The Retail Experience: EUROPE - "Under the Ash Cloud"

It began as a quiet and quick mention on the morning news Thursday, April 14th as I wrangled my kids at breakfast: A volcano in Iceland that had a name that I neither I or the anchorman could pronounce had erupted, and the outcome was that there might be 'some' airline delays at Heathrow. I really didn't pay it a lot of attention and got back to the business of packing lunches and shipping the kids off to school. I was leaving the next day for Berlin via Frankfurt for the World Retail Congress, but this event surely wouldn't effect me. Right?

Fast forward to the next morning when with bags packed I became just one of tens of thousands of travelers that had their plans turned upside down. It wasn't until reaching Chicago that I learned my Lufthansa flight was cancelled. Stay a night was the gate agents recommendation... Perhaps they would get me out on Saturday. Some small bit of hope remained despite increasing information I received that the last large airport hub in the EU, Madrid, Spain, had just joined the ranks of closures.

This is where I now digress from the play-by-play of negotiating my return ticket home, the hours lost on hold with Lufthansa and Expedia, and my personal disappointment of having to abandon all hope of reaching Berlin. We were going to provide news coverage of the World Retail Congress (WRC), and despite our absence  - and the uncertainty of whether or not the conference will happen at all - we will perform that task, albeit remotely, and begin to explore the implications of this "modest delay" on the world of retail. There are two stories: first the immediate perspective on how global retail is being affected by the eruption, and second, the long term implications for retailers if air travel to/from Europe is permanently disrupted. 

Disruption is an understatement. Certainly most goods travel via ships and containers, but the fresh food industry segment relies on air transport. Flowers, cheese, meat, seafood, fruits, and other specialty foods all require expedited transport. Already CNN was reporting that Holland tulips and daffodils were not going to be available to Chicago shoppers. No one at the moment seemed all too upset by this report, but shoppers all over the world will soon discover that staples in their homes are quickly unavailable and have disappeared from the shelves of the grocery story. We represent a global community with global tastes. I expect that I can easily get my Delice de Bougoine cheese from France while in Germany a shopper has similar expectations getting their Mexican mango. These "staples" simply won't be there if airplanes disappear from the supply chain, even in the short term.

Now what? Demand exists, distribution is broken, and the manufacturer/producer is left holding product... which means they'll unload it even at lower prices through the remaining channels they have. Even in the short term, this will wreak havoc for retailers already struggling to balance profit and a value proposition for demanding shoppers. If you are a retailer that is heavily dependent upon perishable goods, even a temporary disruption is potentially the preverbial "straw that breaks the camels back." British grocer Waitrose has already warned that "a handful" of products are already in short supply, including pineapple from Ghana and baby sweetcorn from Thailand, and Tesco and Sainsbury's are also monitoring for supply shortfalls. Retailers all of the world that rely on fresh goods coming into or out of Europe will need to rapidly adjust their value proposition in the face of the hopefully temporary but near total shutdown of European airspace.

But that's just one scenario and the long term implications of a belching Icelandic volcano are much more frightening than just a German citizen not having mango for breakfast or me not getting my French cheese. Global expansion plans may have to be shelved: if Whole Foods, for example, desires to continue its expansion into the UK, how would permanent restrictions on and an increase in price of air freight change their strategy or make them consider abandoning the idea all together? If this natural disaster continues for an indeterminate amount of time, what will the new face of retail look like? We certainly don't know and geologists aren't speculating on when the volcano will return to "normal," but consider just some of these possible retail implications.

About 7000 tons of goods flow via air each day from Asia to Europe, and a further 4000 tons from Europe to Asia, according to a Morningstar analyst, and while many of these represent items where air shipping is a convenience, not a necessity (electronics, for example) the impact of the shutdown on retail is broad:

Grocery/specialty foods

The aisles of the grocery store are an international tour of taste. Shoppers no longer think of Irish butter, fresh cheese from France, or star fruit from Mexico as something remarkable. It's just there. Seasons? Certainly not. If you want asparagus despite it being January in the UK, you can get it... at only a modest premium to have it flown in from somewhere warmer where it's grown. Consider for a moment that just a little over fifty years ago at the grocery store items that were once impossible to obtain out of season are now regularly stocked and expected by shoppers. Our palettes and our menus have been changed dramatically based on air freight and this sudden turn of events might force us back to being more seasonal and local. The UK is a perfect case in point: though air freight makes up only 0.5% of imports by weight, they account for about 25% of the value of imports, and almost 70% of this is carried in the baggage holds of commercial passenger flights, so the air transport ban is already hitting hard and fast. Though "fresh and local" is all the buzz for "localvore" foodies, few will easily give up their desires for the remaining nine months of the year. 

The air freight freeze is already hurting specialty food producers. Buffalo mozzarella, produced in one small area in Italy and highly-prized around the world, has such a short time from the time the cow is milked to the sale in the store that the producers association is already considering options: "In the next couple of days we have to decide," said Vito Amendolara, head of the farmers lobby Coldiretti's office in Campania, the region around Naples famed for the cheese. "We cannot sell buffalo milk as it is, because it is too fatty and is meant solely for production of mozzarella. We will either have to throw away the milk or find alternative markets" by heavily promoting it locally.

Interestingly, the reduction in air freight will have a trickle effect on producing countries' labor markets as well. Much of the "production" work necessary to get the beautifully packaged, pre-sliced and "ready-to-eat" produce into US and European grocery stores happens at the country of origin, as processing there both takes advantage of the lower labor cost and reduces the net weight shipped by removing the rinds, seeds, etc. While much of the food supply chain can be slowed to prevent spoilage, idle workers in factories in food production countries like Ghana will likely be laid off.

