The Supply Chain and Inventory Planning Blog

This year’s Amazon Prime Day was record breaking generating $1 bn in sales. Not only did Amazon beat it’s own Black Friday and Cyber Monday sales, but sales also increased 60% year over year relative to last year’s Prime Day. Amazon continues to dominate e-commerce and will continue to do so for the foreseeable future. But, as we said in our previous post, we definitely believe that there is room in the market for digitally native brands to succeed. They just need to compete on a different dimension rather than trying to beat Amazon at the game that it’s mastered - convenience.

As Amazon continues to grow and dominate, we think that Amazon Prime Day has valuable lessons for growing brands that they can apply to their own business models successfully.

1. The membership model works really really well if you’re fulfilling a real need

While subscriptions of one sort or another have long been in vogue for ecommerce companies, not all of these companies have been successful over the long-term. This year, a record number of customers signed up for Prime Day, demonstrating that the membership or subscription model can work really well, but it needs to have several key components. Namely that the benefits have to be unique, exclusive and drive significant value to the customer. 

The thing that makes Prime Day so special is that it is available to only Amazon Prime members. Most e-commerce subscription providers tend to provide a subscription for the sake of stabilizing their own revenue and cash flow and not necessarily because they offer something unique, exclusive and valuable to the customer. 

That being said, companies like Stitch Fix and Dia & Co. have been successful because they provide exactly that. In the case of a company like Dia, they’re meeting an untapped market need for plus size clothing and have a unique offering in a space where there’s a clear market gap. Literally the perfect use case for a membership model. 

2.  Don’t be afraid to run experiments

In a way, Prime Day is one big experiment for Amazon. The company has used it to test new product lines and releases or supply chain innovations with the focus shifting slightly each year. Once it becomes clear what worked and what didn’t, Amazon can use the plethora of data to improve throughout the remainder of the year. 

While most e-commerce brands do have a strong ethic of A/B testing whether it’s landing pages, marketing copy or other initiatives, it can be hard to run potentially game changing experiments and take big risks as a small company. But, that being said, what Amazon and other successful e-commerce players like Jet have taught us is that big bets can pay off. In an ecosystem where retail continues to be challenged, those who innovate successfully and take bold steps to reinvent their business models even when they seem to be working will be the ones who come out on top. 

3. Make sure your supply chain and logistics are in order before ramping up marketing

While in the past Amazon has had some technical snafus related to Prime Day, the company has certainly succeeded in making sure everything went smoothly this year. While Amazon has a particular strength in supply chain and logistics, the lessons from its past technical malfunctions can teach smaller brands a thing or two.

Similar to the Amazon example, you don’t want to spend a ton of time, effort and money driving traffic to your site when that traffic can’t convert due to a shopping cart glitch (back in 2016), or, on the supply chain side, when you’re out of the inventory you’re advertising. At Fuse, one of the most common problems we encounter is a lack of coordination between the marketing and the supply chain teams. 

While marketing may launch a meticulously planned, omni-channel campaign, too often we find that these campaigns don’t take into account critical questions like if the campaign has the desired impact, can the company actually fulfill the orders? Will there be enough inventory to satisfy demand? While it seems obvious in hindsight, it usually takes a crisis or two for e-commerce brands to streamline the coordination between functions. 

As your company grows and scales and focuses on putting these lessons into practice, Fuse is here to help you focus on your business, not your inventory.

At Fuse, we are excited about the wave of online first brands that we’ve seen succeed over the past decade. In a recent post by Andy Dunn, he called these brands “digitally native vertical brands” and later, “v-commerce”.

Will digitally native e-commerce brands succeed?

We asked Matt Heiman, a consumer investor at Greylock to share his perspective: “My view is that vertically focused direct to consumer online brands are better positioned than pure 3rd party e-commerce concepts over the next few years. Particularly as Amazon approaches 40% of US e-commerce, competing with them is extremely difficult, so the idea of creating a new brand and owning your own customer experience is a better position. Some examples of brands I think have done this well are Casper, Dollar Shave Club and Warby Parker.”

We agree with Matt, and we think that the sale of Dollar Shave Club to Unilever earlier this year for $1 bn has convinced others that it’s possible to build a valuable brand that caters to a different kind of consumer online. Dollar Shave Club’s true value is in the company’s fantastic brand and it’s ability to appeal to and engage with Millennial consumers in an authentic way over social media and other digital marketing channels (1).

E-commerce platforms make it easy to build a brand

We’re seeing this trend first hand at Fuse. Our target customers are fast growing companies with at least 25 employees and anywhere from $10 - $100 million of revenue who are excelling at building their own online first brands. One company, Ipsy, knows all about brand building. Ipsy was started byMichelle Phan, who built her own personal brand as a make-up guru on YouTube. As the company has evolved, the brand which originally appealed to Michelle’s followers and the make-up obsessed, has started to reach more casual consumers looking to expand their horizons.

