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How Retailers Are Looking to Skirt the High Price of Online Fulfillment

Retailers are grappling with an ever-pressing quandary: their growing online businesses’ notoriously bite the (brick-and-mortar) hand that feeds them.

As a result, stores are scrambling for ways to offset the steep cost of e-commerce and shipping goods to demanding consumers ever more quickly.

Fighting to get the profit model right in a bricks-and-clicks landscape, stores from Target and Macy’s to Zara and Kroger are turning to buy online, pickup in store programs, retrofitting locations to double as distribution hubs, and partnering with third-party firms to automate supply chain functions—all while tapping new digital talent to help lead the way.

And they have little choice. Global e-commerce sales hit $2.3 trillion last year, and a whopping 18 cents of every retail dollar earned is spent on fulfilling online orders, a survey by Aptos and EKN research revealed.

Turning a perceived liability into an asset

At the National Retail Federation’s Big Show in 2017, Target’s then-newish chief information officer Michael McNamara said retailers must reach the point where they can ship a single item profitably.

Nearly two years later, the retail industry is nowhere close to that goal, sources said.

One challenge is that by its very nature, “e-commerce has a huge variable component,” said Shawn Harris, global innovation strategy lead for retail tech firm Zebra Technologies, which counts Target, Macy’s and the U.K.’s Waitrose among its clients. “As you sell more stuff, you ship more stuff, and you pay more. When there is great success, there are massive expenses related to fulfillment.”

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The paradox is that, save for Amazon, it’s the legacy brick and mortar chains that are the biggest online merchants today. But many of them, still saddled with an operating model built for the pre-Internet era, find themselves playing a game of catch up.

But despite the unrelenting encroachment of Amazon, retailers are now leveraging something the nation’s biggest online retailer still doesn’t have (yet): A massive fleet of stores.

Once considered a liability amid the rise of online shopping, retailers are now using their stores for consumer-facing perks like click and collect, and for back-office efficiency, such as ship-from-store programs, with the goal of slashing e-commerce overhead and boosting profit margins. Target’s 1,800 stores now double as online fulfillment hubs. To maximize that restructuring, the retailer plucked Gemma Kubat from Walmart in July to serve as senior vice president of supply chain engineering and activation to accelerate the push to more nimble, cost-effective logistics, as it offers shoppers two-day and same-day shipping nationwide.

To buttress its globally mushrooming online business, Zara will convert 2,000 stores in 48 countries to fulfill online orders in a bid to reduce out of stocks on e-commerce orders, boost sales of full-priced items, and better compete with the speed and convenience of Amazon.

The argument for ship-from-store posits that retailers with economies of scale can deliver orders from a location near a shopper’s home more quickly and profitably than is possible from a limited number of warehouses. “It’s about meeting service levels while minimizing costs,” Harris said.

One-third of Zara’s online orders are now picked up in store.

Retailers are increasingly pushing buy online, pick up in store and curbside pickup to not only skirt expensive shipping costs, but also to boost store traffic, with some retailers even rewarding shoppers who participate.

Macy’s, for one, is offering click-and-collect shoppers an extra 20 percent off their next purchase, said Jane Hali, head of investment research firm Jane Hali & Associates. They’re banking on the pattern that shoppers who pick up their online orders typically make additional impulse purchases once they get to the store.

Getting help to automate the supply chain

But when it comes to fulfilling online orders on site, there’s a rub, Harris warns. The practice taxes in-store labor “while adding costs to an already thin-margin business,” he said.

That’s why in the supermarket space, retailers like Walmart, Kroger and Target are investing in companies that specialize in automating online grocery to expedite order processing and contain costs, Harris said.

Joining forces with startup Alert Innovation, Walmart is testing robots that help store associates fulfill grocery pickup-up orders in one of its New Hampshire stores; Kroger has partnered with U.K. online grocer Ocado to run automated warehouses and deliver food to customers’ doors.

Just as merchants move to automate supply chain functions, more than 50 percent of the retail industry is implementing item level radio frequency identification (RFID) technology, according to GS1 US, the standards organization.

Retailers like Macy’s are investing in RFID for real-time inventory visibility of both its store and online stock. That’s critical to a successful retail business, but even more so in a multichannel shopping landscape.

RFID automates the tracking of item-level merchandise throughout the retail supply chain—from the warehouse to the store floor—replacing the process of employees scanning products manually.

Stores are starting to reap its return on investment, said Michelle Covey, vice president of retail apparel and general merchandise for GS1 US.

“It opens up a whole other level of inventory accuracy,” she said. RFID enables a retailer to know the precise location and quantity of an item, “which boosts full price sales, reduces markdowns, and generates higher margins to offset the cost of shipping.”

GS1 UK studied 10 companies this year, including Adidas and Lululemon, with all reporting a return on investment from RFID. Not only did RFID help the brands decrease out-of-stocks, it delivered a boost in sales by an average of 1.5% to 5.5%, the report found.

Its potential payoff for the retail industry as a whole is far greater, according to Auburn University’s RFID Lab: RFID boosts inventory accuracy from an average of 63 percent to 95 percent, and reduces retail out-of-stocks by up to 50 percent.

So deployment should be a no-brainer, Covey said. “The benefits of RFID are obvious at this point.”