Mail order goods / ecommerce

Every thing we read about the ever-expanding retail channel of ecommerce would be now suddenly stalled. There would be no overnight delivery options and even a 5 - 10 business day cycle from order to delivery are compromised. Just two weeks ago I waited on bated breath for my new Karen Millen jacket to arrive from the UK. That wait alone pained me something awful, but that was because I wasn't willing to pay extra for expedited shipping, so I had no choice. Now there would be no choice what so ever so my decision to purchase from a retailer "over the pond" would be completely impossible with a 3-4 week delay for ground shipping.

Fashion

While the fashion supply chain on the whole doesn't move as fast as perishable food, one area that will definitely be affected by a long-term reduction in air freight capacity is the emerging "fast fashion" category, where collections are turned 10-15 times a year instead of the more traditional 4-5. One retail exec we spoke with suggested that unforseen delays in the availability of one collection in stores will have a cascade effect on other collections and that having collections too close together could pose some problems, but as our source said, prefering to remain anonymous: "But the reality is that retailers are very resourceful, and you could only accurately calculate that long term effect if the retailer did nothing to change course or react to the circumstances - and we always do." So for the time being, the impact on fashion is an inconvenience to mail-order shoppers, but the brands should be fine in the medium and long terms.

Pharmaceuticals

Pharma relies heavily on air freight due to the high value and low weight of the products, but other than extremely perishable products (vaccines, plasma, etc.) most drugs will be able to be rerouted onto train and ship freight. While rail travel within Europe can make it feasible to get products from factories in Germany and Switzerland to stores from Norway to Spain, manufacturers with facilities only in the US or Asia where the "slow boat" method would create weeks of delays are now at a competitive disadvantage to those with more regionalized production capacity. One short term opportunity: pharma retailers should be stepping up to help stranded travelers with prescriptions, regardless of where the prescription originated.

Intra-EU rail freight

While the focus over the weekend has been passenger traffic, rail transport and cross-channel ferries are instantly adding capacity to cope with the increased demand. The Eurostar train connecting London with Paris, Amsterdam and Brussels eight additional routes and carried an additional 50,000 passengers over the weekend, and the Dover-Calais ferry operated by P&O Ferries saw 6000 passengers on Friday. The load on a normal day is several hundred...

Restaurants

Certainly this is loosely connected to retail, but it's worth mention. If shoppers aren't able to get product at the store level, they won't be seeing it in their favorite restaurants as well. So many menus feature prominently fresh ingredients flown in from overseas. Sushi in London or Meditteranean mussels in New York? Forget about it... if it can't be frozen and ground shipped, you won't see it on the menu. Look to see menus adjust, as restaurants loath disappointing patrons by telling them "we're out of that." The impact of this will be delayed a few days as restaurants use their stocks and food wholesalers feel the pinch, and remembering the advice never to buy sushi on a Sunday, most sushi restaurants got their fish deliveries on Thursday before the flight lockdown took effect. Look for shortages throughout Europe starting Tuesday when Monday's non-delivery has a sudden sharp impact.

Overall economy

It's too early to predict the long term impacts of the eruption of the volcano, but even in the short term, workers are taking a hit. SAS is prepared to lay off 2,500 ground workers due to the shutdown. Laid off workers means less money for retail, so the "ripple effect" of Eyjafjallajökull will be with us for quite some time after the initial shockwave passes. The bottom line is that even the four days so far of this shutdown are hitting retailers hard: they represent 1% of annual sales, and with retailers struggling to eke out 5% growth year on year, Northern European retailers will feel this disruption for the remainder of the year without doubt. And when you consider that three out of the top five global retailers are Northern European, the impact on retail as a whole is likely to be profound, even if US shoppers don't feel the pinch immediately and the US media continues to ignore the global business implications of the eruption.

It's anybody's guess at this point as to how long this will last. And for the poor weary European travelers I met in the airport that were so desperate to return home that they were seriously discussing a slow boat out of New York as a way to get home, I know they wish it was more than a guess too. 

The World Retail Congress has officially been postponed to October, and though we're disappointed not to experience spring in Berlin, GREC is glad that we'll have the chance to attend and provide coverage. Last year's speakers and topics in Barcelona were outstanding and the retail executive attendees represented some of the world's largest. 

But, in its own way the Icelandic volcano (which is named "Eyjafjallajokull", by the way) represents one of the largest truisms in retailing: you can't predict the future, even a week out. And as travelers around the global struggle to discern whether the delays this week are a temporary disruption or a "new normal" for European air travel, so too will retailers have to explore what this means for them, both in the immediate term and strategically going forward.

Comments

[Melissa Fryback]

Reuter's just posted a story on what is happening with Kenyan flower farmers and the tons of flowers that aren't making it to the EU. This breaking news is sure to be a growing topic with MAJOR implications to global retail. We invite you to post other stories that you find on this subject here. http://ow.ly/1AjT8

[Melissa Fryback]

More on the retail industry impact on Reuters... http://www.reuters.com/article/idUSTRE63I3DR20100419

[Danny Gottleib]

Business Week has an interesting article following the actual costs of the impact of the volcano. Guess who pays the most? http://www.businessweek.com/globalbiz/content/apr2010/gb20100426_807330.htm