Sonos Juggling Demands of D2C Business While Still Navigating Effects of Tariffs

Hills told a webinar hosted by freight logistics company Flexport that during the pandemic, which slammed brick-and-mortar sales worldwide, Sonos is “not only dealing with the impact of COVID, we’re still navigating some of the waters with these 301 tariffs” imposed last year by the Trump administration on goods imported from China. Higher tariffs led Sonos to steer production of most U.S.-bound goods to Malaysia (see 2003050056), which Chief Financial Officer Brittany Bagley told an investor conference in March was on track for completion by year-end.

China was able to come back up to speed on manufacturing after its COVID-19 crisis much faster than other Asian countries, but some companies had moved to alternative manufacturing sources due to tariffs, Hills noted Wednesday. Some of those countries aren’t back online, he said.

“You have to be flexible,” Hills said: “We don’t even know what strings, what lanes we’re going to be shipping from.” Though Sonos is able to forecast customer demand, “because of these challenges, we haven’t even really known where we were going to be manufacturing, what country we were going to be exporting from.” He credited partnerships such as the one with Flexport for ensuring “the constant flow of materials and goods.”

Because of strong forecasting, Sonos has been able to ship most goods the least expensive way, by water, said Hills. It tries to avoid costly air shipping because speakers are “on the heavy side.” But due to uncertainties and some inventory constraints, it has been forced at times to use air shipping, which he attributed to “trying to figure out where we were going to be manufacturing.”

Sonos CEO Patrick Spence highlighted a spike in direct-to-consumer sales (D2C) in April when consumers turned to e-commerce to buy goods they couldn’t get when stores were closed (see 2005070025). That presented labeling, shipping and warehousing challenges. More people are required to move 1,500 units in a D2C model vs. a “handful” of pallets destined for a single retailer, he said: “It’s placing a really high demand and really high importance on your warehousing partner.”

Forecasting is critical for efficiency, Hills said: “You don’t want to pay for warehouse workers to be sitting around waiting for orders to come through, but you also don’t want to be short on labor.” Under-forecasting results in backlogs that affect the customer experience and costs for expediting deliveries, Hills noted. Having to ship from farther locations incurs higher costs, too.

Forecasting D2C sales fluctuations can be unpredictable, said the executive: “It’s much more challenging to capture spikes in demand for D2C than it is for B2B.” An online article or blog can drive an unexpected surge, or a successful promotion can produce an order spike, he said.

Labor in warehouses is an issue in the COVID-19 era, with workers concerned about safety and not wanting to contract the virus, Hills said. "When you’re in a warehouse environment, you’re running around … you’re in the same aisles as others … you can test positive.” Those concerns are heightened for temporary workers, he said.

Sonos is also competing with big box retailers that have bigger warehouse staffing needs due to the jump in e-commerce business since the start of the pandemic. Retailers including Amazon, Best Buy, Target and Walmart boosted hourly pay in the competitive market, offered additional benefits and “advertise safer environments,” Hills said. “If you’re not a big box retailer, you still have the same impact” of needing more labor, while facing a tighter pool of potential hires, he said.