Retailers Bet Big on Retooling Their Supply Chains for E-Commerce
Finish Line’s woes with its warehouse system show high stakes involved in catering to online customers
Athletic retailer Finish Line said earlier this month that it would close a quarter of its 600 stores after its new warehouse-management system failed to process orders fast enough, costing it $32 million in sales. PHOTO: RICHARD B. LEVINE/ZUMA PRESS
Many traditional retailers are struggling as their customers move online, hoping that costly investments to retool their supply chains for e-commerce will eventually pay off.
Earlier this month, athletic retailer Finish Line Inc., which installed new infrastructure in September to fill online orders, said it would close about a quarter of its 600 stores after its new warehouse-management system failed to process orders fast enough. The company said the failure cost it $32 million in lost sales as the peak holiday selling season got under way.
Finish Line’s problems show how much is at stake as retailers try to cater to online customers, an effort that typically raises a company’s costs and shrinks its profit margins.
Retailers are investing heavily in state-of-the-art software, redesigning their warehouses and training employees, with the goal of getting their merchandise to customers seamlessly, whether they buy online or in a store. The strategy, known as “omnichannel” retailing, demands a far more complex and interconnected supply chain.
Contributing to the risks: retailers’ supply chains often rely on a hodgepodge of old and new back-office systems. That can boost the potential for disruptions, which can quickly translate into lost sales—as they did at Finish Line—because consumers have little patience for delays.
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"The customer that we have is looking for instant gratification,” saidImran Jooma, head of Finish Line’s omnichannel strategy, in an interview last fall. “We invest in the supply chain to do exactly that.”
There’s little evidence, however, that brick-and-mortar retailers have found a way to reverse the decline in profit margins that typically accompanies increased online sales, or to slow the riseAmazon.com Inc. and other online-only retailers.
“The ground is shifting beneath us, and the dust has not settled,” saidDavid Hauptman, vice president of product management at Geodis SA’s OHL, a third-party logistics firm that manages fulfillment centers for retailers and other customers. “Nobody’s found the answer yet.”
For most retailers, the effort to adjust to online sales starts at the warehouse. They have redesigned facilities originally equipped to send bulk shipments to a limited network of stores so that workers can quickly assemble, package and ship many small parcels to consumers in far-flung locations. Installing a new warehouse-management system like the one Finish Line started using last fall can cost hundreds of thousands of dollars, experts say.
Increasingly, chains also offer in-store pickup and free returns.
The further down this road a retailer goes, the more its supply chain begins to resemble a spider web, said Cara Wang, a civil-engineering professor at Rensselaer Polytechnic Institute. That offers more convenience for the customer, but raises technology and labor costs for the retailer.
It can be tough, however, to determine how much online or in-store operations affect overall sales. Macy’s Inc., which cut thousands of jobs after disappointing holiday sales, says many shoppers check out merchandise in one of its department stores, and later place an order for it online.
This creates “a complication for us in making sure that we understand just how many stores we need, [and] how far will the customer drive to try on this product once they have discovered it on their mobile device or their tablet device,” said Macy’s Chief Executive Terry Lundgren, on the retailer’s latest earnings call.
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The added expense of e-commerce is a bigger burden for traditional retailers, whose stores saddle them with higher fixed costs than online-only sellers, industry experts say. A new survey of retailers by JDA Software Inc., said 68% of the respondents report rising costs for fulfilling orders. The highest costs were for e-commerce shipping and returns and shipping online orders to stores for pickup. More than half said their biggest pressures come from price, and offers of same-day and next-day delivery by Amazon.
Stage Stores Inc., a regional apparel retailer based in Texas, is struggling with lower profits because of “ higher costs for distribution and our strategic investment in omnichannel,” said Chief Financial Officer Oded Shein, on the company’s most recent earnings call. Stage Stores is in the process of closing 90 of its 850 stores.
To manage costs, many retailers are betting on new software that helps them decide which warehouse or distribution center can ship a particular customer’s order most economically. Many variables factor into those calculations, such as labor costs, distance, and the strength of local supply and demand.
Retailers like Wal-Mart Stores Inc. and Amazon also have invested millions to develop specialized software, robotics, and other high-tech approaches to tracking inventory.
Williams-Sonoma Inc.’s technology investments include “inventory tools that will allow us to better forecast our inventory flow and space capacity requirements by [distribution center], brand and channel,” said Julie Whalen, the cookware chain’s CFO, on an earnings call in November.
For many companies, competing both online and at the mall can mean trading fat profit margins for more customers—at least for now. Fashion retailer DSW Inc. has given shoppers the option of placing online orders for out-of-stock items without leaving its stores. And, the chain is both fulfilling online orders and accepting returns at its growing number of locations.
The company is betting those efforts will pay off by increasing customer loyalty even though they aren’t adding to profits in the near term, said Roger Rawlins, who oversaw DSW’s omnichannel strategy before recently becoming CEO. He said customers who buy DSW products through multiple channels spend two or three times as much as those who shop exclusively in its stores or online only.
The strategy “ultimately allows you to grab additional market share, and then as we learn through using all these capabilities, we hopefully should be tweaking to be able to generate incremental profitability,” Mr. Rawlins said.
