IORMA reports  Ship from Store’ strategy saves money through shorter delivery routes

SAN FRANCISCO — Some of the world’s largest retailers are turning their stores into mini distribution hubs to help them compete better online against Amazon.com.

Instead of fulfilling Web orders from warehouses hundreds of miles from shoppers’ homes, companies including Wal-Mart, Best Buy and Gap are routing orders to stores nearby.

Store employees pick products from shelves, pack them into boxes and drop them into waiting FedEx and UPS trucks that zip off to homes a few miles away.

The trend, known as Ship from Store, saves money through shorter delivery routes. More important, it speeds deliveries, avoids costly markdowns and recoups sales that have been lost to Amazon, the world’s largest Internet retailer.

“This is the most important thing that will change physical retailers over the next five years,” said Matt Nemer, a retail industry analyst at Wells Fargo Securities.

A network of large stores — with high overhead costs — has become a liability rather than an asset in recent years. Amazon, which has no stores, won market share with lower prices and huge selection. But retailers have begun fighting back by using technology to get more sales out of stores — and ship-from-store is a big part of the effort.

“Amazon has already beaten most retailers on price and selection. The third battleground is location and the smart retailers are not conceding that,” said Tom Allason, founder of start-up Shutl, which helps retailers deliver online orders from stores.

Shutl’s service covers most shoppers in the U.K., where the firm partners with retailers including Argos, Oasis and Karen Millen. The start-up is also in Manhattan and plans to expand soon to other big U.S. cities including Los Angeles, Miami and San Francisco.

Wal-Mart, the world’s largest retailer, has been shipping online orders from some stores for about two years and about 35 stores do this now.

“We started ship-from-store as a test. It has exceeded every expectation we’ve had for it,” said Neil Ashe, head of Global eCommerce at Wal-Mart. “We will probably scale this to hundreds of stores.”

Already, 10% of the items ordered on Walmart.com are shipped from stores and the majority of those packages are delivered in two days or less, according to the company.

Two-thirds of the U.S. population live within five miles of a Wal-Mart store, so the company is using these locations as “nodes” in a broader distribution network that includes storage warehouses and specific fulfillment centers for online orders, Ashe explained.

Shipping from stores lets Wal-Mart offer faster delivery of online purchases “at very low cost,” said Joel Anderson, president of walmart.com.

The retailer saves money on fees it pays to carriers such as FedEx and UPS because delivery distances from stores are much shorter.

The strategy is helping some retailers that until recently were left for dead by investors concerned about the competitive threat from Amazon.

Best Buy, the largest consumer electronics retailer in the U.S., was labeled a “Big Box Zombie” on the cover of Bloomberg Businessweek magazine last October. In December, the stock hit a decade-low of $11.20, valuing the company at less than $4 billion — about 3% of Amazon’s market capitalization.

But Best Buy shares have more than tripled so far this year on optimism about a turnaround plan led by new Chief Executive Hubert Joly.

The plan focuses on “turning its store base from a cost liability to an offensive weapon,” Gary Balter, an analyst at Credit Suisse, said.

A crucial part of this is ship from store, which Best Buy has rolled out in about 50 locations.

Best Buy’s Joly sees it as a way to generate more online sales by avoiding situations where shoppers search for a product on its website and are told that it’s not available.

Best Buy gets about 1 billion online visits a year and in 2% to 4% of those cases shoppers cannot buy products because they are out of stock in the company’s e-commerce warehouses. But in 80% of those cases, Best Buy has the products in one of its physical stores.

“Unlocking this potential is an enormous opportunity,” Joly said earlier this year.

Shipping online orders from Best Buy stores could generate an extra $5.8 billion in sales and $168 million in profit next year for the company, according to Balter’s estimates.

Other retailers that have started doing this in recent years include Target, Nordstrom, Macy’s, Lowe’s, Gap, Dick’s Sporting Goods, Ann Inc. and Finish Line.

Physical stores will play a crucial role in driving online sales in the future, says Doug Anmuth, an analyst at J.P. Morgan.

It’s increasingly important as Amazon builds its own fulfillment centers closer to customers. In California, the company is constructing several giant warehouses one to two hours’ drive from San Francisco and Los Angeles.

Amazon already delivers packages in two days for free through its popular Prime subscription. The company is also testing same-day and next-day delivery through its AmazonFresh grocery business in Seattle and Los Angeles — challenging retailers on location, as well as price and selection.

Wal-Mart and other big retailers hope that, by turning stores into shipping hubs for online orders, they can re-create Amazon’s fulfillment network with the assets they already have.

“Some people talk about Amazon with their 100 distribution centers, God bless them. We have 2,600 distribution centers,” said Gap Chief Executive Glenn Murphy, referring to the apparel retailer’s network of Banana Republic, Gap and Old Navy stores.

Gap launched ship from store in 2012. The move has helped it deliver online orders faster, while avoiding situations where shoppers cannot find the right size or color of a particular garment.

Another big benefit: When stores have a lot of unsold products, online orders can be routed to locations with the most inventory. That helps limit costly discounts on unsold merchandise.

Wal-Mart and Best Buy also route online orders to stores that have the most inventory of a particular item.

Nordstrom started shipping online orders from its high-end department stores in 2009. It has helped the company maintain high levels of full-priced sales and get new fashions into stores quicker.

“There’s profit margin enhancement to fulfill an online order in a store that is about to take a markdown on that item,” said Wells Fargo’s Nemer. “It sounds very promising.”

Article Courtesy of  Alistair Barr USA Today www.usatoday.com
and USA Today  www.usatoday.com/story/tech/2013/09/28/retailers-ship-from-store/2862405/
Follow Alistair Barr on Twitter: @alistairmbarr.