The myriad reasons for the current global supply chain problems are complex, ranging from factory closures in Asia to a tight labor market in the US.

The single most important lesson to take might be relatively simple: Maybe it’s time to think more about resilience — and whether the drive for efficiency hasn’t made our systems less robust.

Every day seems to bring news of another glitch in the supply chains that handle consumer products. Too many containers are on one side of the Pacific, and not enough on the other. New cars can’t be produced in sufficient numbers due to a microchip shortage, while other products — from sewing machines to sneakers — are out of stock. Packaging and raw materials, too, are in short supply: That even applies to wooden pallets, the price of which is up roughly 40% year-on-year. Moreover, these supply challenges — along with monetary policy, fiscal stimulus, and pent-up demand — are pushing up inflation, a topic many had hoped we’d left behind in the 1970s.

After decades of whittling down buffers, the consumer products and retail industry has become remarkably efficient at every stage of its supply chain. But, along with the resulting benefits, the industry is now more vulnerable to major shocks. Just-in-time inventory drives down working capital, for example. But it only works if suppliers can deliver in time, thanks to rapid, frequent transportation and glitch-free production by suppliers.

Just-in-time delivery becomes more complicated when manufacturers, seeking the cheapest sources for components, use suppliers on the other side of the world. That implies, long, multi-stage journeys, which worked previously — but do not when ports cannot function at full capacity, let alone when there are not enough containers in which to transport the goods. And those goods might not even be available if they are manufactured in an area of China with power rationing due to high coal prices and emissions targets, or if a factory in Vietnam has to close due to a COVID-19 outbreak.

That’s why it’s time to think about how better to balance the short-term economic benefits of efficiency with the longer-term benefits of resilience. How do we balance “just in time” and “just in case”?

With elevated demand and supply-chain challenges, retailers and suppliers must choose whether to initiate a new type of collaboration or remain stalled in a standoff benefiting no one.

Both sides of the trading partner relationship are looking at negotiations differently. The starting point is challenging, with mutual term structures that could hardly be more complex, combining dozens of terms on the national, and (in Europe) international level linked to a broad set of counterparts ranging from in-store displays, to promotions, supply-chain conditions, or access to sales data. Many retailers report hundreds of individual term agreements across their supplier base, while suppliers oftentimes quarrel with retailers’ operationalization and the effectiveness of the counterparts. In summary, it’s a case of the prisoner’s dilemma, a paradoxical situation in game theory in which two individuals acting in their own self-interests fail to produce the optimal outcome — and as a result, both participants find themselves in a worse state than if they had cooperated with each other in the decision-making process.

Both retailers and suppliers are confronted with a challenging market environment characterized by saturation and slow growth, rising cost to serve, and an increasingly active role of regulators. The time has come for the two sides to simplify their term agreements and devote more time, and energy to focusing on customers and joint value creation — or ultimately having government regulations imposed on them.

Observers have long wondered how long such a highly inefficient collaboration could prevail in an industry that often praises itself for its efficiency and speed. The system in Europe in particular is under tremendous pressure, paving the way for a fundamental reset of the retailer-supplier negotiations, which may have lessons and implications for the US as well:

Convergence and internationalization of competition. Hard discounters are becoming more like supermarkets, Amazon has become a serious fast-moving consumer goods (FMCG) player, and new multinational e-food players are entering the market. In response, traditional retailers increasingly are becoming part of international buying alliances — in Europe, for example, we have seen almost 50% more such participation in 2020 compared to 2015. (See Exhibit 1.)

Yet the incremental return of volume bundling alone is diminishing. All these elements are pushing toward a real redesign and simplification of (international) term structures and doing so from an increasingly powerful position in the market.

Tighter regulation. In Europe, French regulators — together with official watchdogs in several key markets in Eastern Europe — are limiting back margin elements while demanding more transparent counterpart measurement. Retailers are starting to use these dynamics to simplify their term structures not only from a domestic legal perspective, but also as a trigger for a more comprehensive redesign across markets.

Coming to senses. Despite all drawbacks, today’s complexity of terms is often interpreted as a unilateral advantage by both sides, but in reality, it involves unnecessary use of resources and reduced net-net-margin transparency for everyone. If “omnichannel customer-centricity” is to become a real paradigm, then it can only be supported by simpler term and agreement structures.

