The day when in-store, mobile and online are so intermixed that they can't be meaningfully broken out is the same day true merged-channel retailing has happened. For Macy's, that day happened on Tuesday (Feb. 26).
"Candidly, it's getting so hard to know what's a store sale and what's a mobile sale and what's Internet. It's getting harder to figure out the lines between them," Macy's CFO Karen Hoguet told analysts on Tuesday. When asked for some E-Commerce projections, she said: "I really can't give you that number. I mean, I don't know it. But clearly, the growth is continuing very aggressively. But sometimes, it's being bought on a mobile device sitting in a store. So I'm not sure how to define that."
Macy's itself is doing what it can to help blur those distinctions yet more, as the chain expands its already announced plans to use its stores as E-Commerce distribution centers. The concept is that the inventory for certain stores, considered fulfillment stores, could be leveraged to fulfill any online orders. On Tuesday, Macy's said it would sharply increase the number of stores participating in that program.
"We currently have 292 stores enabled to fulfill goods, up from only 23 a year ago. And by the fall of this year, we expect to have a total of approximately 500 stores for filling orders, which represents about 85 percent of our business," the CFO said, adding that such a figure is "a significant number and we may increase it from there. In the future, we expect these fulfillment locations will be key to offering faster and even same-day delivery and also will enable the customer to buy online and pick up in-store."
A key—and arguably the key—part of this plan involves pricing optimization. The problem is the very nature of the fast-paced apparel segment, where not only are styles short-lived, but demand varies sharply between various geographies. That forces products to be steeply discounted quickly.
The game is keeping up margin by finding any way possible to delay those markdowns for as long as possible. But that idea, which seemed straightforward enough on conference room whiteboards, proved to be much more challenging when deployed. "In terms of price optimization, I think that's proven to be a lot harder than we had expected it to be, and we're still working on how to optimize pricing across the company. But that has not been as easy to do as we had hoped early on," Hoguet said. "We've built algorithms to help us determine from where to pull the inventory, and we are learning more each day about how we need to refine these formulas."One problem, for example, is the balancing of shipping cost versus markdown delay. If the goal is to ship to an online shopper in Baltimore and the desired product is in a store in Washington, D.C., as well as a store in Portland, Oregon, which one does the shipping? Even though it's a lot less expensive to ship from Baltimore, the system must consider how much inventory each store has on hand, how old it is and, therefore, how much will be lost when those items go on markdown. How much will it likely be marked down? Is it more than the increased shipping costs from Portland?
"It's a matter of setting the right clearance price strategy at every location. Those rules don't apply everywhere," said Jim Sluzewski, Macy's senior VP for corporate communications. "At what point do you decide to clear an item because it clearly isn't selling well? The initial perception was that if we studied it, we could figure it out pretty quickly. We found that mapping the process wasn't as simple as we thought."
The CFO said Macy's has been trialing with a handful of physical stores and giving far too little inventory, forcing the store to depend on online order fulfillment. "We've done a lot of experimenting this year with goods that are in the stores for which we don't have (in-store) inventory backing it up. A lot of those initiatives have done very well," Hoguet said. "We've also experimented with putting merchandise online that we don't have inventory in the online warehouse, as the inventory is only in stores. In the fourth quarter, we had about 700 items that we tested this with very successfully."
During the analyst call, Hoguet also reported:
Macy's has pushed RFID for years, but the chain said it will ramp up sharply this year. "By the fall, we're hoping to have roughly half of our replenishment business utilizing RFID. Our stores will all be enabled by early in the fall, and we're just waiting as the vendors come up and begin to tag the goods. So replenishment is roughly 30 percent of our business. This could be very important as we go forward," she said.
And in a different RFID use case, Macy's will be auditing shoes on display. "We've rolled it out now to all of women's shoes across the company. And next up will be luggage and men's shoes, which will be up this summer."
Macy's is experiencing lower conversions on mobile devices than laptops/desktops. That theory has been widely discussed, but Macy's is the first to report those results definitively. "We are benefiting from very large increases in traffic on the Web site but also in conversion. The increase in conversion is particularly encouraging given the growth in mobile traffic, where conversion does tend to be lower than on desktops," Hoguet said.
In discussing staffing strategy, Hoguet said the chain initially wanted to use specialist staffers to fulfill orders, on the rationale that they would be faster. That turned out to be untrue. "One of the early learnings was that we had thought we would have special-purpose people doing the fulfillment activity. And we discovered that we were better off using the support associates we had, because they better understood the merchandise, and people who were putting merchandise on the floor are going to find it much quicker if they understand it. So we did change the staffing model some."