D3 New York Takeaway: Retail Is Going All in With In-Store Fulfillment

By: Azad Sadr

Last week I posted four takeaways from the D3 conference in New York. I noted that all of the retailers who spoke were very focused on omnichannel as their major growth strategy. One omnichannel topic that came up again and again throughout the panels was the use of stores as fulfillment centers.

In-store fulfillment is a big deal for these retailers. For example, according to the presenters, Target fulfilled 70% of online orders in its stores last year, while 30% of all of Neiman Marcus’ online orders are shipped from stores as well.

It’s not surprising then that speakers from Neiman Marcus, Michael Kors, Target, Walgreens, and others, all made it a point to present their current and future plans for using stores to fulfill online orders.

In this post I’ll outline the major advantages, challenges, and strategies that these retailers discussed during various presentations, rountables, and question and answer sessions.

And yes, you’re going to have to read the entire post to find out why I’m using a picture of a banana with an RFID stuck to it. 🙂

Advantages

All of the retailers who presented at D3 see in-store fulfillment as a major strategic asset over ecommerce rivals such as Amazon. Here are a few of the advantages they outlined:

  • Already extant store fleets across the country: Brick and mortar retailers already own and operate huge fleets of physical stores placed within minutes of their customers. Using these stores as fulfillment centers means that no money or time needs to be invested in building new FCs.
  • Faster delivery: 75% of the US population lives within 10 miles of a Target store, 80% of Americans are within 5 minutes of a Walgreens store, and 95% of Michael Kors’ customers can get natural next day delivery from their stores using ground. Such close proximity allows brick and mortar retailers that ship from stores to achieve same/next delivery for most of their customers.
  • Lower shipping costs: As a corollary, because brick and mortar stores are already in close proximity to their customers, using them to fulfill orders also lowers shipping costs.
  • Wider selection: Offering all the inventory in your entire fleet of stores allows retailers to surface a wider selection of products on their ecommerce sites.
  • Never run out of product: If one store doesn’t have a product that a customer orders, retailers can use the next nearest store to fulfill that order.
  • Easier staffing: It’s much easier to scale seasonal staffing across many store locations.
  • Better reliability during holidays: Spreading order volume across more locations increases fulfillment reliability during peak seasons.
  • Lower fulfillment costs: Based on the above, in-store fulfillment lowers total fulfillment costs because no new facilities need to be built, shipping costs are lower, and retailers are able to leverage the employees and staff that they already have on hand.
  • More delivery options: In-store fulfillment allows you to offer BOPIS in addition to SFS.
  • Increased purchases: Letting customers know about limited inventory items at a store speeds up the buying process

Challenges

Given the many advantages that in-store fulfillment offers brick and mortar retailers, it’s no surprise that many of them are investing heavily in making sure that this process functions smoothly and efficiently.

All the retailers that presented, however, also faced many challenges in repurposing stores as fulfillment centers.

Here are the major ones that were highlighted:

  • Can’t handle peak season volume: Brick and mortar stores are great at handling normal volumes of daily orders. During peak season, however, they simply don’t have the backroom space or manpower to fulfill large volumes of orders.
  • Not scalable: Along similar lines, as a retailer’s ecommerce sales increase, there is a certain point at which stores will no longer be able to handle even normal daily volumes.
  • Interferes with in-store customer service: Using store staff to fulfill online orders takes them away from other essential duties such as restocking shelves and customer service. The tension between the two different sets of responsibilities can lead to process inefficiencies, confusion of responsibilities for store staff, and bad in-store experiences for customers. Most of the retailers that spoke saw this as a major problem that they are still trying to work through.
  • Reduces in-store inventory: In-store fulfillment can lead to a lot of empty shelves at stores as clerks fulfill orders using their current inventory. This can lead to bad in-store experiences for patrons who are unable to find the product they want to purchase because it was shipped out for an online order.
  • Lowest accuracy inventory asset: At 50-65%, stores have the lowest inventory accuracy of any retail inventory asset. This makes it difficult to maintain high fulfillment rates and keep in-store patrons happy.

