DEEPER DIVES: The Customer Isn't Always Right

Good Morning,

First, as always, thank you for joining.

I spent all of last week meeting clients and connecting with my network in Toronto. You can feel the tension with everyone. That feeling of calm before a storm.

Q4 is coming and the uncertainty around consumer behaviour (what they’ll buy… and when) has everyone uncomfortable.

Here’s what this issue brings:

• If you haven’t seen it yet, check out the Chick-Fil-A autonomous delivery vehicle
  

• I’m giving and overview of the critical role balancing operations and customer needs has for your supply chain (and profitable) execution
  

• Coupang is an Amazon-esque organization that I follow. They have a ton of market favourable conditions that show how hard d2c still is. Here’s a review of their Q2 2024 earnings and my take how how things are going

Cities Are Already Grinding To A Halt. How Much More Congestion Does Autonomous Delivery Bring?

Chick-Fil-A introduced this AV a year ago.

The goal is to be able to connect with more customers directly from their stores while maintaining control of the experience.

A benefit they get is solving a major issue plaguing Uber Eats and Doordash. Customer’s not getting their order.

The process for this delivery is:

1. AV arrives

2. It scans a QR code from your app to open the insulated compartment

3. Customer removes food

4. Customer poses for a picture showing that they have their order

5. Transaction concluded

This process does have some challenges when it comes to ordering for friends, or having someone run out to grab your order for you, it removes issues with customers complaining that they never received it since it’s built on a specific chain of custody.

The technology behind this execution is incredible. The AV is capable of self-driving on city streets and pulling into your driveway.

The biggest challenge I see to them however is congestion. While new and novel right now, what happens when there are hundreds of these things per restaurant chain, flooding our streets and invading our neighbourhoods at all hours of the day.

Will people still be as supportive of the delivery process?

Will neighbours start getting frustrated with one another for making “another lazy take-out order”?

Here’s a few more videos if you want to see more about what Chick-Fil-A is doing:

Chick-Fil-A Autonomous Vehicle Program Overview

On The Roads

Making Turns

The Goal Isn’t To Give Customers What They Want, But You Do Have To Give Them What They Need

Retail and eCommerce is struggling to keep up with market changes.

Seamless delivery of products and services isn’t a differentiator—it’s the expectation.

As everyone is striving to meet growing demands, operations within their supply chains is becoming a battleground for success.

But getting it right is hard. It’s more than just efficiency, and it’s not just about giving a customer everything they want (since that will bleed your dry).

It’s about finding the right balance between cost-effective operations and delivering on customer needs.

The Role of Operations in Delivering Value

One thing you see me talk about all the time is using your operations to create more value.

So many people see operations as a burden to bear. A necessary evil that is required in order to get your product to market.

Some also don’t understand that operations probably covers a bigger part of your business than you realize.

At its core, operations is about transforming your raw materials into finished goods, ready to sell to the market.

This transformation process, is where value is truly added within the supply chain (it’s why customers are buying from your versus other options they have).

Operations creates the foundational customer experience by making sure products are available when and where they are needed.

The challenge today is that the majority of the people ‘selling stuff’ are outsourcing all of the other parts of the value chain. This creates multiple competing interests because what’s important for one party, isn’t always a priority for the other.

It’s easy for service providers to fall into the trap of focusing solely on efficiency—streamlining processes, cutting costs, and maximizing output.

While these are important, they must be balanced against the need to be responsive and adaptable to changing customer demands.

What good is an efficient operation if it can’t deliver what the customer wants, when they want it?

Efficiency vs. Adaptability

Ever heard someone “complaining” about the divide between sales and operations?

This is why.

Sales wants to support the customer on what they say they want. And operations wants to focus on what they can do, and how they do it efficiently.

Finding the balance between efficiency and customer responsiveness is harder than it sounds.

Lean too far towards efficiency, and you risk becoming rigid, and unable to adapt to shifts in customer preferences or unexpected market disruptions.

On the other hand, giving too much can lead to inefficiencies and higher costs, which will impact profitability.

The Influence of Order Patterns

A lot of demand planning and forecasting has people feeling like they have no control.

So they keep looking back at past trends, hoping consumer’s will behave in the exact same way they did in the past.

And while humans generally prefer consistency in what we do, there’s a ton of different factors influencing us all the time.

Order patterns are a reflection of both customer behavior and business strategy.

Customers place orders based on promotions, seasonal trends, or personal needs.

Businesses influence these patterns through marketing, pricing strategies, and the availability of stock.

Understanding these patterns is crucial for optimizing operations and providing positive customer experiences.

Companies that truly embrace this relationship will be the ones that are going to be the most successful over the next 5 years.

As social commerce continues to grow (it’s quietly exploding now, but it’s not getting enough attention), the duality of the consumer/business influence on inventory is only going to get more evident.

I’ve shared in previous newsletters the opportunities (and challenges) that social commerce and demand shaping will bring.

A Tool for Sustainable Pricing

No matter how you price, ALWAYS understand the true cost of each activity within your operations - whether they are in-sourced or outsourced.

This is where Activity-Based Costing (ABC) comes into play.

By allocating costs to specific activities—such as production, order processing, and delivery—retailers and brands can gain a clear picture of where their money is going and identify areas where they can optimize.

And while this might sound complicated, it’s something you can do at various levels of expertise.

Whenever I work with a new client with a cost optimization focus, the first thing I ask about (and want) is their P&L or GL or whatever else they are currently using to track costs.

