Macy's: Adding Same-Day Delivery Would Cost Us Next To Nothing

The big news from Macy's earnings call on August 8 isn't that the department store giant might someday offer same-day delivery if customers ever show a desire for it. The real news is that same-day would require almost no capital outlay, nor will expanding Macy's current store-to-door delivery program beyond the currently planned 290 stores, according to the person who should know: Macy's CFO.

By not building out its delivery capabilities according to some grand plan, the 800-store chain has put itself in a position to do almost anything it wants. And because the CapEx is so low, the ROI is essentially instantaneous.

Adding a store to the store-to-door effort involves "a small amount of capital," said CFO Karen Hoguet, responding to an analyst's question. "It is more expense, obviously, to have these people available to fulfill throughout the store."

Part of the reason there's little capital expenditure required to add a store to store-to-door is that Macy's isn't doing anything fancy in the back room where orders are filled. Orders come in, mostly from other stores ("The lion's share of what they're fulfilling are orders from other stores, not from dot-com," Hoguet said). Then the associates assigned to store-to-door collect the merchandise, and pack and ship it from previously unused back-room space.

There's no fancy automated pick-and-pack, no special technology involved. The whole effort does depend on a major IT project—a chain-wide view of inventory and a fulfillment algorithm that picks the best store to ship an order from, based on whose inventory is moving slowly. But aside from that, it has been done on the cheap.

The result: The original, small-scale store-to-door project had something very close to instant ROI. (Well, except for the odd Loss Prevention issue.) And expanding it cost very little per store, so the payback on that was very fast, too.

Then, once store-to-door was in place, bolting on E-Commerce fulfillment was almost zero-cost. Nothing changed in the stores—an order that originated online was just another order to pick, pack and ship. The fulfillment logic for the online orders was the same as that for store-to-door orders.

No grandiose plan, little risk, fast payback.

According to Hoguet, "By and large, our fulfillment rates coming out of the stores are getting very close to the same accuracy and on-time rate as that in the distribution center," she said, adding, "In total, we are doing a spectacular job in fulfilling the orders out of the stores, frankly better than I thought we could do. So it's really quite encouraging."

Hoguet probably really is surprised. Maybe she shouldn't be.Hoguet probably really is surprised. Maybe she shouldn't be. With a cheap project, ROI is easy, which means store managers can afford to experiment. Do they add hours for part-time associates who then have the flexibility to shift to filling orders when things are slow in the store? Do they put trainees on a pick-and-pack shift until they know the store better? Do they rotate all associates through the back room to see how it settles out best? With no high project cost to justify, there's less urge to micromanage to get ROI, and everyone is happier.

And every in-store technology improvement can feed this effort. RFID tags can improve inventory accuracy, which means the fulfillment logic that picks a shipping store does a better job. The same RFID tags can simplify finding the correct size and style quickly, which is crucial for Macy's because the items being shipped are often coming off the store's racks. Because the RFID's ROI is already assumed to come from replenishment improvements, store-to-door gets that virtually for free.

Is this all part of a big plan? Almost certainly not. Big plans quickly grow complex. This approach is all opportunistic. Anything can be added, if there's no added cost.

So when an analyst asked Hoguet whether Macy's is "poised" to start doing same-day delivery through store-to-door, her answer—that "if we decide it's an important need for the customer, I think we're going to be very well positioned to do so going forward"—was blown up in some quarters into an imminent challenge to Amazon's and eBay's same-day delivery programs.

Will it be? Maybe. But for Amazon and eBay, same-day delivery requires commitment to a lot of build-out to create local distribution centers—lots of CapEx, lots of ROI. For Macy's, adding local delivery from any particular store just requires finding a local delivery service. If things don't work out with the service, it's easy to drop.

Likewise, if Macy's decides it wants to expand store-to-door beyond 290 stores, it's just a matter of adding associate hours at each store involved. If it turns out a store isn't worth the trouble, it will just turn off the lights in that room in the back and re-adjust schedules.

There is, of course, an endpoint to this lightweight planning, low incremental cost approach. But Macy's doesn't know where that is—and doesn't have to know where it is. Macy's doesn't need a big plan—just a stream of small, incremental ideas that cost almost nothing to add or shut down, built on top of local stores where the rent has already been paid.

After all the disadvantages that physical stores have faced in dealing with E-Commerce, for once it looks like all that expensive real estate is actually an advantage.