Can retail stores also act as mini distribution centers?

In a digitized retail world, brands are coming up with new ways to service the increasingly demanding consumer. Macy's shows us one solution for big box, traditional retailers: add fulfillment capabilities to existing retail locations.

Situation Overview

The Internet of Things has drastically changed all aspects of retail from the discovery of brands and products to the means and places of purchase to the returns process. Further the number of times and ways in which a brand or retailer engages with a consumer has increased exponentially since the introduction of the digital age (i.e., omnichannel). While it is a boon for retailers and brands to have access to consumers in more ways, the omnichannel world forces the brand to create experiences across all channels that are consistent. For example, Brand X must have the same in-store and online experience (from a story, service and product perspective) to retain existing and add new consumers. A critical, yet challenging element in creating this consistent experience is omnichannel fulfillment. Customers expect to be able to purchase, pick-up and return product across all retail locations, and responding to that expectation requires significant flexibility in distribution systems.

A solution: retail locations as distribution centers

The solution

To address changing consumer demands, Macy’s has turned its retail locations into mini distribution centers. Macy’s operates 870 stores, including Bloomingdale’s and Bluemercury locations, and every one of the Macy’s stores double as mini distribution centers for online orders.1 By leveraging its stores as fulfillment centers for online orders, Macy’s can fulfill an online order more quickly and provide the consumer with more shopping options such as reserving in store or buying online and in-store pick-up.2  These mini-distribution centers augment an already robust distribution logistics network: as of January 30, 2016, Macy’s operated 23 mega distribution centers, 5 of which are focused on e-commerce exclusively.3

Implementation

Adding fulfillment capabilities to 500 stores is no easy task. Macy’s had to invest in infrastructure to make this happen. Fortunately, Macy’s leveraged the digitization of inventory management and point of sale programs to make the execution easier. Macy’s implemented hardware and software solutions to help handle in-store and online transactions, replacing approximately 40,000 cash registers nationwide with more modern machines that could handle both types of transactions.4 Additionally Macy’s invested in technology that created inventory management of in-stores and online inventory in one program.7 Lastly, Macy’s partnered with third parties to build efficient packing stations in the stores without taking up too much space.5

Example of efficient packing station 5

efficient-packaging-station-pic

Outcome

While there is no metric that clearly indicates whether the strategy of retail stores as mini distribution centers is working well, the continued growth of online sales indicates that something must be clicking. In its latest fiscal year ended January 30, 2016, Macy’s reported that online sales grew by double-digits year-over-year while overall sales were down 4%.6 If consumers were having issues receiving product or felt that the wait time was too long, they could find another solution to shop such as Amazon. Further, this strategy offers two additional benefits to Macy’s. First, by bringing in-store inventory and online inventory under one program, Macy’s is better able to manage inventory and meet demand. Macy’s can shift inventory from store to online to fulfill unexpected online demand or reduce stock in-store if demand is lower than forecasted.7 Second, the mini distribution centers allow Macy’s to compete more effectively with Amazon by lowering shipping costs. Instead of shipping from one central location and paying for delivery through several zones, Macy’s can ship from the store and only pay for delivery through one or two zones. This savings helps Macy’s fight Amazon who can reach customers easily by leveraging its logistics platform.8

Conclusion

Macy’s is one example of a company leveraging technology to improve operations and meet shifting consumer demands. Macy’s added a fulfillment function to its retail stores to satisfy the consumers’ increasing desire to have the product at that moment wherever they are. Unfortunately, it does not seem like these changes are enough to offset the growing competition from pureplay e-commerce retailers like Amazon and the declining mall/department store traffic that is plaguing traditional North American retail. To stem the decline in sales, Macy’s has been expanding its outlet offering as well as continuing to invest in omnichannel marketing and operations to better access and service the consumer. It will be interesting to see where the Internet of Things drives this iconic retailer next.

Words: 701

Sources:

[1] http://www.retaildive.com/news/how-macys-plans-to-revive-its-american-department-stores/405576/, accessed November 2016.

 [2] http://www.innovativeretailtechnologies.com/doc/macy-s-puts-customers-first-with-omni-channel-initiatives-0001, accessed November 2016.

[3] file:///C:/Users/admin/Downloads/2015%20Macys%20Annual%20Report.pdf, accessed November 2016.

[4] http://www.innovativeretailtechnologies.com/doc/macy-s-grows-order-fulfillment-centers-to-0001, accessed November 2016.

