A VC in Vacationland

Speaking of the man biting the dog, Macy's has decided to build a new network of internet fulfillment centers across the US–using the backrooms of their existing stores. The reason? Amazon and their success at capturing the consumer with high in stock positions of hot items and rapid shipping.

Macy's might have a hot item in stock in the stores but not in one of its current on-line fulfillment centers. As a result the consumer is disappointed and the store may end up selling the hot item at a discount since no one in that region wanted it.

This will end up being a major and costly undertaking…about one-third of their 800 plus store backrooms will be expanded, additional inventory added and new technology put in place to identify available inventory across all stores so as to be able to fulfill on-line orders.

The upgrades will be particularly valuable for selling hot items, such as new ready to wear fashions from leading designers, which typically sell out on-line in a few days, but can languish in the stores for weeks and often end up in markdown if no physical buyer shows up.

But we are not speaking about super efficient  pick, pack and ship operations like Amazon robotic driven fulfillement centers. The entire store level process at Macy's is manual, with runners finding the product in the store and hustling back to the storeroom where employees wrap and ship orders.

Macy's is playing catch up in the "omnichannel" strategy world, where bricks & mortar retailers are integrating internet and physical locations to try and compete with Amazon and eBay. On-line sales are growing at four to five times physical store sales and show no signs of letting up. Nordstrom's started t a similar program in 2009 and can ship internet orders from any of its stores. Same for Toys R Us, which was useful last year for me to acquire a hot Lego set from a midwest store when the New England ones were all sold out.  You can even be notified when new stock of a desired item appears in one of the Toys R Us stores and order it for direct shipping.

But the reality of this "new" approach to supply chain management is much higher fulfillment costs compared to Amazon.  Stores like Macy's and Nordstrom's can justify these costs to avoid lost sales and keep high margins on hot items, but the fulfillment of ordinary items will suffer margin degregation if done at an inefficient store-level back room. Long term, look for the physical retailers to adopt a model similar to Amazon.  It is ironic that Amazon bought Kiva Systems and now gets to sell the technology back to its competitors.