By Phil Wahba and Dhanya Skariachan
MARTINSBURG, West Virginia Dec 24 The brave new
world for U.S. retailers can be found in small cities like
Martinsburg, West Virginia.
That's where department store chain Macy's Inc
recently opened a facility the size of 43 football fields - big
enough to stock 1 million pairs of shoes - just to fulfill
orders made online.
The $150 million building, its third one dedicated primarily
to supporting macys.com, has already been handling 60,000 orders
on a busy day this holiday season. Macy's expects that figure to
triple in two years.
"The customer is increasingly voting that she wants to shop
both ways," said RB Harrison, Macy's executive vice president in
charge of integrating e-commerce and store operations.
From Macy's to Home Depot Inc and Best Buy Co Inc
, retail executives are racing to speed up order delivery
and improve inventory management, which if done well, can help
Many chains are also hiring staff, or even buying firms in
Silicon Valley, to get the edge in technology.
"Today, tomorrow and going forward, you are comparing the
experience in our store to the experience of sitting in your
living room, in the comfort of your home, ordering something on
your laptop, your smart phone or your iPad," Home Depot Chief
Executive Frank Blake told Reuters.
"Your willingness to put up with rude associates, dirty
stores and out of stocks is just going to go down and down and
down. Our bar on performance in our stores is going to go up and
up and up," he said.
To be sure, online sales to date account for just 7 percent
of retail sales, according to Forrester Research. But the firm
expects online sales growth to rise 45 percent to $327 billion
and account for 9 percent of overall sales by 2016.
Retailers are realizing they must respond to that kind of
"When I was meeting with brick-and-mortar retailers 24
months ago they weren't thinking about online," said Carlo
Bronzini Vender, a senior partner at New York-based investment
bank Sonenshine Partners who helped advise Drugstore.com when it
was bought by Walgreen Co in 2011. "Now people are being
more proactive about it."
Even if some retailers like Macy's are less exposed to the
threat from e-commerce's 800-pound gorilla Amazon.com Inc
than a company like electronics chain Best Buy Inc
, they are all under enormous pressure to offer faster
delivery times, better service and an array of products.
Already armed with 40 e-commerce fulfillment facilities,
Amazon is set to open another 7 centers next year.
And by next year, Amazon could offer cost-efficient same-day
shipping to every customer in the 10 largest U.S. cities,
according to RBC Capital Markets.
This year, Saks Inc, Dillard's Inc and
Kohl's Corp are among retailers that opened the biggest
online fulfillment centers they have ever had.
And those without much of an online presence are moving
quickly to get one. For example, T.J. Maxx parent TJX Cos Inc
, which sells designer clothing and home goods at
discounted prices, said on Friday it bought off-price Internet
retailer Sierra Trading Post for about $200 million.
Most national retailers have largely stopped opening new
stores as same-store sales growth has slowed compared to online.
But the stores can be a major weapon for companies like
Macy's and Home Depot as they fight Amazon.
Since this summer, 292 of Macy's 800 stores have been doing
double-duty as mini-fulfillment centers that assemble, pack and
ship online orders, up from 23 stores a year ago. It plans to
add this function to 200 more stores next year.
Nordstrom Inc has been doing this for years, giving
it a big lead over other department stores.
At Macy's, already 10 percent of orders placed online have
been dispatched through stores this holiday season.
"It's a natural extension for us because of our ability to
leverage the 800 stores' inventory," said Harrison of Macy's. He
noted that the cost for equipping a store for e-commerce is
relatively small, requiring a small space in the docking area
for tables, scales, and room to pack boxes.
Saks is testing "ship-from-store" and expects to roll it out
next fall. Wal-Mart Stores Inc and Kohl's are also
"Fulfilling online orders from the store is the most
important thing that will change physical retailers over the
next five years," said Matt Nemer, an e-commerce analyst at
The strategy is aimed squarely at boosting profit margins.
Saks CEO Stephen Sadove envisions a scenario in which a pair
of shoes sitting unsold at his Saks Fifth Avenue flagship could
be used to fill an online order and sold at full price, instead
of ending up being sold at a discount, hurting profit.
Macy's computers have complex algorithms that scour
companywide inventory, factor in distance and shipping costs to
come up with an optimal way to assemble and ship an order.
Despite higher shipping costs, Macy's shipments are often
split between locations if a computer determines that the
benefit to margins from selling an item that a store doesn't
need or has too much of outweighs the extra expenses.
Stores are also serving as pick-up spots for online orders,
and many retailers are finding this a boon. Wal-Mart says
customers spend about $60 in a store when they pick up items
In November, Best Buy decided to assign additional employees
to deal with in-store pick-ups since 40 percent of bestbuy.com
orders are now picked up.
DANGER OF MISSTEPS
Even Amazon sees the benefits of a physical presence.
Staples Inc said last month it will install "Amazon
Lockers" at its stores, allowing customers to have packages sent
to Staples stores to avoid delivery hassles.
The biggest reason many retailers are only now offering
'ship-from store' and in-store pick-up is that the traditionally
managed store and e-commerce inventory had been handled
That is changing rapidly. Saks is spending about $40 million
this year to update its computer systems in part to integrate
databases. Industry experts say Nordstrom's e-commerce lead over
department store rivals stems in large part to technology
investments it made years ago.
But there are risks.
Computer systems and staff have to be ready or else
retailers can face disaster, said Forrester Research analyst
Sucharita Mulpuru. The use of stores is pointless if, for
example, an inventory system gives the stockroom person
collecting an order incorrect information about where a coat is
located, leading to wasted time.
There is also a big risk of an item in store being
"shopworn," or unsuitable to be sold.
"It's smart to fulfill from stores if you can figure out a
way to get your operations right," Mulpuru said, noting the
potential for human error is another concern. Such problems are
limited at fulfillment centers because the systems are highly
Executives agree. Harrison said stores are not meant to
replace fulfillment centers, with their much greater breadth and
quantity of products, but are there to supplement them.
"It's always going to be more efficient to ship from a
fulfillment center," Saks' Sadove told Reuters. "You're never
going to be perfect in 'ship-from-store'."
SILICON VALLEY APPEAL
To support its e-commerce strategy, retailers are
aggressively hiring in Silicon Valley. Nordstrom took on more
than 400 new employees with software engineering and website
development experience, including Kirk Beardsley, an e-commerce
executive from Microsoft Corp who had been a director
of business development at Amazon for over seven years.
Retailers hope to take this even further by analyzing online
data. Macy's executive Harrison said data collected this holiday
season will help prepare for the next steps in its online push.
Last year, Wal-Mart acquired California-based start-up
Kosmix, which developed technology to filter data from social
media networks. As a result, Wal-Mart's San Bruno,
California-based e-commerce offices now house more than 1,000
Getting hold of the technology to back up these efforts is
driving acquisitions. They are frequently small ones, driven by
retailers' attempts to master the online sales process, rather
than immediately boost sales.
Home Depot, which bought tech start-up Redbeacon earlier
this year, is looking to acquire or partner with more companies
in the Valley, according to CEO Blake.
Redbeacon, founded by a trio of Google Inc
veterans, matches homeowners with the best contractors for jobs
such as cleaning and home repair. That kind of innovation will
send shock waves through the sector, Blake said.
"I think there is going to be as much change over the next
10 years in retail as in the last 50 years. So if you're
prioritizing where you put your best people, your best resources
and all the rest, for us it's on inter-connective retail," said