Impact of Climate Change on the Retail Supply Chain


by Bonnie McEwan  

Climate change disrupts the retail industry by creating volatility in the business environment, which impacts resource availability and prices, as well as stimulating regulatory shifts. Perhaps the most vulnerable part of the retail business is the supply chain, particularly for sources and infrastructure located in the developing world.

Vulnerabilities

The main vulnerabilities to the retail supply chain include the cost and availability of secure energy sources and water, along with weather events that disrupt the transportation of goods from Asia to the US and the EU. Companies that have just-in-time inventory systems may rely heavily on air transport for the rapid shipment of goods, but air transport alone contributes more than 3% of global greenhouse gas emissions. Increasingly, national governments are taking steps to limit those emissions, including here in the US, despite political opposition.

Alternative and Sustainable Energy from Wind Turbines


Even companies that already have sustainability strategies in place are finding that their initial efforts are not suitable for the long term, since ecological changes take place over time. What works today may not be effective a few years down the line.

For example, some companies that switched from carbon fuels to renewable hydropower later faced energy shortages due to reduced water runoff associated with drought. US businesses that reduced their use of air transport in favor of rail freight recently learned of a phenomenon called sun kinks, in which intense heat causes tracks to buckle and trains to derail.

Railroad Track With Sun Kinks

Also, changes made at one point in the supply chain may spark a domino effect, causing problems in another. One example is unanticipated changes in substitute materials. If, say, enough manufacturers switch from synthetic fibers — dependent on petrochemicals — to cotton, the price of cotton will rise along with demand. And this also creates a new vulnerability because the cotton crop is affected by floods, extreme heat and other unpredictable weather conditions.

Opportunities

Depending on your point of view, the challenges posed by climate change may also present some opportunities. Agile, forward-looking companies have an opportunity to gain competitive advantages by using new technologies and business models. Smart sustainability strategies can deliver benefits in brand prestige, increased sales, cost savings and investment capital. Take these examples:

Wal-Mart and Tesco have been applauded for addressing climate change throughout their value chains and there is evidence that consumers have responded.

• Upstart Tesla Motors became California’s third-bestselling luxury car in 2013, pushing BMW to speed up development of its own luxury electric vehicle.

Tesla Model S Luxury Electric Car

• Major retailer Marks & Spencer estimates that its global supply chain accounts for about 80% of its carbon footprint. Through a sustainability initiative called Plan A, M&S sources sustainable packaging from Sweden, works with fish suppliers on marine stewardship, and has set up eco-factories in the UK, Turkey and China, among other activities. It has paid off: In 2010 and 2011 alone, Plan A delivered £70 million in net benefits, which M&S has reinvested in its sustainability work.

Some companies have formed business coalitions, whose strength lies in their ability to scale through the pooling of finances, sharing of best practices, and incubation of innovation.

Richemont, the world’s third largest luxury goods company, is partnering with IKEA, the world’s largest furniture-maker, to take the lead on developing internal corporate carbon pricing structures in which all of a company’s business groups pay a fee for carbon. That money is reinvested into sustainable energy.

Ikea Invests in the Environment

• Denmark-based companies DONG Energy and Novo Nordisk formed a partnership in which DONG Energy helped Novo Nordisk improve energy efficiency in exchange for investment of energy savings into DONG’s wind farm. Novo Nordisk saved about US$12 million between 2007 and 2012. The company’s investments made the wind farm financially feasible.


Alex Niemeyer, a director at McKinsey, sums it up:

“One thing that has structurally changed in the world is that historic supply chains tended to be more stable. They dealt with normal volatility…not radical events like Fukushima or the Iceland volcano. Today’s supply chains need to be set up to deal with big volatility all the time. And that doesn’t just mean risk—that also means opportunity to take advantage when a competitor is affected or when a new market opens up.”

About Gevril Group

Gevril GroupGevril Group, watchmaker and wholesale watch distributor, is the exclusive U.S. agent for exquisitely designed and crafted European luxury and fashion watch brands, distributing and servicing some of the best affordable luxury and Swiss watches and trendy fashion watches. Gevril Group also operates a full-service watch repair, staffed by master Swiss watchmakers. Contact Gevril Group by email or by calling 845-425-9882.

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Impact of Climate Change on Inventory Control and Management

Inventory Warehouse


by Bonnie McEwan  

Just a few weeks ago, the mainstream media began to cover climate change in greater depth than ever before. Following a report from The White House on how climate change is affecting every region of the US, most Americans now understand that climate change is real. Interestingly, the retail industry is ahead of most sectors in addressing climate change, a topic we are covering in this blog. In this post, we take a look at how climate change impacts inventory control and management.

