Best Buy Stores to Serve as Mini DCs
BestBuy.com has an out-of-stock problem. To fix it, the company is following Macy’s, Nordstrom and others in turning to its physical store locations as distribution centers for online orders.
Sharon McCollam, Best Buy’s chief financial officer, announced last month that the company would start shipping merchandising from 50 store locations to fill some of the orders place by its customers on BestBuy.com. The plan is to turn every one of Best Buy’s stores into a mini DC within a year.
According to a Star Tribune report, somewhere between two and four percent of shoppers on Best Buy’s site have failed to make a purchase because the items they chose were listed as out-of-stock. Eighty percent of those items were available in Best Buy stores.
"We’ve got 1,000 stores sitting with inventory and have just gotten done telling a customer they can’t have what they want," Ms. McCollam told attendees at a recent Goldman Sachs dotCommerce conference.
According to the company, 40 percent of orders on the site are picked up in the company’s stores, pointing to an even greater opportunity to fulfill orders with store inventory when not available online.
Best Buy’s CFO is also looking to sell returned merchandise online rather than sending to third-party resellers. She estimates the chain is losing $400 million a year returning merchandise rather than selling it.
BrainTrust
Discussion Questions
Why do so many retailers seem to struggle with managing inventory across sales channels? What challenges will Best Buy face in turning its stores into mini distribution centers for BestBuy.com?
Best Buy is a very good example. Until recently, the digital and terrestrial businesses were completely separate entities. And it showed.
Treating inventory as a shared asset across all selling channels is really the only way to make inventory more productive and profitable. It helps mitigate the phenomenon of chaotic paths to purchase. With continued double digit CAGR, the digital channel is hungry for product. The stores need an relatively deep assortment for a satisfactory look, especially right at new product introduction. No such need in the digital world.
It just makes sound business sense to support “ship from stores” and it’s important to compensate store personnel on fulfillment of demand generated elsewhere.
Retailers struggle because they are still thinking in terms of channels—punta!
Best Buy continues to flail around with its store concept, overlooking the fact that having mini-warehouses and mini stores-within-a-store and whatever else are just retail band-aids that don’t address its core problem.
The biggest problem I see the latest move will create is to further dilute focus and therefore further erode the in-store experience and—by extension—the brand.
This feels like a no-brainer. It must’ve felt that way to the management team too, looking at their remarks. I can only imagine that this is the wave of the future.
Every retailer seems to be struggling with the same issue right now: How to make its brick-and-mortar inventory more productive as a fulfillment tool. Best Buy is following the lead of some smart retailers who are finding tactical solutions to out-of-stocks at their e-commerce distribution centers. It’s one more step on the continued evolution to “omnichannel,” since the customer is already way ahead of most retailers.
Eighty percent of items in stock but not shipping due to online stock-outs? That’s absurd. While I applaud Best Buy for figuring out it has an issue and moving to resolve, to state the obvious, if you have an item, sell it. A lot of B2C companies struggle with managing inventory across multiple channels is due to technological shortages. Many companies don’t want to invest in more sophisticated systems, or overhaul their entire database when newer channels like online are added, and thus fit round pegs into square holes. It works—there’s workarounds and band-aids all over the place—but it works with limited functionality.
Inventory needs to be accounted for in real time, and moved from one space to another in real time. If not, they will face the same issues of having physical inventory designated for one warehouse (in-store) that doesn’t speak to the other inventory warehouse (online) and will create double work for employees to confirm items are in stock, changing their position in a system, and getting them out the door in a timely manner. As for making physical stores into mini DCs, is it inappropriate to say, “Duh?”
The challenge is having the hardware and software to identify where each piece of inventory is in near real time AND the ability to connect the fulfillment question with logarithms about average sales per hour or day on each product so fulfilling an online order does not create out-of-stocks for consumers in the store. Getting the pieces of the technology and software to perform both of these jobs well is a huge challenge. This is one challenge Best Buy will face. The other issue is to determine what role the store could, will, or should play for their consumers. Those decisions will impact the role of the blue shirts and the size of inventory at the store. All of these issues need to be addressed with this new move.
Shipping costs vs. slow turn and/or high shrink items are making very visible the pains of e-commerce sales melding with brick and mortar stores. In many cases, the e-commerce company will turn this return item issue to the supplier side with order pass through. These same suppliers charge for both shipping and returns in many of their high risk sales. This allows the e-commerce to maintain a profit with slim margin and free shipping.
Where the e-commerce-only stores are winning is in their ability to show service vs. direct sale separation for customer support ownership in the market. Brick and mortar stores dipping a toe into the e-commerce side are stuck with no credible reply to the consumer response, “I bought it from your company, why can’t I just return it to the store and get my money back?”
There are a number of practical realizations that must must take place in order to insure a successful coexistence of these two totally different sales practices under one umbrella. Of paramount importance and priority is the full separation and standing of the corporate Information Technology (IT) department and its management team from the e-commerce division. Likewise it is also of equal importance to separate the e-commerce company essentials, as in purchasing, planning, sales and operations, from the brick & mortar company. This is only the first hurdle in the effort to create a commonly understood differentiation between the brick & mortar company and the e-commerce company. Step 2 is the creation of separate, but verbally and visibly similar company name and logo and brand names and logos without engaging market and consumer skepticism or ridicule. In order to solve problems, they must first be identified followed by understanding.
Allowing for separation and company responsibility when exploring a new market plan will create a means for recognizing issues needing attention before they are a problem with loose or no controls.
George presented this in a way that makes it almost a no-brainer as well as one of those “aha!” moments, staring them in the face all the time. If Best Buy executes this properly it will make them more customer centric. I see this as a wave of the future for many retail outlets.
In my view, Best Buy is emerging as a big-box retailer that is exploring innovative virtual to brick and mortar retail strategies to discover what works.
Best Buy is smart to follow Macy’s and Nordstorm and turn physical store locations into distribution centers for online orders. Sharon McCollam’s strategies on order fulfillment and selling returned merchandise online are spot-on.
Customers prefer retailers who offer an integrated omnichannel experience. I would be surprised if Best Buy was not exploring DCs in-store.
Leveraging the investment in physical stores for new purposes makes perfect sense. The retail store of the future will change and this is a sign of what is to come.
“Recycling” returned merchandise should bring good results as well. Given the opportunity to purchase merchandise at an advantageous price should be attractive to many people. The trick is to balance how much of that cost-advantaged material is in each store and to be attentive to potential dilution of higher margin sales.
Why do they—or anyone else—struggle with inventory? For the same reason they struggle with any issue: competence…or more precisely, the lack of same (something that’s both “out” of stock, and “in”… as in “incompetence”). And while I wish them well, simply turning stores into DCs isn’t going to solve (all of) their distribution problems. Without better overall inventory management, they’ll simply increase the in-store out-of-stocks, which may cause customers to turn to bestbuy.com…or to somebodyelse.com.
This sounds nice, but for Best Buy, there are some challenges due to the business nature of Best Buy focusing on hot new releases.
No one cares about buying a washer/dryer set at Best Buy in this context. What they care about is the hot new gaming console, the hot new mobile phone, etc. So if people are rushing to the physical store during the holiday season, is Best Buy going to tell the physical store customers they’re out of stock as everything will be shipped out?
Or better yet, will online customers be told the product is out of stock as Best Buy keeps them for their physical store customers?
Another excuse to add more to the employee workload which will further make people standing in the aisles a distraction from their appointed tasks—finding merch for online consumers. It may be the future, but that’s not a profitable future.