Inventory imbalances cost Chewy $20M amid pandemic 'demand shock'

Dive Brief:

Pet e-tailer Chewy reported $20 million in extra fulfillment spend in the first quarter of 2020 due to "inventory imbalances in the fulfillment network," according to CEO Sumit Singh speaking on the company's Tuesday earnings call.
The coronavirus pandemic brought a "demand shock" that increased Q1 (ending May 3) sales 46% year over year. The volume tested Chewy's fulfillment network, and expenses increased due to more split shipments, longer delivery distances and more expedited orders, explained the CEO. The company also accumulated a shipping backlog over the quarter, which it tackled by hiring 4,600 additional hourly employees — most of which went to fulfillment centers.
Chewy orchestrated an "accelerated ramp-up" for its ninth fulfillment center in Salisbury, North Carolina, in April and will open a 10th in Archbald, Pennsylvania, later this year, said Singh. "It is a demanding task to open a fulfillment center, and it is even more challenging to do so in the middle of a pandemic," the CEO added.

Dive Insight:

More fulfillment centers can help handle more online order volume, but a fulfillment network is only as good as the inventory allocation strategy that fills it. Just ask Amazon.

Inventory rebalancing has been a major expense of the transition from two-day to one-day shipping for Amazon's Prime service.

"Inventory really has to be very close to the customers now," Salal Humair, senior principal scientist in Amazon's Inventory Planning and Control Group, told Supply Chain Dive in February.

As of Wednesday, Chewy advertises free one- to three-day shipping on orders totaling more than $49, with no obvious warnings or caveats for pandemic-related delays. Singh said on Tuesday's call that, despite the pandemic, the pressure to deliver fast has not subsided — part of the $20 million went to ensuring delivery speed.

"For a portion of our volume, we increased the use of express shipments as a way to ensure timely deliveries and protect customer experience," Singh said. The additional warehouses may help Chewy keep up with fast delivery promises. But even if fulfillment costs normalize, more warehouses mean more inventory.

Chewy's total inventory was up 77% year to date at the end of the first quarter, which CFO Mario Marte chalked up to the new fulfillment center and the sales jump, warning that more sales at faster fulfillment speeds means carrying more inventory long-term.

"So, as our sales grow, we have more inventory to maintain the levels of our customer experience that we aim for," the CFO said.

Correction: A previous version of this article misstated the location of Chewy's Pennsylvania fulfillment center.