The good news for many of our customers is that it’s much easier to build a strong brand online today than it was five years ago. Due to the proliferation of front-end e-commerce platforms like Shopify,BigCommerce and Squarespace, it’s much easier to build a great brand with minimal upfront investment. With the emergence of Shopify Plus as an enterprise e-commerce platform for companies looking to scale, we expect this trend to continue.

Inventory management systems haven't kept up (until now)

Although this is good news for many aspiring brand builders, the unfortunate reality is that back-end tools and platforms haven’t necessarily kept up with the front-end. Shopify has done a great job building an ecosystem around its API, but there are still a lot of gaps on the back-end. That’s where we at Fuse come in. Our goal is to help simplify the inventory planning process to help companies answer the key question related to their biggest investment: “How much should I order?” We’re really excited about the growth of online first brands in the market, and are just as excited to be able to help those brands focus on their business, not their inventory.

(1) Source: Bloomberg

Marc Andreessen famously stated that “software is eating the world.” In e-commerce today, Amazon is certainly eating Whole Foods, but is it eating the world? While the full implications of the acquisition remain to be seen, there are a few things that we can infer from the acquisition and its impact on both food and e-commerce.

Standalone food start-ups will continue to struggle

Since the first tech bubble, standalone food start-ups have struggled to succeed. In the early 2000s, Webvan, a precursor to today’s Fresh Direct and Instacart went belly-up. There are several key factors that contributed to the start-ups failure, but the main one was a lack of scale. Today, despite being tremendously popular among Millennial audiences, food start-up Maple shut down last month. Others, like Munchery, continue to struggle and may not be long for this world. On the other side, the shining success in the industry has been Blue Apron, which announced its IPO. While some attribute Blue Apron’s success to marketing, we attribute it to a laser focus on implementing operational efficiencies and constantly improving with scale. 
 
In general, that will continue to be the theme. Food (and more broadly, inventory) waste has the potential to take a company down and creates notoriously tight margins. In many ways, Amazon, who has made its name operating on razor tight margins, is the perfect acquiror for a food business that tends to experience these issues to the extreme. 

The war between Amazon and Walmart is about to heat up

With a slew of acquisitions recently - Jet.com, Bonobos, Modcloth - Wal-Mart made it clear that it’s making it’s presence known in e-commerce. Amazon has countered with the Whole Foods acquisition and will start going after the bread and butter of Walmart’s business. Not only that, but given Amazon’s expertise in operating on low margins, it’s actually well positioned to decrease Whole Foods notoriously high prices. This will broaden Whole Foods’ reach and put it in more direct competition with Walmart Grocery shoppers. At the same time, Amazon can offer a slew of other attractive food related services online and in stores. 

But can brands still stand up to Amazon?

As we look to the broader ecosystem, what does this mean for brands and retailers? Is everyone else doomed? While this may be an unpopular opinion, we here at Fuse don’t think so. 
 
As the competition between Amazon and Wal-Mart heats up, the two will tend to converge into two very similar players with limited differentiation in the consumer’s eye. The number one differentiators will be price and convenience. In many ways, while Amazon’s success has put pressure on physical retail, it’s acquisition of Whole Foods actually validates that physical retail isn’t going away.
 
By 2020, Millennials will account for 20% of retail sales. Unlike prior generations, Millennials are looking for unique experiences and deeper connections to the brands they shop with. While Amazon and Walmart will always win on convenience, brands that work hard to facilitate unique experiences, value props and bespoke feeling (if not actually bespoke) products will continue to speak to Millennials. What’s more, creating these brands online is easier than ever today and there is so much more flexibility in what a brand’s physical presence needs to look like. It doesn’t have to be a fully stocked store, but rather, it can be a showroom or pop-up. 
 
In the early days of e-commerce, all brands were essentially competing on convenience. But, today, as e-commerce becomes more and more ubiquitous, it’s clear who’s poised to win on convenience. In many ways, this can be liberating for brands given that instead of competing on faster shipping, they can compete on delivering the brand experience Millennial consumers are searching for. 
 
In short, we don’t believe that the rest of retail is going away, but we do believe that retailers have to get smarter not only on brand, but also on the operations side. As tools like Fuse continue to grow, scale and become more ubiquitous, brands can help themselves compete against larger players who have vastly more resources. No matter what type of brand you’re building, Fuse is here to help you focus on your business, not your inventory.