Throughout the world, Earth’s changing climate has caused temperatures and sea levels to rise, storms to become more frequent and severe, growing seasons to shift, drinking water to become more scarce and land to become less stable. These changes affect the food supply, health and living conditions of us all, but especially of the world’s poor and near-poor, many of whom produce the garments we wear, mine the raw materials we use and work in the nations where we source key products. Here are three ways these changes affect inventory management.

1) Disruptions in deliveries. Whether moved by train, truck, air or ship, storms and abrupt changes in the weather delay deliveries and sometimes destroy cargo. Buying trips are delayed. Inventory may not arrive when retailers need it.

2) Factory conditions, already bad in many nations, are likely to worsen. Travel to and from work will be more difficult for workers, especially those in the developing world. There may not be enough drinking water or food to sustain workers and maintain their productivity. Disease, particularly malaria, will increase. Worse than merely arriving late, your inventory may not arrive at all.

3) When poverty worsens in response to climate change, other problems are exacerbated. These include increases in conflict, crime and piracy. Black markets, graft and theft raise the price of goods and may also lower their quality. Perishable products like fruits and flowers and fragile items such as china and stemware are more likely to arrive spoiled or damaged.

Actions to Take

1) Review traditional formulas for inventory turn and order control. Identify the 20% of your inventory that drives sales, then reduce or don’t stock the 80% that doesn’t. Narrower inventory is easier to source and to manage.

2) Along similar lines, examine the ways you balance inventory levels against possible stock outs. If you are losing sales because customers won’t tolerate back orders, perhaps you need to accept a lower turn. Figure out which costs more, carrying larger inventories or missing out on sales due to stock outs.

3) Develop multiple sources for each product. Try to identify sources in various parts of the world so that bad weather or armed conflict in one area don’t make it impossible to obtain a popular item.

4) Investigate alternative distribution locations. Adding regional warehouses may raise top line costs, but having secure inventory, reducing fuel costs and offering prompt delivery to customers could increase sales and profits.

5) Ditto for investments in technology that streamline distribution, increase product tracking and decrease the risk of wayward inventory.

Some businesses have taken these or related actions and achieved good results. However, the lion’s share of adaptive innovation to climate change has occurred in the area of supply chain management, which we’ll look at in an upcoming post.

About Gevril Group

Gevril GroupGevril Group, watchmaker and wholesale watch distributor, is the exclusive U.S. agent for exquisitely designed and crafted European luxury and fashion watch brands, distributing and servicing some of the best affordable luxury and Swiss watches and trendy fashion watches. Gevril Group also operates a full-service watch repair, staffed by master Swiss watchmakers. Contact Gevril Group by email or by calling 845-425-9882.

Join the conversation! Follow Gevril Group on Facebook, Twitter and LinkedIn.

Please subscribe to the Gevril Group newsletter and blog digest.

Impact of Climate Change on Retailing

Climate Change


by Bonnie McEwan  

4 Lessons in Meeting Consumer Needs and Wants

A number of companies in the retail industry are ahead of the curve on adapting to climate change. This may be because retailers are very close to the end point of the consumption process. They see and learn firsthand from customers what they want and how they use the products they buy. For retailers who have less experience in this area, here are five lessons learned from the leaders about the ways climate is changing consumer needs and how to respond to them.

1) Seasonal merchandise is becoming less seasonal. These days, customers in the global north are likely to need snow shovels in April or running shorts on Thanksgiving. Retailers need to reconsider their ordering patterns and inventory management practices. This is a global challenge felt throughout the developed world This year, even Alaska ran out of snow shovels!

2) Increased frequency of weather emergencies means that people will need to stock up on basic supplies more often. The recent spate of 79 tornadoes in two days in the US Midwest is a good example. People need batteries, bottled water, generators and other survival equipment more often than in the past.

3) Consumer purchasing power may shrink, especially in areas that are hard hit by weather emergencies. People will favor products and companies that sell durable merchandise. They may buy less often, and when they do they will expect quality. Patagonia, a retail leader in responding to climate change, has capitalized on this with a campaign called The Common Threads Partnership. Patagonia pledges to make “useful gear that lasts” and the consumer pledges not to buy what s/he doesn’t need.

4) Consumer awareness of climate change and its causes has spurred demand for sustainable products. A Harris Interactive survey in May 2012 found that 69 percent of American adults purchase green products or services and nearly one third believe such products are the norm and a required expectation. This offers an opportunity for retailers to meet an emerging need. Luxury brand Gucci took note and launched its “Sustainable Soles” line of footwear made with biodegradable plastic. Gucci also offers biodegradable liquid wood sunglasses, which combine wood fibers from sustainably managed forests, lignin from paper manufacturing and natural wax.

Responding to consumers is not the only challenge that climate change presents to retailing. The PwC 17th Annual Global CEO Survey (Feb. 2014) found that more than half of the retail CEOs surveyed (51%) believe that “resource scarcity and climate change” will transform their businesses over the next five years. This compares to 46% of CEOs in all business sectors. A particular concern of retail CEOs is that supply chain disruptions could threaten growth. A whopping 88% said they were either “aspiring to change” or already had a “program underway” to make changes in their supply chains. This will be the focus of a future blog post.