Strategies

Though most of the retailers stated that they are still grappling with many of the challenges that in-store fulfillment presents, they did offer some interesting strategies for dealing with those challenges:

  • FCs must support stores: Michael Kors, Target, REI, and Walgreens stressed the importance of using FCs to support store fulfillment, especially during peak times. This didn’t just mean ramping up the volume of FCs when needed, but planning for and investing in the building of new FCs once daily online order volumes exceed the fulfillment capacity of store fleets. Michael Kors, REI, and Target are all making investments in such facilities.
  • Create “flow centers”: “Flow center” is the term that Target uses to describe facilities that function as both fulfillment and distribution centers. Such facilities are able to support both direct to consumer shipping as well as wholesale shipments to stores. These types of centers can relieve a lot of the inventory pressures that regional stores experience when fulfilling online orders by both taking over some of the order volume as well as making sure that stores receive the wholesale inventory they need.
  • RFID: If implemented correctly, RFID can give retailers much better inventory visibility into their stores, allowing them to surface and find more product for their omnichannel offerings. Macy’s used to have around 65% inventory accuracy in their stores and performed inventory checks once a year. Using RFID they now have over 95% inventory accuracy and are able to check inventory once a day.
  • Reduce clerk time spent on other tasks: Walgreens found that 70% of their clerks’ time is spent on restocking shelves. They therefore developed straight-to-shelf delivery processes for their stores by letting store associates know immediately where a product needs to go. This removes the need for a backroom and frees up time for employees to devote to customer service and online order fulfillment.
  • Targeted data and analytics: According to Walgreens, the rules of averages are too wasteful in the modern era of retail. Applying targeted data and analytics all the way down to the store and sku level can allow retailers to be more nimble and flexible in their responses regional, seasonal, and behavioral changes in the market and their customers. This will allow them to better target the capabilities of their supply chain and store fleets to meet customer needs.
  • Integrated supply chain: Many of these retailers spoke of having had two separate supply chains, one for their stores and one for direct to consumer. By integrating these two together, retailers such as Walgreens and Target were able to remove many of the inefficiencies in their supply chains as well as make their operations more nimble and customer focused.

Conclusion: Retail’s Big Omnichannel Fulfillment Bet Is On Its Lowest Accuracy Asset

From all of the presentations and panels that I attended, it’s clear that retailers are going all in with using their store fleets to fulfill online orders.

This is a really interesting strategic move considering that, as noted above, stores have the lowest accuracy of any inventory asset in retail. It therefore highlights the difficult choice that retailers face.

If order volume grows at 20% per year, a retailer will have to invest in doubling its fulfillment capacity every five years. This is what we’re seeing with Amazon but it’s not something anyone in the supply chain would look forward to doing. Building new FCs is expensive, time consuming, and risky.

That’s why retailers are betting on in-store fulfillment: sacrificing 30-40 percentage points of inventory accuracy by using store fleets is much less expensive and risky than investing in new FCs.

There are, of course, ways to mitigate the inventory accuracy problem of stores.

First, fulfillment risk can be spread across a number of regional stores so that if one is unable to fulfill an order, another one will. As we’ve seen, however, during peak season or once order volumes reach a certain level, it becomes much more difficult to spread out cancellation risk. That’s why Target and Michael Kors are investing in new FCs and flow centers.

Second, RFID can improve inventory visibility. Macy’s and other chains have seen huge in-store inventory accuracy gains using this technology.

RFID, however, comes with its own issues. First, RFID can’t be used in stores with a lot of metal like Home Depot and Costco because it emits at such low frequencies. Second, retailers will have to require all of their suppliers to implement RFID in their supply chains, which comes with its own costs and complications. Third, it doesn’t work very well with groceries. Can you imagine RFIDing every banana in a grocery store?

However retailers decide to tackle these challenges, one thing is apparent: technology and processes for increasing and communicating in-store inventory accuracy will be key for retailers to successfully leverage their brick and mortar fleets for online order fulfillment. #d3newyork

Azad Sadr

Azad Sadr heads up Dsco’s Content and Product Marketing departments. He loves telling stories and boiling complex topics down to digestible content for non-specialist readers. Over the course of his career he’s worked in academia, the oil and gas industry, and most recently, supply chain research and analysis. In his free time he enjoys walking around the town, drinking coffee, and writing fiction.