When we first started Fuse, we had several key hypotheses as to how we could improve the way inventory planning is done by retailers today. First, we were convinced that it’s impossible to plan a growing business in Excel. As the volume of data and the number of SKUs grow, it’s easy to make errors in Excel and, in fact, impossible not to when you’ve linked several spreadsheets and Excel is crashing mid-save. Excel’s capabilities are limited, and thus planners must rely on backward-looking metrics like sell-thru and historical growth rates, which don’t accurately paint a picture of their growing business. Second, an algorithm can better detect anomalies and accurately estimate seasonality than a human whose attention is divided amongst the many other urgent priorities of the day.

After working with our early customers for some time, we’re proud to say that both our hypotheses were correct -- we’ve found that the ROI of using Fuse makes a meaningful, material difference on both the revenue and the cost side.

10% More Revenue

On the revenue side, we’ve found that Fuse helps our customers achieve 10% more revenue. We did a deep dive into our customers’ biggest quarter - Q4. First, we took a look at stockouts in Q4. We defined a stockout as zero sales with 95% confidence. This means that we excluded instances in which zero sales could have legitimately meant no demand for the product. Second, we assumed that our customer’s revenue target for Q4 was equal to actual Q4 sales. In reality, given the number of stock-outs our customers experienced (more on that below), the revenue target was likely most definitely higher than the sales figures actually achieved. Finally, at Fuse, we always encourage our customers to modify the forecast by including relevant details like product launch dates, products that are phasing out, as well as other information they might know about their business that an algorithm doesn’t. For purposes of our analysis, however, we excluded that information. 

Even assuming the above simplifications, we found that our customers could have made 10% more revenue and avoided 450 stock-outs (on average) during Q4 if they’d followed Fuse’s algorithm. In fact, one of our earliest customers who joined the platform in Q4 had zero stock-outs in Q1. 

What does this mean? Well, for one thing, it means that Excel is definitely not the right tool for growing businesses to plan inventory. In addition, it also means that even without additional input from our customers, Fuse’s initial predictions (based on seasonality) can achieve dramatically better results for our customers.

Reduce Overspend on Inventory by 3x

What we often find with the growing companies we work with is that a significant stock-out in the past, or paranoia about stocking out, leads to panic overbuying. This ties up precious capital and resources in inventory that could be deployed elsewhere. 

In Fuse, we use a forward-looking weeks of supply target to help customers maintain a lean inventory buffer. We often find that many of our customers are managing their buffer using sell-thru (which is backwards looking) or a historical weeks of supply target. For a growing business, these backward looking metrics don’t reflect current trends, and can lead to dangerous overbuying. However, with Fuse, it’s now possible to look forwards instead of backwards, thanks to our accurate forecast and real-time actualization of sales.

We took our customer’s forward-looking weeks of supply target (based on Fuse’s forecast) and applied it to create a recommended inventory buy and replenishment recommendation. What we found was that on average, our customers were overstocked in almost 200 products and spending 3x what they needed to on inventory. By following Fuse’s recommendations, our customers can dramatically reduce their inventory spend and more efficiently manage their working capital, freeing up cash for initiatives that will grow their business, like customer acquisition.

Conclusion

Our data shows that prior to Fuse, our customers were buying not enough of the right SKUs and too much of the wrong SKUs. With Fuse, our customers can switch this around and invest more capital on the right SKUs and less on the wrong SKUs. At Fuse, we’re here to help you focus on your business, not your inventory. 

In a previous post, we highlighted five reasons why e-commerce brands still need a physical presence, but we don’t think that that physical presence needs to be traditional store. Two new models, the showroom and the pop-up have emerged, and we think they can be just as effective if not more so than a traditional physical store.

According to Pop-Up Republic, pop-ups have driven $10 bn of sales annually and are continuing to grow. Even big brands like Nordstroms have created in-store pop-ups embracing the trend. Why are pop-ups so popular? And how can they be effective for growing brands over having their own retail store? And where do showrooms fit in?

Pop-ups provide flexibility

As a temporary location, a pop-up can provide ample flexibility for experimentation. As a brand, you can lease different size spaces in different locations at different times of year to figure out what works for your brand and resonates with your customers. The inherent transience of a pop-up allows you to A/B test different concepts, something that e-commerce brands are already doing all the time on their websites. Think of a pop-up as an opportunity to A/B test key variables like size, location, layout and assortment of your physical stores. In addition to these benefits, pop-ups are also a temporary expense thereby minimizing the risk of making a bad, long-term financial decision.

Pop-ups create a sense of urgency

The great thing about a pop-up is that it’s something new and temporary. These two elements can combine to encourage customers to buy now and to buy more than they otherwise would. Because they know your store won’t be there forever, customers are encouraged to make their purchase right when they see something they like rather than waiting until the next time they come back. While a physical lease runs 5 - 10 years, most pop-ups won’t be in a single location for more than three months.

