Will Stores Become Warehouses in the Omnichannel Future?
A host of chains are now expanding their capacity to fulfill online orders from stores. The benefits include more quickly distributing inventory that had traditionally sat in a warehouse, leveraging store personnel, and testing products earlier with actual buyers.
In February, Macy’s announced it was expanding online fulfillment from 292 stores to 500 by the close of 2013 as part of its omnichannel push. It currently has a total of 840 Macy’s and Bloomingdale’s locations.
"We’re finding that customers don’t really care from where we pull the goods, as long as we fill the order accurately and the delivery is timely," said Karen Hoguet, Macy’s CFO, in February on her firm’s fourth-quarter conference call. "We’ve built algorithms to help us determine from where to pull the inventory, and we are learning more each day about how we need to refine these formulas."
She added, "We expect these fulfillment locations will be key to offering faster and even same-day delivery, and also will enable the customer to buy online and pick up in-store."
The challenges come when an online order delivery leads to out of stocks at the store level. Readdressing commission structures is also an issue as many associates only see the website stealing sales from them.
"It’s totally an issue," said Jason Merrick, director of e-commerce for Peter Glenn Ski and Sports, which operates 11 stores in Florida, Georgia and Virginia, in a statement. "We measure how much each store ships and communicate those metrics to the stores." (Mr. Merrick will discuss the complexities of e-commerce fulfillment at the Internet Retailer Conference in Chicago in early June.)
Algorithms help Peter Glenn’s web operation pull product from stores where the product is selling more slowly and avoid fulfilling from a store where the product is moving fast. Technology is also used to avoid the need for phone calls, faxes and having store associates constantly re-key web transfers into the POS system.
Peter Glenn employs one staffer at each store to fulfill web orders, regularly keeps store managers up to date on the latest fulfillment techniques, and bases store managers’ bonuses in part on the accuracy of shipments from stores. Its headquarters’ web team monitors open orders.
- Macy’s Fourth-Quarter Conference Call – Seeking Alpha
- Macy’s, Inc. to Expand Arizona Fulfillment Center – Macy’s
- Stores that fulfill web orders – Internet Retailer
- New Order Fulfillment Software Helped Fatten Macy’s Holiday Margins – The Wall Street Journal (sub. required)
- Macy’s Regroups in Warehouse Wars – The Wall Street Journal (sub. required)
Discussion Questions
Will brick and mortar retailers turn stores into fulfillment centers ala Macy’s in the future? Will pulling inventory from stores become a meaningful competitive advantage for brick & mortar operators in the years ahead?
I think it’s one part of the answer to the problem of stores. With more and more digital channel growth, stores as they exist today are too big. One way to shrink them down is to convert the space over to fulfillment and leverage store inventory against wider demand. For fashion, with its color/size complexities, this is a must do. And with Amazon, eBay, and even Google pushing hard to close the gap between online ship and in-store “instant gratification,” retailers are going to need their stores to respond to that competitive threat—a retailer in 48 states already has a “local” distribution network, if they can leverage stores.
But I don’t see this as meaningful competitive advantage—I see this as “staying in the game.”
Thinking about retail from its elemental perspective helps TREMENDOUSLY in understanding where it is and where it is going. None of this “golly, gee whiz,” look what they are doing now!
Retailing has THREE components: 1. The meeting of the minds – the process that goes on in the shoppers head, that matches that of the retailer; 2. The movement of merchandise TO the shopper; 3. The transfer of money from the buyer to the seller.
The second component, the movement of the merchandise, is what this discussion is about. And, of course, with the growing Convergence of Online, Mobile and Bricks (COMB) retail, getting the merchandise to the shopper must be rethought from top to bottom. And, of course, as the convergence continues for front ranking retailers, ALL assets will be brought to bear, both their shopper facing warehouses (stores) and non-shopper facing warehouses—”remote-supply center warehouses?”