In our view, now is the right time for retailers and suppliers to drive changes before losing the customer out of sight and the appearance of additional regulatory impediments. This will allow for a simplification of the collaboration and more time and energy for (jointly) focusing on customers. Some European retailers have already begun this transformation and are starting to reap the benefits. Others who have yet to begin the process should not lose time and consider the following recommendations:

Create net-net transparency on Stock-Keeping Unit (SKU) level first. Knowledge is power, and leading the change is better than reacting to the proposals of others. Economic control over term simplification first requires deep transparency on the true net-net profitability on a product level. Retailers and suppliers should prepare now for the dynamics to come or risk losing control over the total P&L impact.

Warehousing remains a critical portion of the supply chain with increasing complexity driven by the speed, scale, and volume of customer ordering. The growth of e-commerce has led to a proliferation of stock-keeping units (SKUs), and there’s an ever-broader need to engage and retain customers by offering immediate fulfillment. Technology is a factor as well, as new automation systems flood the market, and operations leaders face the challenge of keeping pace and understanding which technologies apply and what kind of impact they can create.

Worldwide, companies spend an estimated US$350 billion a year on warehousing. That number grows each year as pick sizes, or the size of orders picked from warehouse shelves, shrink and costs balloon, raising pressure not just on margins but also on service levels.

The warehousing categories that drive service level improvement include inventory accuracy, efficient space utilization, and proper process and physical workflows. Each category facilitates speed and accuracy and can be improved by implementing basic, but critical, practices and management capabilities, by leveraging a control tower concept. By implementing a technology-enabled warehouse decision-making process and system commonly called a control tower, operators attain real-time end-to-end visibility, predictive decision support, and collaborative information sharing.

From our work we’ve identified five best practices to enable the key capabilities and benefits of the warehouse control tower:

One of the enduring legacies of the COVID-19 pandemic has been the role that younger consumers have played in reshaping retail. Younger generations in the United States shop very differently from their elders, and understanding their preferences is essential for merchants designing and implementing payments strategies for the long term.

Younger generations’ buying power, already strong, will only grow as they age into their highest-earning years. Millennials are already on the cusp, and Generation Z is following on their heels. Merchants need laser-like focus on these two increasingly powerful groups of consumers.

Younger generations are much more comfortable than older ones with shopping online, particularly for non-necessities beyond the typical categories of food, medicine, and household goods. When asked if non-essential purchases were planned over the next week, 40% of Gen Zers and 50% of millennials said “yes,” vs. 26% of older groups, according to Oliver Wyman’s retail payments analysis survey from June. With alternative payment methods like buy now, pay later (BNPL) and other forms of digital payment gaining popularity, these generations are leading the charge for change. Younger consumers are the core shoppers of the future and will reshape the way customers interact with merchants.

We see a similar trend playing out in digital banking: Gen Zers and millennials are more likely to use digital banks, although the majority still use traditional ones for primary bank accounts. Our June retail payments analysis survey showed that 21% of people age 18 to 24 use digital banks, compared with only 3% of those in the 55-64 age group. These new digital banks often have creative payment solutions that are attractive to younger customers.

Younger generations not only have a greater tendency than their elders to prefer shopping online for things other than necessities — they also are more likely to shop online on a marketplace, with roughly 5% shopping via the websites of social media influencers. We expect these markets will continue to gain popularity with younger consumers, mainly because millennials were the first generation to grow up with social media.

Younger generations diverge from older ones in the payment methods they prefer. They have a greater propensity to use cash and debit than older segments and a much lower tendency to use credit cards. Yet this population is willing to use alternative payments, opening themselves to new ways of engaging with merchants that offer payments options integrated into their daily lives. We expect this trend to continue as alternative payment offerings such as BNPL solutions, cryptocurrency, and super apps become the preferred way for consumers to shop and pay.

The majority of BNPL users, for example, are under the age of 35. These shoppers are generally wary of traditional credit cards; Gen Z usage of store credit cards is only 27%, compared with 48% for baby boomers. BNPL represents an alternative, allowing shoppers to enhance their purchasing power by splitting up the payments over several months, without interest.

If the retail and consumer goods industries had been preparing for a more settled period after the disruption and hyper-competition of the past decade, in 2020 they got the opposite. The COVID-19 pandemic led to numerous big changes.

Online shopping surged. Technology-assisted methods of intermediation, such as online shopping advisers, became more widespread. And product brands accelerated their direct engagement with consumers.

These transformations have raised customer expectations, and from now at least one rule will apply to all the industry’s segments and geographies: Average propositions will no longer work. That means retailers and consumer goods manufacturers need to figure out what they want to be known for.

Many of the transitions underway are dramatic accelerations of long-term shifts that had already been in the pipeline. Succeeding at any of the new models will require three things: match fitness, a game plan, and the leadership to implement.