Pop-ups can support your e-commerce business

For many emerging brands, the goal of their physical presence (whether wholesale or other), is ultimately to drive traffic to their higher margin direct to consumer business. Not only do pop-ups help you maintain your margin, but they accomplish a similar objective. If the customer was curious about your store, they’ll search for you online and be more likely to buy something than had they not walked by your pop-up. In a lot of ways, you can think of pop-ups as more like event marketing rather than a distribution channel.

Social media creates great marketing reach

In a world of social media, pop-ups become even more attractive because there’s an easy and convenient way to share the fact that you’re opening a pop-up with consumers. What’s more, it creates an opportunity for a conversation with your customers over social media in which you invite your loyal followers to come visit you in person. In the pre-social media days, it would have been very difficult to actually attract customers to your temporary location.

Showrooms are a natural extension of the pop-up

Most showrooms tend to be permanent and have been used successfully by brands like Warby Parker. While traditional stores hold inventory, pop-up shops often do not. Instead, they give the customer an opportunity to experience the product, decide what he or she likes and then place the order. Instead of walking out with the item, the customer gets the exact product they picked out delivered to their home. 

In a world in which physical retail stores are closing left and right, brands are searching for a great way to connect with customers and own the customer experience without taking on the liability that a physical retail store often comes with. The great thing about both pop ups and showrooms is that they derisk the financial investment required in creating your own physical space. In the case of the pop-up, the fact that it’s a temporary space limits the financial risk. In the case of a showroom, the fact that there’s little to no inventory investment is a different way to minimize that same financial risk. 

Regardless of whether you choose to keep your business e-commerce only or open a pop-up, we’re here to help you focus on your business, not your inventory.

A few months ago, we published a post on why we believe that digitally native brands can and will be successful. First, they are well positioned to completely own the customer experience. Second, it’s easier to find and target the brand’s ideal customer online. Finally, there are many storefronts (like Shopify and Big Commerce) to choose from that look great and don’t require a team of engineers.

How do consumers feel about luxury e-commerce?

But, can the same logic be applied to luxury items? According to Bain’s Spring 2016 Global Luxury outlook, growth of luxury goods has slowed to 1%. In the US, specifically, the luxury market is in decline due to limited domestic spending and no support from tourism. However, amidst this grim outlook, e-commerce is gaining ground on traditional channels and is expected to grow by 15% per year through 2020. 

We ran a survey to understand how consumers feel about purchasing luxury items online. An overwhelming majority (90%) of our respondents said that they would buy a luxury item online, which is great news for brands. But, many of them caveat that there are only certain kinds of luxury items that they feel comfortable purchasing. First, they prefer purchasing from brands they already know. Second, they prefer to have interacted with the brand first in store. Finally, if it’s an item with a very specific fit, they want to have tried it on in advance.

Customer experience is key to success in luxury

We asked two up and coming brands, Floravere and SENREVE, in two very different industries (wedding gowns and handbags, respectively) to share how they tackle these customer needs.

According to Emily Ambrose at Floravere, “There is nothing more luxurious than serving the customer on her terms.  We deliver wedding dresses directly to the customer, so she doesn't need to hunt down the one dress. Instead, she can try-on in the comfort of home with her loved ones and no pushy sales people. Going digitally native gives us the opportunity to offer unprecedented customer service in our space.” 

Julia Mehra at SENREVE shared a similar perspective: “Luxury purchasers are increasingly turning to online retailers to satisfy their wants and needs. Our SENREVE woman is very busy, so shopping online suits her lifestyle. We’re seeing shopping behavior on our site indicating that the online model fits well with the modern woman’s schedule. We serve these women by delivering a beautiful, timeless, elegant bag for the modern, successful, on-the-go woman.”

Interestingly, both brands defined luxury not simply based on the nature of the good, but also based on convenience of the experience. Recognizing that fit is important, Floravere creatively opted to ship samples in multiple sizes and supplements the experience with a personal stylist. 

And so is building your brand over time

We believe that digitally native brands can be successful in the luxury goods market, but to do so, they’ll need to recognize that the experience of luxury has changed. Retailers must deliver on a customized experience that sacrifices none of the quality and achieves all of the service. Like with anything that is new, it takes time. Time to change generations of retail experience. It takes good word of mouth. It takes a dedicated set of initial customers who are willing to try it out.  And, then, your brand, your product, your service has to speak for itself.

Whether you’re a luxury e-commerce brand or not, Fuse is here to help you focus on your business, not your inventory.