Will limited-assortment warehouses help Chewy avoid ‘demand shock’?

Discussion
Photo: RetailWire
Sep 24, 2020

A number of retailers have set up smaller warehouses to support last-mile delivery. Chewy last week said it opened its first “limited-catalog fulfillment center” to handle surges in orders.

Chewy’s new warehouse, centrally located in Kansas City, comes following a first financial quarter in which the online retailer experienced “demand shock.” Shipping volume catapulted 50 percent in March versus February as marooned households doted on pets and adoptions soared. The company saw elevated out-of-stocks, while split shipments, longer delivery distances and expedited orders required to fulfill orders in a timely manner impacted margins.

Last week, on Chewy’s second-quarter conference call, Sumit Singh, CEO, said the incremental fulfillment capacity at the new limited-assortment warehouse provides “flexibility to effectively load balance” across its other 10 fulfillment centers. The site also “acts as buffer capacity” to support abnormal surges, including those related to holiday selling.

“This new FC is a capital-light, high-velocity operation focused on fast fulfillment during peak demand periods,” said Mr. Singh.

Chewy is also counting on automation to drive logistical efficiencies. Its first automated fulfillment center is set to open next month and the second is slated for mid-2021. The retailer expects automation to drive up to a 60 percent improvement in safety and economics-related metrics, a 25 percent increase in throughput capacity per square foot, a 50 percent increase in labor productivity and a 30 percent reduction in fixed and variable fulfillment cost per unit.

The broader trend has been opening smaller warehouses close to major population centers as demand for speedy online shipments accelerated well before COVID-19’s emergence.

Last October, a report from CBRE found that the availability rate for warehouses between 70,000 and 120,000 square feet, which the real-estate consulting firm referred to as “light-industrial” properties, continued to outpace that for larger warehouses (plus 250,000 square feet), driven by local economic activity, urban population growth and same-day delivery expectations of consumers.

A Wall Street Journal article from last December found numerous grocers opening or testing micro-centers as small as 10,000 to 20,000 square feet in part to support fresh food deliveries. The article still found grocers such as Kroger relying on large bulk warehouses to tap economies of scale.

DISCUSSION QUESTIONS: Will limited-assortment warehouses effectively help Chewy and other retailers better manage inventory flows? Do you see the trend toward smaller and more specialized distribution centers over larger ones continuing in the years ahead?

Please practice The RetailWire Golden Rule when submitting your comments.
Braintrust
"Flow of products from the initial inbound leg to store shelf or consumer door represents a substantial opportunity in this segment."
"Some customers will not like less choice, but something has to give."
"With such a push towards localized assortments, it requires advanced predictive analytics to ensure that the right product is at the right place at the right time."

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15 Comments on "Will limited-assortment warehouses help Chewy avoid ‘demand shock’?"


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Jeff Weidauer
BrainTrust

E-commerce warehouses will continue to proliferate and it’s likely they will follow a “hub and spoke” approach with small limited assortment locations connecting to a larger central warehouse. The ultimate goal is micro-fulfillment and dark stores to get even closer to the customer.

Neil Saunders
BrainTrust

To improve flexibility and availability all retailers will need to look at supply chains and distribution networks. This likely means there will be a shift from a focus on big central warehouses to a more distributed fulfillment system that, as well as large centers, incorporates limited-assortment warehouses and, where a retailer has them, physical stores carrying inventory. This was already happening before the pandemic, but the surge in demand resulting from all the events of this year has accelerated the process.

Ken Morris
BrainTrust

I believe Chewy should leverage its parent organization’s stores (PetSmart) to fulfill these orders along with a network of MFCs (micro-fulfillment centers) and/or CFCs (customer fulfillment centers). The trend is clearly toward robotic micro-fulfillment and opening larger centers is a fool’s errand.

Jeff Sward
BrainTrust

Yes, absolutely. The pandemic has given every retailer and every brand invaluable data on how demand was prioritized and focused on during those peak periods. They also learned what didn’t sell even when other choices had sold out. Retailers and the whole supply chain now have to use that data to be a lot smarter during future crisis moments. Sounds like an outstanding opportunity to be smarter about SKU breadth and depth both before and during a crisis.