Match fitness in the digital age implies understanding your customer and being quick and agile when bringing new products and formats to market. Companies have to establish new channels and business models while still operating their core business, making it essential to focus more intensely on cost and end-to-end processes.

Customer understanding. In the digital age, retail and consumer goods companies need detailed knowledge of their customers and end users. A key question is how to get access to data and content on their behavior and thinking. While digital tools and platforms should simplify this task, it is not easy for these to stay relevant.

To hold consumers’ attention, such platforms should offer meaningful benefits — for instance, engagement through communities, high-quality recommendations, and personalized services and offers. So, retailers and brands are introducing new breeds of customer programs and private communities. To complement these, they are also listening in to the flow of content on social platforms, which provides a detailed, objective, and up-to-date picture of consumer opinion.

However, it is still quite common for incumbents to run data analytics and digital engagement with customers separately from the core commercial parts of the business. This disconnect no longer works in a world where digital processes are used throughout an organization. Companies need to develop a clear picture of how the growth in consumer-related data can enhance the development of products and services and make their entire business more effective.

Cost focus. Building digital channels and direct-to-consumer businesses requires substantial investment in infrastructure and capabilities. To finance this, companies need to generate and increase their profits in a significant way. However, price pressures are growing, as prices are more transparent than ever. One example is the rise of platforms comparing consumer goods prices in different European markets, which creates new challenges for companies used to addressing those markets in targeted ways.

It is therefore essential to streamline costs and improve process efficiency. One effective approach is end-to-end transparency. This involves tracking costs across all departments and organizational silos — from the conception of a product to its activation; and from raw materials all the way to the shelf, whether this be digital or physical. The value chain can then be transformed through a zero-based approach: redesigning activities and resources from scratch, and focusing on what the customer really needs.

Consumers’ widening range of choices in products and shopping channels make it urgent for companies to find ways to stand out. Playing to win in all dimensions of the retail and consumer products businesses is unlikely to succeed: The various aspects of the industry require different organizational focuses, which will sometimes oppose each other; trying to succeed at them all would demand unrealistic resources.

Our Retail’s Revolution report therefore suggested six models that will prosper in the new world, each based on a particular dimension of strategic control. These are paradigms, however, and most retailers and consumer product makers will likely combine elements of more than one model.

Product leader. These leaders offer market-beating products and brands with exceptional recognition. They trigger strong emotions, often by telling stories and delivering unbeatable quality or value. In many cases, product leaders aim for and achieve global scale — a path more accessible than ever given the global scale of social platforms, influencers, and marketplaces. But there is also a role for small, local producers that satisfy the growing consumer demand for products that are ethically produced with a low carbon footprint. In all cases, direct access to the consumer can help brands learn about consumer tastes, consumption patterns, and purchasing behavior.

Magnetic ecosystem. Shopping ecosystems can become magnetic by providing a seamless, hassle-free experience and real engagement through communities and AI-powered advice. This is usually achieved through a mix of strategies, such as personalized recommendations, one-click payment, and same-day delivery for members. Integration with other industries — such as health, media, and financial services — will increase the variety of such services. Constant innovation, surprise, and improvement will play a big role in keeping these platforms fresh and magnetic over time. Currently, we see a lot of focus on setting up private user communities and channels.

Choice intermediary. Choice intermediates are where consumers increasingly begin their shopping journeys to save time and money and make better decisions. Review aggregators, for example, which are popular in the travel and restaurant business, assemble high-quality reviews and generate customized recommendations. Market mappers, such as online flight bookers, focus on products and help the consumer make sense of the available choices. The choice-intermediary model could scale well globally, particularly in sectors with few market-specific products, such as technology, hardline goods, and some areas of apparel.

Findings suggest the perception of the company as investing in sustainability leads to a halo effect — consumers, especially those with strong environmental values, believe the products will be effective.

When you reach for a jug of eco-friendly detergent in the store, are you buying it because you want to protect the environment? Or do you believe it’s likely more effective than a traditional cleaner? Or perhaps it’s some combination of the two?

Understanding how consumers perceive sustainable products has become increasingly important, as these products — once considered niche — crowd retail shelves. Share of sustainably marketed consumer goods has grown an estimated seven times faster than that of conventional products.

In this context, Kellogg marketing professor Alexander Chernev recently researched the link between knowing a product was made by a sustainably minded company and perceptions of that product’s performance.

