This is an excerpt from Monday’s (4/26) Point of Sale retail supply chain newsletter sponsored by ArcBest.
In a research note penned late last year, UBS analysts called Bed Bath & Beyond’s supply chain “primitive.” It’s a sharp take, but Beyond’s executives understand the company’s got a lot of catching up to do in many areas. Prior to former Target Head of Merchandising Tritton coming aboard as CEO, Bed Bath & Beyond seemed stuck in neutral, losing market share while forgetting to innovate. My mother loves Beyond, so I spent many afternoons there growing up. When I returned to a store for the first time in ages early last year, I thought I had been teleported. Nothing had changed. The lights were still strange, daunting piles of product were still stacked from floor to ceiling and there were just way too many options for everything.
That’s begun to change in the months since. In fact, one of Tritton’s first initiatives as CEO was to think about how many different types of can openers the retailer should stock. After BBBY cut the number of options from more than a dozen to about three, sales rose. Tritton, in an interview last February, said that overcrowded stores lead to “purchase paralysis.” Cutting down SKUs is only one part of solving for a much bigger paralysis within Beyond’s operations: store replenishment.
Over the next three years, Bed Bath & Beyond will invest $250 million in its supply chain as it attempts to squeeze decades of supply chain transformation into months. The investments are intended to bring forth a complete overhaul encompassing supply chain, technology, store network and design, and operations. The early stages of this investment are already underway both in physical and digital infrastructure projects. Tritton and team are looking to transform ~450 stores over the next few years, which together represent ~60% of the company’s sales. In its fiscal 2021, BBBY is targeting to transform between 130 and 150 stores across the country, covering nearly 30 states, including 26 stores during the first quarter. The retailer also converted about 25% of stores in the U.S. and Canada into regional fulfillment centers for local delivery, COO John Hartmann said.
Another facet of its supply chain that is currently undergoing major changes is Beyond’s distribution network. “We are asking our supply chain teams to really pivot quickly,” Hartmann told Supply Chain Dive in January. Currently, the retailer operates 30 cross-docks that consolidate vendor shipments but that number will retreat significantly as it moves toward regional warehouses run by one or more third-party providers. According to Hartmann, BBBY is “working now through the final stages of selection” in its RFP process and will be making a public announcement soon.
“We plan to establish four regional distribution centers to more efficiently and cost effectively manage the flow of merchandise to our stores,” Hartmann said during the company’s Q4 earnings call. “We believe this is a key first step in vastly improving our store replenishment approach.” While primitive may have put a little too fine a point on it, Hartmann called Bed Bath & Beyond’s store replenishment time “noncompetitive.” Once the four regional warehouses are up and running, the company expects to achieve many operational and business benefits over time, including reducing the store replenishment time to under 10 days. The problem? It’s currently 35 days!
In January, Hartmann called the intended new model for Bed Bath & Beyond “common sense.” He continued to say, “It is a meaningful pivot for Bed Bath & Beyond. However, these are very well-known and very well-exercised capabilities by others in the industry today.” Beyond isn’t reinventing the wheel here, just utilizing tried and tested methods of retail fulfillment that have been working for decades. Plus a few newer tricks, but still nothing proprietary.
Here’s a few of the changes:
Stores transformed into local fulfillment centers for e-commerce orders
Updated stores with new signage, uniforms and lighting
More regional warehouses
Expanded partnership with Google to enhance shopping experience
Selected ERP system from Oracle to replace legacy tech
Partnered with RELEX Solutions automated forecasting, planning and replenishment
Unlike bigger general merchandise retailers, Bed Bath & Beyond is not built to build everything itself. The management team understands the value and importance of strong partnerships to fill gaps in the team’s expertise and the company’s supply chain. “What we’re looking for is a partner who understands our business and has the competencies and capabilities that we don’t have today. … It makes both financial and partnership sense to use someone’s capabilities as opposed to try to build them yourself,” said Hartmann.
There is one partnership BBBY would like to have a little more control over, and that’s with its primary carrier, FedEx. In the most recent quarter, shipping costs took a sizable bite of Bed Bath & Beyond’s margins — estimated at 80 basis points. The peak surcharges put in place on Ground volume (among other services) in June, upped shipping costs with that carrier by 20%, Hartmann said. In its fiscal Q4, the company established relationships with national and several regional carriers to take additional volume. But Hartmann said the additional capacity was more about securing service than controlling costs.
In the new model, warehouses are closer to stores and product closer to consumers. Reducing the distance and increasing the frequency of shipments from DC to store/fulfillment center should allow Bed Bath & Beyond to negotiate more favorable terms.
All of Bed Bath & Beyond’s modernization efforts, whether physical or digital, point toward a common goal of strengthening the balance sheet. The digital investments should help bring BBBY’s inventory management and demand forecasting into the 21st century and help curb end-of-year markdowns. Better understanding of customer behavior and shrewd product assortment, things CEO Tritton is renowned for, should provide avenues to boost sales. Additionally, Tritton is bringing his vast private label experience to BBBY with eight planned label launches this year alone. The retailer has said it expects its private-label sales will grow to represent 30% of its business within three years, up from about 10% from today.
The physical infrastructure outlays like warehouses closer to stores could lead to lower logistics costs, especially in the near term while transportation capacity across basically every mode is strained. Beyond was late to the BOPIS/curbside game, only implementing it in April 2020. However, since rolling the service out it has grown significantly and accounted for 17% of digital sales in Q4. And between ship-from-store and same-day services, BBBY fulfilled 41% of digital sales from its stores in Q4.
Final thoughts. Bed Bath & Beyond was well on its way to retail hell before Tritton came to the helm in 2019. The company was struggling to maintain market share with fierce competition from the likes of Tritton’s old team at Target and from fast-growing digitally native upstarts like Wayfair, Brooklinen and others. Its stores hadn’t been updated in decades. It had virtually no omnichannel strategy and a poor online presence. And it was caught in a vicious cycle of overordering, misordering and subsequent end-of-season markdowns.
But Tritton has put a powerhouse team around him including the former CEO of True Value, a former CFO and former chief merchandising officer at Walgreens Boots Alliance and a marketing executive from L Brands, to name a few.
There is a lot of low-hanging fruit and even some on the ground already. The problem for BBBY is balancing how to pick up as much as possible as fast as possible. And it began the mission in the midst of a global pandemic that shut down 90% of its stores for a period. So to shareholders of Bed Bath & Beyond, I suggest patience. After Bed Bath & Beyond released its fiscal fourth-quarter earnings results Wednesday, shares tumbled more than 11%. Wall Street likes these turnaround stories to happen quickly, but don’t let the stock price convolute the progress.
This is a decade-long story in the making with tons of execution risk. But starting at primitive, there’s nowhere to go but up.
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