©instaphotos via Canva.com
Should Stores Be Relied on for Online Fulfillment?
Walgreens recently closed a warehouse in Illinois focused on e-commerce fulfillment, joining Walmart, Target, CVS, and other retailers that are increasingly relying on stores for online deliveries.
With 78% of Walgreens customers living within 5 miles of one of its stores, fulfilling online orders in stores is expected to support same-day delivery and make things “more efficient by having a single system for handling goods rather than managing separate distribution networks for e-commerce and in-store,” according to the Wall Street Journal. Orders will be fulfilled by store employees or by an outside service such as DoorDash or Uber Eats.
For Walgreens, speedy delivery is expected to win more customers, and serving both store and online customers from a single pool of inventory should improve overall inventory productivity.
“There’s a huge amount of efficiency in leveraging the sunk costs of a retail store as a place for fulfilling online orders for customers,” Brendan Witcher, analyst at Forrester Research, told the WSJ.
As noted in a McKinsey study, one of the challenges of in-store fulfillment is lower inventory accuracy rates (estimated between 70% and 90%) compared to distribution centers (typically more than 99.5%). Stores also weren’t designed to do online fulfillment at scale, and there’s a potential for traffic jams if in-store pickers jam the aisles.
Both Target and Walmart have started to come up with solutions for these problems. Target has invested in sortation centers that remove the sorting and packing process from store backrooms, allowing the company to “save valuable time and space for our store teams to fulfill additional orders and serve guests.” Meanwhile, Walmart has invested in store-based market fulfillment centers as well as in other areas to drive ship-from-store efficiencies.
“In the digital channel, the percentage of orders picked and shipped on time and the average Drive-Up wait time have all improved from last year,” John Mulligan, Target’s chief operating officer, said last week during the retailer’s third-quarter analyst call. “Also in support of the digital business, the percent of items ordered but not found has declined from a year ago, meaning that we are fulfilling more items per order and canceling fewer, a key factor in guest satisfaction.”
Best Buy, Dick’s Sporting Goods, Ulta Beauty, Zara, Macy’s, and Lowe’s are among other retailers touting the benefits of ship-from-store in recent years.
Footwear retailer Boot Barn, on an investor call earlier this year, said increasing in-store fulfillment to over 300 stores has expanded assortments to online customers. Boot Barn CEO Jim Conroy told analysts, “In-store fulfillment has resulted in shorter delivery times and a pronounced expansion of exclusive brand sales online, which further contributes to the profitability of the business.”
Discussion Questions
How would you rate the pros versus cons of using stores for online fulfillment? Where do you see the biggest opportunities to drive efficiencies and reduce costs within the ship-from-store process?
Poll
Loading …BrainTrust
Neil Saunders
Managing Director, GlobalData
Scott Benedict
Vice President, Partnerships at WhyteSpyder, Inc.
Using stores for online fulfillment can sometimes be more profitable as the sunk cost of running the store is already accounted for. Profit is further enhanced if the consumer can be persuaded to collect the product in person. That said, stores need to be geared up for this: staffing needs to be adjusted, inventory levels need to be reviewed, new processes need to be put in place, and more space needs to be given over to fulfillment operations. A retailer like Target is good at this. However, I am not so sure a retailer like Walgreens is quite so adept. Walgreens already struggles with poor staffing levels, so without investment, having associates managing more of the fulfillment side is a recipe for disaster.
Neil, right on point here. See my other comments.
Overall, using stores for online fulfillment is superior, as long as the retailer can adequately execute at the store. Leveraging existing physical locations provides the broadest geographic network and brings traffic into the stores where additional products might be purchased. However, in order to realize this benefit, retailers must have store processes, inventory visibility and human resources available to conduct the fulfillment work, and not compromise the overall store experience or alienate/ignore ‘regular’ customers who visit the store. It’s a delicate balancing act that is still ‘hit or miss’ for many retailers. Unfortunately, too many retailers still rely on existing staff to not only conduct fulfillment services, but also run the store. Having dedicated staff to manage online fulfillment will cost more upfront, but payoff in higher customer satisfaction, a better store experience and ultimately sales.
Online fulfillment from stores makes perfect sense. Getting the right product to the customer quickly and at the lowest cost makes this a must do. This technique has the additional benefit of giving stores a wider and deeper product assortment and reduces out of stocks which seem to be a universal challenge.
There are technology tools available to simplify the process as it is important to get this right both on the initial allocation and mid-stream dynamic reallocation that resets on demand during the season.
Fulfillment from stores has the many advantages listed in this discussion. However, it is not something that I would recommend for all types of retail businesses. I believe that the larger footprint stores can do this better because their depth of inventory should enable large stores to meet the online demand without upsetting inventory levels to a noticeable degree. Additionally, making room to process fulfillment of online orders is easier for large stores than small or boutique-type stores. We are back to the same observations that this panel has made before. Not everything is for everyone and one size does not fit all.
