Does Whole Foods have a backroom problem?


According to a report from Business Insider, the rollout of an order-to-shelf inventory system is being blamed for frequent stock outs in at least some Whole Foods’ locations.
The system, which first began being implemented in 2016, basically moves some products directly from the loading dock to store shelves to reduce the need for backroom storage and more efficiently bring product to shelves. The benefits of what’s also described as a “store ready” distribution model include reductions in inventory, store labor, waste and shrink along a with promise of better in-stock positions since items are being replenished more quickly. Such a system also helps supports online delivery from store.
On a quarterly conference call in February 2017, Ken Meyer, Whole Food’s EVP of operations, said its order-to-shelf initiative had cleared Whole Foods’ backrooms of all items except “never-outs” or items continually re-stocked. He said, “It’s creating a really strong, efficient process, from the way the goods are received in the back door to bring them right out to the shelf. And it’s really improving and helping our out of stocks, as well — dramatically.”
Target rolled out a similar automated ordering system around the same time.
“The concept is pretty simple,” CEO Brian Cornell was quoted by Supermarket News as saying in an analyst meeting in February 2017. “When a store sells one bottle of shampoo, we put one bottle of shampoo on the next store delivery truck within hours.”
But interviews with seven Whole Foods employees by Business Insider indicate that, while less food is spoiling in storage rooms, out of stocks have been more of a regular occurrence on shelves. The problem is exacerbated, according to the report, when there is an unexpected increase in shopper demand or a product shipment delay.
Barclays, in a note in early January, wrote that it had likewise witnessed empty shelves inside Whole Foods stores, although the analyst felt the problem may be due to increased shopper traffic following the Amazon merger. “This is a high class problem if in fact sales have really accelerated — but is also an execution issue resulting in lost sales.”
- Whole Foods Market (WFM) Q1 2017 Results – Earnings Call Transcript – Seeking Alpha
- Supply-chain changes drive results at Target, Whole Foods – Supermarket News
- Is order-to-shelf technology the future of retail distribution? – Food Dive
- Whole Foods has a ‘high class’ problem that’s leading to ‘entirely empty’ shelves – Business Insider
- Are out-of-stocks driving shoppers online? –RetailWire
- Retailers Rethink Inventory Strategies – The Wall Street Journal
DISCUSSION QUESTIONS: Are you a fan of order-to-shelf inventory management systems for grocers? What are the primary execution challenges for grocers attempting to reduce stock in backrooms?
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14 Comments on "Does Whole Foods have a backroom problem?"
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Principal, Retail Technology Group
This is a perfect example of the vicissitudes of unit inventory management. A retailer can add safety stock in a back room to prevent stock-outs created due to unexpected demand and delayed supplier shipments. Customers will be happier and there will be fewer lost sales. But this comes at a cost (additional space and inventory). Of course, the answer lies in striking that balance that we call perfect inventory management. It is not a trivial pursuit and few if any will get it right, ever.
President, Integrated Marketing Solutions
A huge challenge for most retailers is the logistics and infrastructure required to manage the inventory at such a refined level. Evolving Big Data and analytics will enable more accurate forecasting of replenishment (except for major events like hurricanes). Having enough trucks and frequency of deliveries to meet demand could prove to be a major challenge in many cities. Driverless delivery becomes a real success factor in scaling this model. While there are some current challenges, this is the high class problem retailers need to solve in the future of retail.
Principal, Cathy Hotka & Associates
Whole Foods backroom issues are emblematic of the industry as a whole. Physical retail has to figure out inventory and assortments, or risk losing out to endless aisles online, where an ever-growing number of competitors vie for consumers’ business. The retailers who can figure this out will be well-poised for the future.
Strategy & Operations Delivery Leader
Consultant, Strategist, Tech Innovator, UX Evangelist
The theory is great, the reality not necessarily so. Whole Foods really needs to strike a balance between empty shelves and this kind of automated system. An easy option is more frequent deliveries to store – like once a day, but that gets expensive and likely negates the gains that an automated replenishment management system offers. A better solution is to pick and choose what products need more backroom inventory and which don’t. High turnover and repeated out-of-stocks indicates more in-store inventory is needed, rarer out-of-stocks fit the system better.
