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SJ Special Report: Online Versus Bricks and Mortar

Macy’s and a lucky handful of other retailers have seen rising profits and, more importantly, rising margins in the last two years. The reason? Online sales. These companies are capturing more value from goods sold online, on a per-unit basis, than they are doing with bricks and mortar.

Macy’s is the trend leader on this issue. The firm rolled out its omni-channel sourcing platform early and was able to be ahead of the pack because, paradoxically, it came late to the e-commerce game and had no experience as a catalogue retailer.

“They’ve taken their one thousand retail stores and turned them into one thousand distribution centers. They actually will ship merchandize to an online order, directly from a store,” says Mark Burstein, President of Sales, Marketing, and R&D at NGC, a provider of PLM and other enterprise solutions.

Macy’s in-store associates have access to the company’s total inventory, so when a customer asks for a product they can get it delivered to their home the next day, delivered in store, or they can be told where they can find it. This minimizes lost sales.

Greg Davis, VP of Product Management at Starmount, a mobile POS solutions provider, says, “This transparency allows a retailer to really be agnostic with regard to channel. It’s all about driving a consistent experience to a customer, allowing them to buy where they want, when they want, how they want.”

Because online sales can be sourced from any inventory stock, the company is able to fulfill orders from stores where the item is least popular, or most overstocked, minimizing discounting and helping guarantee Macy’s receives full price for every item sold. “The goal of every retail store is to sell their inventory quickly and at full price, because the one constraint they have is their square footage,” says Burstein.

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“It’s probably increasing profit per square foot anywhere from 10 to 15 percent.”

On the back end, the company is seeing somewhat higher costs in terms of pulling and shipping their goods, since a retail storeroom is not laid out like a DC. Despite higher costs in some aspects, it’s clear that the strategy works across the balance sheet.

Burstein says, “They’ll take an online order that comes in from their website and they will forward it to the closest store that has product, so now it has also reduced their transportation costs, it has reduced their storage costs, and it has actually enabled them to increase the profit for every sale they make online.

What this does is it eliminates having to maintain that online inventory in the distribution center, versus having it on the retail floor where customers can see it and buy it.”

More importantly, it increases customer satisfaction by guaranteeing a seamless experience.

Online is inherently cheaper than bricks and mortar because of lower overhead, but not all companies are fully capitalizing on its potential. Eventually, most firms will have to make the same transition, says Burstein, “If the online segment is more profitable and you own retail stores, probably the smartest move is to start migrating and using those stores as your distribution centers.”

These efficiencies are only possible with total inventory transparency across all channels. It’s affecting sourcing, as companies are able to translate real time shop floor information into purchasing decisions on the fly.

“The number one topic on people’s radar right now is supply chain management, or supply chain visibility. If something goes into a retail store and it’s not selling and they have to mark it down, that’s not good. What they want is the transparency to know if it’s not going to sell, so they just don’t make it,” says Burstein.

At Urban Outfitters, which uses a mobile POS system that interfaces with their enterprise solutions, their marketing strategy hinges on quick feedback. “They buy a lot of merchandise, but they don’t buy very much of anything, so out of stock is a very significant concern for them,” says Davis.

“They can track in real time what sales they’re missing and how allocations and products were off, so they can react much quicker to what’s happening. It’s much more forgiving on the allocation side if you have the ability to fulfill from other stores and from e-commerce.”

So is online cheaper than bricks and mortar? Yes, but companies need to take the next step in order to get all the benefits. Davis says, “Solutions like ours really unlock data that has never accessible before on the store floor, to enable that associate to be more of a participant and less of a bystander. It gives them tools that really get them back into the game.”

Want to learn more about omni-channel retail? Check out Sourcing Journal’s new white paper collaboration with TradeCard, Omni-Channel Retailing Demands a New Supply Chain, available free here