in your categories in order to hopefully be less impacted by blanket reductions in orders.

Weak 1Q22 ad spend on Walmart Connect due to slowing online sales and macro uncertainties:

Our research indicates brands have pulled back WMC dollars short-term driven by 1) softer online demand as more shoppers return to in-store or omnichannel shopping, 2) product shortages, and 3) margin headwinds due to inflationary pressures. Despite a slower start to the new year, advertisers are planning to ramp ad spend in 2H22 to still reach full-year commitments on Walmart Connect – on average, vendors looking to grow budgets +20% y-y which is 4-5x less than the initial asks from Walmart. One of the areas of frustration with WMC continues to be cross-platform measurement as data/reporting across media types are typically silo-ed unless vendors make significant investments. Lastly, while execution will likely take time, brands remain excited about changes and innovations on the horizon such as shifting to a second price auction, self-serve display, live commerce, and more.

Amazon refocusing efforts on broadening its assortment, sometimes at odds with brands’ priorities/profitability:
One theme in our recent research is Amazon’s desire to expand its assortment offering after being capacity constrained (space and labor) since 2020. Now that more space has opened up, Amazon is looking to be at selection parity with brick & mortar retailers. Specifically, the company looks to be placing an emphasis on low ASPs which are the items brands have most commonly delisted (due to unit economic issues). Amazon also believes this will better support shoppers being impacted by inflationary effects recently. While Amazon was very profitability focused in 2021, it seems that it has now reached a turning point where it is prioritizing the topline and growing sales and looking to maintain its strong market share position. This comes at a time where brands are still very much constrained and looking to improve profitability – especially through SKU rationalization, not maximization.