Macy's Store-To-Door Gets Smarter And Prepares To Take On Amazon

Most retailers have yet to dip a toe into merged-channel inventory, but Macy's is already starting to tweak the model. The Macy's "Store to Door" pilot (if a store is out of a product, it can be shipped to the customer's home from another store) is set to expand from 23 to 290 of the chain's 810 stores this year, but with a twist: Items will ship not from the closest store, but from the store where they're most likely to be remaindered.

That improves Macy's revenue, but also sets it up to take on its most threatening rival—Amazon—where the online giant should be at its strongest.

The new Macy's system, which will be live this summer, "will pull the inventory from the store least likely to sell the goods, so it's frankly a markdown that would have happened had we not sold it, as opposed to a lost sale," Macy's CFO Karen M. Hoguet told an earnings call on Tuesday (Feb. 21). "It's really quite cool if it works properly."

Hoguet added, "There'll also be a factor built in for distance to customer. But the telling part of the logic—the key driving factor—will be where the goods are selling through the slowest, to pull it from those stores."

That's a clever improvement on just having an enterprise view of inventory. In that respect, Macy's is about two years behind Nordstrom, which rolled out its buy-it-anywhere inventory system in 2010. Making sure the system also keeps merchandise from having to be discounted is the sort of thing that makes CFOs a lot happier to OK these initiatives.

But the real challenge isn't just squeezing out the last few dollars from every sale. Macy's is edging closer to taking away the advantages of online retailers like Amazon.

Consider: Until now, except in the handful of stores in its "Store to Door" trial, if the product a customer wanted was out of stock at a Macy's store, the likely next stop was Amazon, which would deliver it in a day or two. End of story. The customer could even order from her phone as soon as she was told the item was out of stock—and before leaving the Macy's store.

Now Macy's has the chance to even up that game. Of course, it will depend on how efficient the Macy's stores are at shipping out those packages. Turning every Macy's (actually, only about one-third of them) into a distribution center isn't just a technology challenge. Each store has to become a mini-Amazon DC. If the individual stores can't execute, customers will figure out that Amazon is a better alternative. To at least some degree, it's about who can get the goods to the customer the fastest.

In practical terms, Macy's is now in a three-way race to shorten the time between merchandise and customers. Amazon is building more DCs, spread across the U.S., so it can cut delivery times. (Could that explain why Amazon has flipped its long-held stance against collecting sales taxes? With enough DCs in enough states, it becomes impossible for Amazon to claim it doesn't have an in-state presence.)

Meanwhile, Nordstrom in December 2011 quietly launched a pilot program to offer same-day delivery in Seattle and La Jolla, Calif., for online orders, including all weekend. Yes, there's a $10 delivery fee, which would probably seem stiffer if this wasn't Nordstrom. And the service is only available for items that are in stock at the handful of stores participating in the trial.

But what happens when that trial expands to all Nordstrom stores? Suddenly, Nordstrom has an advantage than Amazon can't match, at least as long as it's using overnight delivery services. If an item is out of stock but available in a Nordstrom store across town, the customer can wait for Amazon or have it hand-delivered that day.

And what's impractical for Amazon and possible for Nordstrom is also possible for Macy's—in fact, it's old hat for the local department stores that were bought up to form today's Macy's chain, many of which were still delivering merchandise to customers' homes as recently as the 1970s.

Does that sound like too much of a throwback—1970s delivery trucks to beat Amazon's Internet advantage? Five years ago, it would have sounded crazy. Now it may be the most effective way for brick-and-mortar chains—especially the biggest chains—to leverage those merged-channel inventory systems to actually take sales away from their biggest competitor.