As a regular shopper, produce is where I see the most low/no stock issues and the store often is wrong about when a particular item will be coming in. More work is needed.
President, Dellmart & Company
Chairman & CEO, H2O+Beauty
I am supportive of Whole Foods’ move to shelf inventory management. It will require Whole Foods to tailor its system to fit the various types of inventory they have. They likely would still need to carry some backroom inventory for some heavily trafficked products. It will make it much more efficient for managing inventory costs and reducing throwaway, but execution will have to be fine-tuned and staff will have to be trained.
Retail Strategy - UST Global
Glad to hear that 20 years of best practices, new technology and bigger data still haven’t completely solved this problem. There is still a need for common sense supply chain practices. The odd part is that for grocery stores who have well tenured department managers that do ordering, even without sophisticated technology these experienced people do a pretty good job of keeping the shelves reasonably full and spoilage reasonably low. The hard part is finding these people to work in stores these days. It all goes back to the demand plan.
Until inventory systems manage on-shelf stock levels separately from back-room stock, the problem will never go away. You can only sell from shelf stock, but most retailers only manage “balance on hand” which leads to off sales, inaccurate demand assessment and the problems shown here. There are answers!
CEO, Alert Tech
As a long time Whole Foods shopper I started noticing differences late last summer. Product I could only find at Whole Foods, and a driver of why I shopped there, began to disappear. Deterioration of the quality of the produce and empty shelves became noticeable just before the holidays.
I’m now shopping at H-E-B’s Central Market.
CFO, Weisner Steel
This is a variant of “just-in-time” delivery, which was seen a few years ago as some kind of miracle that allowed Japanese companies to be more efficient. Of course once it was analyzed, it was seen that the process simply shifted costs from manufacturers back along the production process to suppliers (so it might have been more efficient, but not to the degree claimed).
Inventory is a battle between shipping costs and real estate costs — i.e. between continuously replenishing from offsite vs. storing onsite — and Amazon being Amazon (though this program predates their ownership) is likely trying to get suppliers to make daily deliveries, regardless of the costs of doing so. We’ll have to see where this ends up, but in the end, I suspect Whole Foods will have to give up their fantasy of zero back room … if that in fact was the ultimate goal.
CEO, President- American Retail Consultants
No. This appears to be the usage of poor statistics for this article. Using a 7 person “interview” does not create facts. There are no hard numbers here, no factual history, and no comparison between order-to-shelf and other fulfillment models. Furthermore there are no large scale numbers to support the foundation of this article.
Quotes do not create a basis of fact. We need to always pay heed to the old Mark Twain adage “There are lies, damn lies and statistics…” and this article doesn’t even have good statistics.
Retail Solutions Executive, Teradata
This type of automation can really be of benefit to retailers’ operational expense, but if done incorrectly (as in Whole Foods’ case) will be a dramatic and negative impact on the CX. There are many variables to accommodate to hit the perfect balance of in-stock versus out-of-stock, and it will change daily due to outside factors, like weather, supply chain variables and difficulty in forecasted demand. For an operational system like this not to be a detriment, the data models and algorithms used to forecast will constantly need to be revised.
This is a new frontier and will get better with time and will hopefully help retailers financial standing to invest in other areas. But it will be some rough road until that perfect balance is achieved.
Retail Transformation Thought Leader
The quest for perfect unit inventory management and replenishment continues! The concept is of course excellent, but more difficult to execute in practice, and it’s really a question of scale. I recall other retailers following this path (Vitamin Shoppe comes to mind) but the volume of merchandise being replenished in each case was lower than your typical fast moving product in grocery.
The challenge really has to do with the logistics and transportation of product to the grocery store in time to prevent an out-of-stock. Careful analytics of past sales can mitigate this, but, there are other factors — seasonality of product, sudden shopper shifts in taste (think of a viral video on YouTube suddenly driving desire for one brand over another and the inventory management system isn’t replenishing the new brand). Plus, there could also be other infrastructure questions around store network connectivity that doesn’t allow for the inventory order management application to process transactions in near real-time as required.