In fact, this is where the real battle between Walmart and Amazon will occur. Walmart is the world’s premier logistics organization, with a long leg up on Amazon on this account. However, Amazon is the world’s premier SELLING organization, and has a leg up on Walmart, on this account. And how fast can they extend their logistics into the neighborhoods? How many C-stores are there that could synergistically become Amazon lockers? I do hope both of these companies have their wits about them! (Note to both: Stay the hell out of politics, and stick to business!)
And NO, stores are NOT going to “become warehouses.” That happened 100 years ago. Sorry if very few have noticed that retailers fundamentally behave as merchant warehousemen, NOT SALESMEN. Again, that’s because in these neighborhood emporia, the shoppers do ALL the selling. Duh! This is SELF-service.
Just to confirm, what does everyone think OOS, Out-Of-Stocks are all about? The warehouse has failed to maintain large enough shelf-space for the top selling items in a FAST MOVING consumer goods (FMCG/CPG) world.
As retailers, like Peter Glenn and Macy’s, hone their fulfillment and inventory skills, fulfilling customer online orders through stores will become more viable and widely accepted. Stores that do it well will have a competitive advantage. This is all part of retail moving to a seamless shopping experience. Consumers already expect that pricing will be the same online vs. offline, and that they can buy online and return in-store. Ordering online and picking up in-store or having local store delivery is the next logical progression.
Kudos to Macy’s, Lowe’s, and other retailers who deliver consumers what they want: the ability to purchase with full ignorance of the silos that most company organizations impose upon them.
Truth is that this question is part of the problem…to view consumer purchase against arbitrary boundaries. Consumers just want to buy stuff in the way that makes most sense. Warehouses? Nope. Stores.
It’s simple. If it’s easier for the customer, and the customer is willing to take advantage of it, then do it!
Most retailers have a distribution system that allows for store transfers, quick delivery of inventory, etc. If the customer sees dropping by the store to pick up their order as a convenience, then they will do it. This is working for many retailers and there will be a “tipping point” where consumers become aware enough that this may become a viable system to get the customer his/her merchandise.
The line between the brick and mortar and online retailers is blurring!
They are already fulfillment centers. As it becomes more difficult to find employees, and threats of raising the minimum wage, stores might move away from the traditional formats. Remember Service Merchandise? A similar format I saw back in the 70s and 80s. Their model was being a fulfillment center.
I was in Walmart #1 yesterday and thinking about in-store fulfillment as I walked the store. The store, of course, was filled with a huge variety of merchandise. But, it couldn’t match Amazon’s offering.
So, my conclusion, stores as fulfillment centers will add profitability to each store and the company. It will change the mindset as retailers. But, it will not give the retailer a competitive advantage versus pure online retailers.
Retailers must first evolve into primarily an online retailer with their brick and mortar locations becoming the showroom and pick-up locations.
In the omni-channel era, many big box stores are looking a little too roomy. Retailers are tightening assortments and reducing facings in an attempt to lower inventory carrying costs.
This presents somewhat paradoxical consequences. First, it creates an opportunity to condense the selling area in some larger stores and allocate more space to the back room. Even if some of this space lies empty, it ties up much less capital compared with excess item facings on the shop floor.
In some locations, excess back room areas might be well used as fulfillment areas for purchases made online or from the “endless aisle.”
Retailers should tread carefully, however. “Pulling inventory from stores” implies that inventory must be kept on hand in those stores. The variety of items ordered through online channels may vary compared with those selected in the physical environment. Reconciling this on a routine basis is an operational challenge.
Turning those back room spaces into satellite fulfillment centers for the buy-online-pickup-in-store is a promising concept. Developing the right know-how is a work in progress.
I don’t think stores will turn into fulfillment centers but I do think they will multitask. Today’s customer wants convenience and buying online is so very convenient. As long as I know what I want, that is.
The need for the store is still there and, of course, we can’t forget about the ‘quest for the find’ that all great shoppers long for! We just don’t need as much square footage to satisfy these shoppers so why not use the rest of the space for fulfillment?