Richard Hernandez
BrainTrust
Richard Hernandez
Director, Main Street Markets
11 months 30 days ago

With the increased demand of product via online sales, I see micro-fulfillment centers continuing to grow to meet the demand of consumers – it only makes sense.

Paula Rosenblum
BrainTrust

As long as the company has some good predictive analytics it will definitely help. As always, it’s about having the right product in the right place at the right time.

Suresh Chaganti
BrainTrust

The limited assortment approach tells me that they figured out the core products that form the majority (hopefully 80 percent or more) of the sales. They also must have figured out the product combinations that are often purchased. Reducing the number of packaging variations makes it more flexible for warehousing and logistics. Some customers will not like less choice, but something has to give.

Mohamed Amer
BrainTrust

Chewy’s approach is sound in their search for flexibility and speed of the network to meet surges in demand without taking an inordinate hit on their financial statements. From a cost per unit delivered perspective, the move to greater automation in their warehouses will help drive the savings they need to make further investments in their supply chain network. The pet food industry has historically lagged on the automation front for their warehouses, mixing centers, and distribution centers. Bottom line, flow of products from the initial inbound leg to store shelf or consumer door represents a substantial opportunity in this segment.

Brandon Rael
BrainTrust

The key challenge for digital native companies such as Chewy, and legacy brick and mortar operations is to stay ahead of the consumer demand curve. With such a push towards localized assortments, it requires advanced predictive analytics to ensure that the right product is at the right place at the right time.

This is exactly why micro-fulfillment centers and more regionalized smaller distribution centers have become so prevalent. We have seen this trend emerge before the COVID-19 pandemic, and we should expect this strategy to gain momentum over the coming years.

Perry Kramer
BrainTrust

Yes, we will continue to see a larger number of limited assortment warehouses in the mix of many larger retailers’ overall logistics environment. In addition to many of the benefits identified including supply chain flexibility and augmented peak period scalability the cost model of implementing modern systems in a smaller footprint is very attractive. If a retailer can implement the most current technology in a smaller footprint and achieve improved efficiencies it is a win in every category. As Suresh identified a significant component of this is keeping shipping costs down by using analytics to identify a majority of the product combinations to minimize multiple shipments for a single order. An additional advantage Chewy has is that its subscription model gives it a better forecasting model than most retailers.

Gary Sankary
BrainTrust

Tesco used this strategy with great success in urban markets in the U.K. for high turn items like produce and dairy. I think it’s a great idea, as we learned in March, “just In time” has its shortcomings when demand becomes unpredictable. The key is selecting the right items by market and having enough demand close to the fulfillment center to make this viable.

Ralph Jacobson
Guest

Since I was a grocery store manager in the ’80s, I actually imagined a stockpile of the top 10-20 percent of SKUs to help ensure in-stock conditions. Remember, 80 percent of SKUs move less than one case per week per store. The typical fast-moving consumer goods store gets more than one delivery per week, so a stockpile of the fastest-moving items would virtually eliminate out-of-stocks. Hmmm… I guess better late than never!

Ryan Mathews
BrainTrust

Let’s deconstruct this question. How does adding physical assets help a company when demand predictably ebbs post-COVID-19? The simple answer is, it doesn’t. So here’s a provocative idea. Is it possible to develop a consumer-centric version of a “cross-dock” warehouse model that takes shipments in from a variety of suppliers, sorts them by zip code — or whatever — and then ships them out via a third party or commonly known trucking fleet so that I get my Amazon shipment, my Chewy shipment, and my monthly ration of Uncle Rick Moss’ Organic Cynicism cookies, etc. all in one drop? It seems to me that that would prove to be a better model than having everyone establish more warehousing space, requiring more proprietary delivery models — but maybe that’s just me.

Rick Moss
Staff

That reminds me, Ryan, we’ve neglected to warn you: “Our site uses Cynicism Cookies so that we can remember you and understand how you use our site. If you do not agree with our use of cookies, please change the current settings in your privacy preferences.”

Ryan Mathews
BrainTrust

Rick, thank you for the reminder, but I never forget who I’m dealing with. Great pun.

wpDiscuz
Braintrust
"Flow of products from the initial inbound leg to store shelf or consumer door represents a substantial opportunity in this segment."
"Some customers will not like less choice, but something has to give."
"With such a push towards localized assortments, it requires advanced predictive analytics to ensure that the right product is at the right place at the right time."

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