About Gevril Group

Gevril GroupGevril Group, watchmaker and wholesale watch distributor, is the exclusive U.S. agent for exquisitely designed and crafted European luxury and fashion watch brands, distributing and servicing some of the best affordable luxury and Swiss watches and trendy fashion watches. Gevril Group also operates a full-service watch repair, staffed by master Swiss watchmakers. Contact Gevril Group by email or by calling 845-425-9882.

Join the conversation! Follow Gevril Group on Facebook, Twitter and LinkedIn. Please subscribe to the Gevril Group newsletter and blog.

The Domino Theory in Retailing

Circuit City Store Closing


by Bonnie McEwan  

The Progression of Retail Store Closings

Cold Warriors loved an idea called the Domino Theory, which held that once a country “fell” to communism its neighbors would also fall, like dominoes in a chain reaction. While that didn’t happen in geopolitics, it may be happening in retailing. One retail store closing can trigger a series of events that serve as the tipping point for a host of related financial problems.

At the macro level, the first groups to feel negative effects are real estate investors and commercial property owners. For example, Morningstar estimates that there are 262 unpaid commercial mortgage-backed security (CMBS) loans that are secured by mall properties where JC Penney is an anchor tenant. Ninety-eight of those mall properties are already on Morningstar’s watch list.

Nine of those malls are on the list for a JCP store closing. All are located in small markets where replacement retailers will be hard, if not impossible, to find. If the malls go down, then it’s not just Penney employees who are out of work, but the many more people who work in other stores at those malls, some of which also house vulnerable retailers like Sears, Abercrombie & Fitch and American Eagle Outfitters.

The Community Conundrum

Retail store closings make waves throughout a community. Take Compton, California, for instance. When Circuit City closed its store there in 2008, it derailed revitalization efforts throughout the whole area, which was already in dire economic straits. It wasn’t just the direct effects of the store closing, but the message sent by the closing: business is not good here.

Consumers were affected by Circuit City closings too. The chain generated serious revenue by selling long-term product warranties. It assured warranty holders that their coverage would continue, but if a customer had a problem he would have to travel to a Circuit City outside of Compton. For the similar reasons, gift cards were harder to redeem and returns more difficult to negotiate.

In December of last year, Dominick’s, a grocery chain owned by Safeway, announced it was exiting Chicago. This left some low-income neighborhoods without a full-service grocer, where they had access to fresh, healthy food choices. To top it off, when a new food store wanted to move in to an abandoned Dominick’s, community activists learned that the closed property was encumbered by a restrictive covenant that prohibited another grocer from opening in the space.

Far-Reaching Effects

Further along the domino chain, wholesalers and suppliers are hurt when retail stores close, as are other retailers. Orders are cancelled and consumers who are now living on unemployment can’t afford to purchase anything other than necessities. Goods that people bought routinely when they had paychecks suddenly become luxury items that remain on store shelves.

It’s not fair to blame retailers for all of this. After all, it only makes sense to close stores that are under-performing, and those are most often in areas of high unemployment. In early 2012, for example, Sears Holdings closed 17 Sears or K-Mart stores in three states with substantial unemployment. They included Florida, with a 10% unemployment rate at the time, Michigan, with 9.8% unemployment, and Mississippi, with 10.5% unemployment.

A Cyclical Cycle

Worst of all, it turns out that the retail dominoes aren’t really in a chain at all. They’re in a circle, where each one influences the next and where the negative effects of store closings can build into a spiral that takes everyone further down the economic scale. People lose jobs, which communities can’t replace. These communities gradually become what labor economists call intransigent jobless areas, where the hurdles are high for attracting new business because the consumer base is low-income. This reduced purchasing power translates into fewer places to work and shop, as well as a lower tax base for local government.

In December 2013, the US Bureau of Labor Statistics reported the lowest annual retail sector unemployment rate (7.7%) since 2009, when it was a full 10%. Things are getting better and with the current round of store closings the health of the retail sector overall is improving, but it may still leave bodies on the ground, especially in areas of the country that have yet to show signs of economic recovery.

About Gevril Group

Gevril GroupGevril Group, watchmaker and wholesale watch distributor, is the exclusive U.S. agent for exquisitely designed and crafted European luxury and fashion watch brands, distributing and servicing some of the best affordable luxury and Swiss watches and trendy fashion watches. Gevril Group also operates a full-service watch repair, staffed by master Swiss watchmakers. Contact Gevril Group by email or by calling 845-425-9882.

Join the conversation! Follow Gevril Group on Facebook, Twitter and LinkedIn.

Please subscribe to the Gevril Group newsletter and blog digest.