As retailers view their investment in real estate as distribution points – in addition to their original intent – it opens tremendous opportunity. Not only does it place inventory closer to consumers (convenience), but it also has the potential to maximize return on the per square foot investment.
Of course, there are MANY challenges. Here are a few: 1) disruption – the last thing a retailer can afford to do is frustrate in-store shoppers; 2) inventory management – setting expectations and delivering to them is crucial (perhaps less is more); 3) retooling – running a dichotomous operation out of one facility requires rethinking the use of space); and 4) staffing – asking existing staff to take on new roles may requiring reskilling, retraining, and reassignment.
I mentioned inventory above. Retailers may want to narrow their range of “fast-moving” SKUs to be available for local distribution rather than trying to be all things to all people. Overextending assortment expectations is a potential recipe for disaster.
The only caveat I would make is to consider the plight of the mall retailer. All of these companies mentioned here have street-level access, parking lots, and even shipping docks in some cases. That makes rejiggering the store to be more fulfillment friendly a bit easier. Malls tried to enable curbside pickup during the pandemic, to little avail and with a lot of direct logistics costs inside the mall itself (accumulating orders across stores to one pickup point for the convenience of the consumer), and couldn’t make that work. Mall stores have an extra premium on their space and very little back stock room to enable ship from store – in addition to already being down to bare bones minimums on staff that make ship from store more difficult. Not saying it can’t be done, but you definitely have to consider all the costs and angles before embarking on this journey!
I smell a revenue opportunity for mall operators. They became telecom providers in the 1990’s for the same reason. My vision from the jump has been that one of the loading doors becomes the customer pick-up area, and stores funnel the products to be shipped to the same group. We can’t keep distracting the employees that we know are critical to a better in-store experience with non-revenue generating functions. Just like a lot of strip mall retailers have found Instacart to be as inexpensive as “doing it themselves,” mall stores will end up finding it the same.
I don’t see retailers doing the picking themselves, but I can definitely see a product, a shipping label and a bin. And the mall employees do the rest.
A point worth amplifying, Nikki and Paula. As mall operators fret about how to repurpose spaces once occupied by defunct “anchor” stores they would do well to consider how they might provide fulfillment and distribution services to their retail tenants.
I can imagine same-day delivery vehicles leaving the mall hourly loaded with orders from multiple stores and covering routes that are AI-planned for maximum efficiency.
(Or … if they can’t make that work, they can always turn old anchor stores into vertical farms…)
There’s one word in this article that drives the whole conversation. Efficiency. Efficiency = profit. And there are now several retailers proving to themselves that store-based fulfillment is the most efficient process. Now consider that today’s stores were never remotely designed to accommodate this process. So I think we will see some re-rationalizing and redesigning of store formats so that this already more efficient process can deal with the headaches caused by an evolving relationship between retailers and customers.
For retailers and brands with a good sized store footprint, store fulfillment makes sense. You’re positioning inventory closer to the customer, reducing delivery costs, providing faster delivery, and some of those orders will be picked up instead, further reducing costs. What’s more, especially at smaller stores, staff can have a lot of ‘idle time’ so while for high volume retailers warehouse picks may be cheaper, for lower volume retailers, store fulfillment can essentially utilize ‘free’ (or otherwise underutilized) labor.
The key is making sure you have your inventory in the right place at the right time. Which means you need to have a unified view of both offline and online demand to power better inventory planning and replenishment strategies, and optimized sourcing logic, both designed to maximize inventory turns and reduce inventory carrying costs.
Online-only retailers have a distinct disadvantage when it comes to profitability. Ship-from-store can result in inventory visibility issues, but it’s considerably less expensive than shipping from warehouses.
Stores that effectively handle online orders can see significant improvement in financials with the reduction or elimination of expensive fulfillment center operations. However, as Neil rightly points out, the store has to be ready for these changes. Space allocation, associate training, change in processes all need to be tested/validated. For those retailers who want to keep separate operations (online vs store), I would encourage them to look at new disruptive technology that views inventory differently than traditional 20-year old demand forecasting software.
In-store fulfillment for online orders that may be local or regional. That is one of the reasons Amazon bought Whole Foods, which essentially became their e-commerce/delivery distribution footprint. It may not make sense to completely eliminate distribution centers, but I can see certain local stores being a perfect answer to a more efficient e-commerce distribution strategy.
As retailers become more sophisticated in their integration across channels, I can envision where store fulfillment will become a significant source of distribution. The key however, is to integrate systems to effectively enable this type of execution and achieve higher in store inventory accuracy rates than just 70-90%. If customers are disappointed on a continual basis, they will eventually take their business somewhere else.
On-line fulfillment from Stores is critical to opening up a broader array of merchandise to a broader array of customers in an instant. In addition to obvious ability to shorten the delivery time, if stores are staffed and configured correctly, done right it will reduce markdowns and back hall costs on seasonal items providing improved margin and customer satisfaction wins.
In general I am not an fan of centralizing business models into massive nodes. Huge, regional fulfillment centers may operate very efficiently, but the benefits may be partly or largely offset by added transit distances, risky inventory bets, and future inflexibility. Great for distribution centers that send pallets to stores. Less great for fulfillment centers that prepare deliveries to homes.