Some past research suggests that products developed using traditional technologies or materials will be seen as superior to “green” options that are developed with sustainability in mind. This is known as the “sustainability liability.”

“It’s zero-sum thinking,” Chernev says, “where if a product is good on one attribute, it must have deficiencies in others” — a kind of compensatory reasoning as his own previous research has highlighted. “Consumers may think, ‘It’s great that the company is making sustainable products, but I’m going to buy the regular one.’”

Recycling has become widespread, and some major brands have already taken up reusable and compostable packaging on a limited basis. Most coffee shop chains sell reusable mugs, and many are now testing recyclable and compostable cups. Some major grocers have introduced compostable meat trays and salad boxes. Compostable bowls are increasingly common in fast-food chains, and compostable clamshells are being used to tote leftovers from forward-thinking establishments.

Each of the three solutions has advantages and disadvantages in cost, how effectively products are packaged, and benefit to the environment — the extent to which they are truly sustainable. Product makers and other users of packaging have to figure the best options for their purposes.

COVID-19 has fundamentally changed our lives, in many ways permanently. One of the profound changes we are seeing is in the way consumers purchase goods and services: Increasingly the store is delivered to the customer rather than the other way around.

This has led to an exponential rise in delivery companies who have now expanded to serve as aggregators for many merchants. Two years ago, who would have predicted that a relative unknown grocery delivery super app would now have a 50% share in online grocery delivery and a valuation of $40 billion? Overall, US food delivery revenues are estimated at $130 billion-$150 billion, with online grocery representing the lion’s share at $90 billion-$110 billion.

The valuations of delivery aggregators have skyrocketed through the pandemic. Leading players have expanded seamlessly from delivering food to a host of new categories, including prescriptions, electronics, home décor, and beyond. One of Southeast Asia’s largest consumer technology platforms, provides insights into where delivery platforms might be headed as they gain control of customer relationships. Launched in 2012, the company has evolved into a super app with everything from ride-hailing and food delivery services to financial services for the unbanked. It announced it would go public in April 2021 at a $40 billion valuation, the app has had over 214 million app downloads across the eight Southeast Asian countries it operates in and recorded $12.5 billion in gross merchandise value last year. As aggregators expand to new areas of activities; merchants with proprietary payments can expect increased competition in financial services as well.

As the user base and the functionality of these apps grow, it is important to consider how much of consumers’ share of mind and attention they are capturing. And with this share of mind and attention comes significant parts of the customer shopping and payments journey. Delivery aggregators are fundamentally re-defining the role of the payment transaction for merchants that rely on their services for last-mile delivery.

As these aggregators capture share of the customer relationship, there are distinct implications for merchants (See Exhibit 3).

What is the optimal view of delivery aggregators as our “frenemy”? What will the future of payments look like in a world where the merchant increasingly does not control the checkout experience and perhaps even the payment experience? These questions become most salient when delivery platforms start to nudge shoppers from one merchant to another. For instance, certain grocery platforms actively track basket purchases and a customer purchasing vitamin C from retailer A may find a promotion for vitamin C and other products sold by retailer B in their inbox the next day.

For merchants’ corporate strategy, partnering with aggregators is a delicate balancing act between driving sales and preserving strategic control over the customer relationship, of which the payment is one key component. Relying on delivery aggregators has direct implications on merchants’ revenue and multiple aspects of their payments operations. For instance, grocery merchants can expect to pay a 5%-10% fee per transaction on delivery orders fully serviced by aggregators, directly impacting revenues. In addition, merchant payment acceptance costs can also double, depending on the delivery platform. Beyond financial impact, using delivery aggregators has repercussions at each step of the online purchase customer experience.

Depending on the delivery operating model selected by the merchant, the customer transaction may reside in the aggregator or in the merchant’s environment. If the checkout flow sits with the aggregator, there are several additional implementation considerations for the merchant.

On the back end, fraud and disputes need to be handled, typically through new processes and returns also need a dedicated approach. Furthermore, enabling the use of proprietary merchant-led payment methods may require new integrations and loyalty earning is difficult to offer.

Merchants also need to consider the impact of this third-party-led channel on their payment partner relationships that include transaction volume commitments, for instance with acquirers or card networks.

For merchants, working with aggregators triggers significant strategic and operational considerations that directly impact their payments. These considerations cascade down from overarching corporate strategy to customer experience, operating model, and finally implementation considerations. The strategic choices made at each step influence payments, especially costs and customer experience, considerations that are critical areas of focus for merchant payments teams engaging with delivery platforms.

This article was originally published by the Merchant Advisory Group on July 19, 2021.