Macy’s Wins with Omni-channel Fulfillment

Last week Macy’s, the department chain retailer, announced its fourth quarter results. The company has done well in a tepid economic environment. Macy’s has been beating estimates for same-store sales for several months, posting year-over-year comparable store sales growth of 3.7 percent. In its peer group, Macy’s is one of the industry’s star performers.

As Chief Financial Officer Karen Hoguet made clear in her call with financial analysts, Macy’s omni-channel strategy is one of three key strategies driving its success. According to a Wall Street Journal article, without web purchases, same-store sales for the fourth quarter would have only increased 0.6 percent. Ms. Hogue spent a good portion of the call discussing the omni-channel strategy, and because Macy’s is one of the most successful omni-channel retailers, it is worth reporting what she said in some detail. All quotes below are from Ms. Hogue’s comments.

Omni-channel offers “enormous opportunities,” which Macy’s has only begun to tap. The retailer has put significant resources into figuring out “how to best optimize the use of warehouses and our stores in an ever changing fulfillment environment.” For Macy’s, this means “filling many items that are ordered in our stores from the inventory either from other stores or from our online fulfillment centers. At the same time we began in 2012 to fill orders entered online out of inventory in our stores. 292 stores are enabled to fulfill goods, up from only 23 a year ago. By fall of this year, we expect to have 500 stores fulfilling orders.”

When it comes to fulfillment, “we are finding customers don’t really care where we fulfill the goods from, as long as we fill the order accurately and the delivery is timely.” Macy’s stores that are capable of omni-channel fulfillment have expanded back rooms where goods are packed. The picking is done in the front of the store. “One of our early lessons is that we had thought we would have special purpose people doing the fulfillment activity. We discovered we were better off using the support of the [store] associates we had because they better understood the merchandise. And people who are putting merchandise on the floor are going to find it much quicker.”

Nevertheless, store picking is not easy. Picking fashion items is difficult because of size, color, and style product variations. Macy’s is investing aggressively in RFID for replenishment. “By the fall we are hoping to have roughly half our replenishment business utilizing RFID… And we are just waiting as the vendors come up [to speed] and begin to tag the goods.” RFID will greatly aid store fulfillment people in locating the correct goods in the front of the store.

In addition to being an execution problem, store fulfillment is an optimization problem. “We’ve built algorithms to help us determine from where we pull the inventory…In the future we expect these formulas will be key to offering faster and even same-day deliveries. And [they will also] enable the customer to buy online and pick up in our stores. We’ve done a lot of experimenting this year with goods that are in the stores for which we don’t have [sufficient store] inventory backing it up.  A lot of those initiatives have done very well. We’ve also experimented with putting merchandise online that we don’t have inventory for in the online warehouses. The inventory is only in the stores. In the 4th quarter we had about 700 items we tested this with, very successfully. It is good from a profit perspective because these are typically goods whose economics don’t do so well in big warehouses.” I interpreted this as meaning that Macy’s has a tool for calculating granular total landed costs by product by channel. If true, that is impressive.

Another key initiative for Macy’s is focused on store personnel training. It is important for omni-channel and training initiatives to reinforce each other. “We are encouraging our store associates to think omni-channel. This means selling customers merchandise that may in fact not be in that store, whether it be out of stock or not even carried in that particular location. It also means embracing the customer making a return.”

In conclusion, an omni-channel strategy can be an important driver of growth for brick-and-mortar retailers. But it is not a quick fix. Macy’s began its omni-channel initiative in 2009. And it cannot succeed in isolation. “It all starts for us with our merchandise acumen and our ability to run great stores. These are central to our omni-channel success.”

[Editor’s Note: For related commentary, watch last week’s Talking Logistics episode where Adrian Gonzalez interviews two retail executives about omni-channel fulfillment and the future of retail logistics].