Digital tech and machine intelligence can support a more “networked” or “mesh” approach to consumer order fulfillment that may be more resilient and fault-tolerant. Quick delivery from the nearest store can be a boon for consumers. This can happen consistently well if the retailer has a bulletproof inventory/order management system that knows where every item is in every location (in the warehouse or the stores).
My bet is that retailers will continue to refine “smart” methods for in-store order fulfillment and slow their roll on capital-intensive fulfillment centers. But the answers will be different across the spectrum of retail formats and product types. (Today’s comments from Nikki and Paula here offer keen insights about how this might work in shopping malls.)
For large retailers that have the space to box and ship orders, online fulfillment (shipping) from stores makes sense from a product availability and shipping cost perspective. However, this process also requires dynamic staff planning to ensure orders are efficiently fulfilled. Another BIG caveat is that the retailer has accurate real-time inventory. This is another argument for investing in real-time inventory tracking.
Grocery retailers who fulfill ecommerce orders from store – and their brand /category partners – are beginning to experience an unintended consequence; changes in store assortment.
Online shoppers, even shoppers who have shopped the store for years, change their behavior when buying online. Most common changes when shopping online are larger sizes, multi-packs and multiples of the same item. Often the online buying behavior these shoppers never exhibited in store.
As a result, the store sales data tells the category management teams to revise store assortment to replace smaller with larger sized items. Often at the cost of eliminating some SKUs.
As ecommerce sales increase, the store shelf shifts from a wide variety of items for store shoppers to the larger items needed to fulfill e-commerce orders.
The assortment change does follow the sales data. As more ecomm orders are fulfilled in store, more shelves get stocked with larger sized items. Maybe the conversion of the store assortment to a mini distribution center assortment is a natural progression.
I lean toward ecomm and store differentiating to address the shopper needs of each channel.
Why limit ecomm items to what’s available in store when shoppers have shown they will shop differently online.
Leveraging brick-and-mortar operations for online order fulfillment is a no-brainer in our digital-first age, especially with the rising expectations of same-day delivery. Retailers and grocers have been challenged to develop a profitable digital fulfillment model while advancing the flexibility of the ecommerce operating model.
Walmart, Target, Kroger, and Best Buy have built a scalable, efficient, cost-effective, and most importantly, profitable fulfillment from store operating model. This is a challenging undertaking, as it requires significant investments in in-store technology, infrastructure, training, and a dedicated team that can support BOPIS, curbside pickup, and same-day delivery options.
There are some fundamental capabilities that retailers and grocers will need to invest significantly to deliver a profitable ecommerce fulfillment model while modernizing their operating model:
The driving determination on whether stores should participate in online order fulfillment is whether it improves the customer experience, if it benefits the customer by having it onsite. Customers should be able to shop both in-store and/or online knowing they can complete their shopping, to save time, steps and hassle.
Operational success means stores must carve out separate space for online receiving, sorting, packing, and with dedicated labor, even if only a skeleton crew. This prevents temptations to grab product or people to cover for operational shortcomings or at the whim of a rush. As well, to ensure reporting and ROI is accurate, it’s best identified and measured as a separate group, with a separate line item.
Can your retail store commit to these standards? If not, don’t create promises to customers you can’t keep.
The short answer is…”yes”…they should be relied upon to help fulfill online orders. However, staffing, training, and store systems/processes have to be upgraded in many cases to make this vision one that can be brought to life effectively. Additionally, one question that one could only see internally at a firm like Walgreens is an understanding of the “cost to serve” of online order fulfillment from a store versus a dedicated micro warehouse or other automated facility. Certainly, leveraging an existing asset base of stores, employees, and inventory is great, but can you be more efficient using those assets when awesome new fulfillment technology exists out in the marketplace?
Using stores as fulfillment centers is a great way to leverage the asset. In order to make this efficient, the retailer’s supply chain systems need to be ready for the complexity AND if you do not do it “right” you risk ruining the in store shopping experience.
While an attractive & potentially positive profitability benefit to automated Customer Fulfillment Centers (CFC), the devil is in the execution. Bricks & mortar stores were designed to be wandering, self service meccas. Selecting product from stores to fulfill an online order may restrict customer movement. This may be true in all but the largest stores. Also, instore out of stocks may be greater than that of a 375000 square food CFC shed.
In my opinion, using stores for online fulfillment has significant benefits, especially in terms of quick deliveries and maximizing existing store infrastructure. The proximity of stores to a significant customer base, as seen with Walgreens, supports efficient same-day delivery. Despite challenges like lower inventory accuracy and potential congestion in store aisles, there are opportunities for improvement.
General strategies involve investing in technology to enhance inventory accuracy and exploring streamlined processes for in-store fulfillment. To drive efficiencies and reduce costs across the ship-from-store process, a focus on optimizing logistics, employee training, and potential collaborations with external delivery services could prove effective for a broad range of retailers.