No doubt, it will be tricky to work out but those retailers who can do it, will see the best results. IMHO
The model which is in existence today for brick and mortars will have to adapt and quickly. Major retailers have started the process of closing the doors of non-essential locations. Stores will slowly move to a showroom model to cut down costs while maintaining efficiency through expanding their supply chain.
However, I do not think that pulling inventory from stores will be a meaningful competitive advantage. Consumers have already indicated that same-day shipping isn’t a big differentiation. That being said, I do not foresee the added benefit of pulling inventory from stores being significant.
If I’m correct, unsold inventory on a retail floor is taxable. So why would a retailer have so much unsold inventory on a retail site instead of a distribution center? I vision independently owned “distribution centers” right next to the retail site to avoid the tax implications.
It is one part of the equation. Obviously the cost per square foot in store retail space is higher than warehouse space, so there needs to be an economic balance. Pulling inventory from stores can be part of the overall customer strategy to decrease the lead time to delivery for online customers. The challenge will be the data visibility needed and the decision support needed not to cause store out-of-stocks if there is a run on the item online.
This space is constantly evolving. Each retailer will have a different way of fulfilling their customer needs based on the products they sell. I’ve often thought Best Buy should change its business model to be more of a fulfillment center. Kind of a “try before you buy.” Everyone goes there to try things out and then they go home to get the best deal online.
Macy’s seems to be on the right track for their line of business. But I don’t think you can take their business and apply it across all retailers and all products.
I’ve got to echo the opinions of those who advocate delivering goods to customers in whatever ways they prefer. No, B&M stores will not become fulfillment centers only—but many will embrace that function if it pays off.
Important to remember: Pick-up of online orders at local store locations does NOT infer or require that the store stocks the product. Instead, orders are shipped or transferred (free) to the nearest store for customer pick-up. It’s a great way to offer free shipping for any product offered online regardless of whether it’s stocked in a nearby store at the time of ordering.
Absolutely, brick and mortar stores will turn into warehouses or retailers would have to adopt a concept of a dark store, which many retailers in UK have adopted. Leveraging stores as warehouses needs sophisticated IT systems to enable them to do so in minimal time, especially for grocery when the order is typically picked up from store inventory. Route optimization in the store for picking up can really help save time.
Advanced logic for reserving the stock in-store needs to be built to bringing operational efficiencies. This requires robust forecasting systems which can predict online as well store orders to ensure availability in the store. Today, most retailers ship the online items to the store separately and it is not reserved from the store stock.
There is room for lot of efficiencies and brick and mortar players have a clear advantage here if they play their cards right.
Ultimately, the consumer will decide how prevalent this method of product to consumer delivery becomes. Macy’s customers have voted sufficiently to move the retailer to make the method available in the majority of its locations. I don’t see this significantly shrinking the footprint of their stores, but rather increasing their share of the overall market for the products they sell.
On the other hand, many retailers lack the financial resources, competency, lack of will, or all three, to move forward effectively in this area. The ones who do will continue to consolidate their positions, while upstarts will continue to offer interesting alternatives that meet niche (but still large) consumer shopping and fulfillment desires.
Good execution of the idea will be the key to success. Strong process and applied discipline will make the system hum and clear communication of the “greater good” of the policy impact for the overall business should be made to store associates to avoid conflict and frustrations. A good idea that will be challenged by the ability to execute. Those that do it well may find advantage against competition.
I would agree, although it comes with the inherent challenges. Not all retailers would have embraced omni-channel and unless you tune yourself in, this would be a dream to accomplish. Also, this calls for better fulfillment route optimization like the store which has that product as Fast moving good shouldn’t ship to consumer even though they are quarter miles apart.
Coming back to the question of whether they should turn out to be small fulfillment centers, I believe this is the call of the day. In my opinion, the first and foremost thing would be price advantage. The biggest concern of B&M stores today is showrooming effect and with this model, the would definitely save some cost and pass on the benefit to the consumer to battle the price war with e-retailers.