Start with the big buckets and the things that seem out of place. With one customer I did an analysis on their shipping costs. As an eCommerce brand, it ws all going to one line item, and they were generally ok with the spend as a percent of revenue.

But when you broke it out, it was clear that there was an imbalance in the providers and the services being used that they weren’t intentionally doing.

Easy to fix (once you know).

For brands and service providers, this detailed understanding of costs is essential for creating sustainable pricing models.

Without it, companies may find themselves pricing products too low, leading to losses, or too high, driving customers away.

Knowing your costs doesn’t mean you can sell at a loss (if you have to). But at least you know exactly what you are doing, why and how much it hurts.

Business strategy and decisions are always the most effective when the decision makers are fully informed. Finding out after the fact sucks.

Embracing Adaptability and Change

Staying ahead requires more than just a being good at what you do today—it requires a culture of adaptability and continuous improvement.

It needs people who are always looking for that next tweak. The change that makes something (even 1%) better.

Markets change, customer expectations evolve, and new challenges emerge.

Companies that thrive are those that are willing to question themselves and push their thinking to adapt their operations in response to these shifts.

A true culture of adaptability isn’t about reacting to change but anticipating it.

By creating an environment where innovation is encouraged, and processes are regularly reviewed and refined, anyone can maintain operational excellence (even in the face of uncertainty).

The success of a retail or eCommerce brand lives on its ability to manage operations effectively while dialed in to customer needs.

By balancing efficiency with adaptability, understanding the true cost of operations through Activity-Based Costing, and demanding a culture of continuous improvement, you guarantee that they not only meet customer expectations but exceed them.

Coupang Is The “Amazon Of South Korea”. What Does Their Focus And Strategy Tell Us About Where eCommerce Is Going?

eCommerce conversations always seem focused on the US (or China).

But other markets are important too.

One of the most important to watch is South Korea (this is where Coupang is from).

South Korea has a smaller population base than the US (51M vs 336M), but like a lot of other Asian countries, benefits from a much better population density (1,378 vs 94 people per sq mi).

That density is extremely favourable for eCommerce activity.

Coupang reported their Q2 2024 earnings last week, here’s the TLDR:

• Net Revenues: $7.3 billion, up 25% YoY and 30% on an FX-neutral basis

• Gross Profit: $2.1 billion, up 41% YoY​

• Product Commerce Segment Revenue: Increased by 13% YoY (18% in constant currency)​

• Product Commerce Gross Profit: $1.9 billion, with a record gross profit margin of 30.3% (up 310 basis points YoY)

• Product Commerce Adjusted EBITDA: $530 million, up $122 million YoY, with a margin of 8.2%​

• Developing Offerings Revenue: Increased by over 470% YoY, heavily influenced by the acquisition of Farfetch​

• Net Loss Attributable to Stockholders: $77 million, primarily due to the inclusion of Farfetch losses and an estimated $121 million KFTC fine

• Adjusted EBITDA: $330 million, with a margin of 4.5%​

• Net Income Excluding Farfetch and KFTC Fine: $124 million​

• Free Cash Flow: $1.5 billion on a trailing 12-month basis, up $420 million YoY​

While the overall performance was solid, I’m always looking for where people are investing their resources, and what challenges they are facing.

Coupang’s core Product Commerce segment (merchandise sales) is flowing. It’s the typical buy and fulfill model like Amazon has. It’s a third part marketplace blended with their first party sales.

For the 13th quarter in a row, the marketplace sales are outpacing their own direct sales. Exploring the implications of this shift, particularly how it affects profit margins, operational complexity, and long-term strategy are important for emerging eCommerce brands especially.

Both Amazon and Walmart are taking a more active role in building up their marketplace. I’ve shared multiple articles on LinkedIn recently about them facilitating more volume direct from China. Walmart has also jumped into the mix with their support offer.

Amazon has shifted their requirements for 3rd party sellers to prepare products in ways that can more easily move through their new regions and support that focus. This hasn’t been met with enthusiasm from sellers as it’s increasing costs as they now have to get product to multiple DCs.

The reason why this is important for an eCommerce brand is because more 3rd party seller activity means more of a need to create systems to effectively support it. That will force more standardization and fulfillment requirements from all of the major players when you choose their fulfillment options.

What will work for selling on Amazon may not be the same types of requirements for selling with Walmart for example. If you aren’t paying attention to the details, or you end up having to create special inventory lots for each platform, you could end up with your costs increasing.

The next important signal from the Coupang results is the Developing Offerings segement. This segment includes several diverse services such as international expansion, Coupang Eats (food delivery), Coupang Play (video streaming), and fintech services.

These may not seem relevant, but they are.

Why?

They continue to show that every large eCommerce marketplace / platform is aggressively looking for ways to build out their ecosystem.

The impact of this will be felt with smaller service providers.

Since these large outfits will be able to combine streams of revenue from a multitude of sources, they types of offers they will be able to support for sellers using their fulfillment options will be better.

They may be cheaper, or offer more included benefits or simply help brands generate even more sales through cross pollination.

I’ve been talking for a while now about the need to create an integrated customer experience through operations.

Most 3PL providers don’t actually offer anything unique (or even interesting). Talking about being a low cost alternative, or having “high” SLAs is table stakes. No one would buy anything from someone who’s pricing is out of touch with the market, or can’t actually fulfill orders for their customers.

So you need to ask yourself, is your 3PL actually don’t anything to support your business other than the basics?

If the answer is no, you may find yourself at disadvantage as the Amazon’s of the world look to take on more and more 3rd party sellers in order to support their infrastructure and investments.

That’s it for this week. Thanks for being here.