[5] http://www.cisco-eagle.com/case-studies/Distribution-Case-Studies/Macys-micro-distribution, accessed November 2016.

[6] https://www.internetretailer.com/2016/02/23/mobile-sales-double-macys-fiscal-2015, accessed November 2016.

[7] http://www.wsj.com/articles/SB10001424052702303505504577404123150295102, accessed November 2016.

[8] https://www.emarketer.com/Article/Stores-Distribution-Centers/1011402, accessed November 2016.

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7 thoughts on “Can retail stores also act as mini distribution centers?

  1. Great article regarding retail industry response to the rise of eCommerce! Macy’s has a great starting point for this, given that each of their stores averages well over 150k sq ft (1). Much of that space can be partitioned and used to store high-demand items in addition to the existing fulfillment centers.

    What do you think Macy’s is doing that differentiates it from other retailers in this space who are simultaneously making ‘digital additions’? Do you think the rise in sales is simply keeping pace with the average consumer’s switch or has Macy’s found something in their value prop that is striking more often?

    (1) https://www.macysinc.com/for-investors/store-information/store-count/2016/default.aspx

  2. Very interesting article. It is very interesting to see how historical “brick and mortar” retailers are now turning their physical presence into a strength and asset. While many historical retailers can consider ecommerce as a threat, it is great to see how Macy’s is actually using this presence to build efficient e-commerce logistic operations. My question is: are other retailers adopting a similar strategy or is Macy’s the frontrunner in that space ?

  3. Awesome post! I’ve read several posts thus far on how traditional brick and mortar retail stores are adapting in the digital age. Its interesting how Macys has decided to use its physical retail stores as logistic distribution centers to combat pure play e-commerce sites such as Amazon. While Macys has invested in cash registers with software that can handle both in-store and online purchases, perhaps Macys should also consider innovating its cash register system entirely. Other retailers are investing in mobile point-of-sale technologies with handheld scanners that help to make the in-store experience more immersive as well as personalize the experience as store associates are able to ring up transactions on the spot. Further, companies are also investing in technologies that allow customers to purchase merchandise through their smartphone. (http://www.starmount.com/news/making-mobile-happen) As you note, it is clear that Macys will need to continue to innovate in order to stay relevant in the digital age.

  4. Great overview of the omnichannel challenge. Macy’s strategy is also clever because one would a large physical footprint would be a liability in a more digital retail world. However, they’ve been able to turn that footprint into an advantage. As you explain, using these stores as fulfillment centers means they can improve their use of space, and don’t have to shut down as many stores. We may see a future where Macy’s department stores are far fewer floors, and the rest of the space if storage. Makes sense to me.

  5. Very interesting post on the future of retail. Amazon and e-commerce retailers have obviously disrupted the space but as you point out I don’t think we have seen the final chapter of this story. The traditional large retailers like Macy’s were caught a bit off guard by the magnitude and speed of the change in retail but as you explain what is most interesting is what they will do now that they realize the shift to digital. I do think that there is some excess capacity in terms of brick and mortar stores but the physical retail locations for Macy’s actually provide a key point of differentiation that online retailers cannot match. The omnichannel strategy will be interesting to keep an eye on and see if it is a success or if as consumers we have truly moved to an all digital world when it comes to buying our clothes.

  6. Macy’s investment in its stores fulfillment capabilities seems like a great move to counter customers’ demands for customized shopping experiences & shipping options. The internet has certainly changed the way that shoppers interact with brands, as consumers now want product when they want it and where they want. While I think that fulfillment is certainly one way for a brand like Macy’s to remain competitive in the digital retail world, is Macy’s doing anything else to digitize their in-store experience for customers? What about on mobile? People in general are shopping at malls less so I wonder if there is an opportunity to increase traffic by leveraging in-store digital experiences. Perhaps Macy’s could consider an in-store, customized coupon offering that would pop up on their app when consumers enter the store. This could work to drive traffic to stores as well as drive sales for items that perhaps the customer wasn’t even considering to buy before entering the store!

  7. Really interesting post, Matthew! Also great grammer/spelling throughout. Seems like you are really learning…

    Lots of the reason for large central warehouse are centralizing logistics and economies of scale with the supply chain. Do you think Macys, with this current model, will be able to off-set those loses? Feel like it could be tough having somebody in the back managing complex, omni-channel orders but at the same time, the stakes may be too high to not do otherwise. Just some food for thought.

    Thx.

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