Originally posted by SupplyChainBran
By: David Latona, SCB Contributor
When Saks Fifth Avenue separated its e-commerce business from its physical stores last year, it veered away from an omnichannel strategy, severing its online and brick-and-mortar operations. Subsequently, venture capital firm Insight Partners bought a half-billion-dollar stake in the new digital brand. Now, business media outlets are speculating about a potential public offering and possible $6 billion valuation for the e-commerce spinoff.
This response from investors has put pressure on other department stores to follow suit. Some of these stores, such as Macy’s and Kohl’s, however, have been recognized within the industry for their innovations in omnichannel commerce. Their synergistic distribution models have created valuable resilience in their supply chain and organization-wide efficiencies benefiting HR, operations and branding.
Other savvy retailers have found new ways to get the most out of their brick-and-mortar locations. Many are even equipping their physical stores with added storage, transportation and sortation capabilities so that they can double as micro-fulfillment or distribution hubs.
So what’s behind the push to undo years of effort, and separate e-commerce from brick-and-mortar retail?
In a word: money. The move away from omnichannel is an attempt to show higher profits for a standalone e-commerce entity, without the retail brick-and-mortar dragging down its overall EBITDA (earnings before interest, taxes, depreciation and amortization). E-commerce has been a growth driver during the pandemic and is here to stay, with more than 145 million consumers around the world turning to online shopping for the first time in 2020, according to eMarketer.
But the idea that brick-and-mortar is dead is misguided. Many big-box stores are indeed shutting down, but in their place, brick-and-mortar is taking on new forms, with boutiques and other smaller locations replacing traditional anchor stores in malls and retail outlets. A new generation of retail stores has more than made up for the departure of big-box locations. According to Forbes, growth in brick-and-mortar sales actually outpaced that in e-commerce sales in 2021.
For a national retailer like Macy’s or Kohl’s, the biggest supply chain advantage of maintaining a brick-and-mortar footprint is having forward-deployed inventory across the country and across a store’s existing infrastructure. This distributed inventory has enabled brands to meet customers wherever they are. For instance, if a customer in Los Angeles wants a certain item and it’s not available at their local retail store, the retailer can quickly and easily ship the item directly from another store to the individual, as opposed to shipping it from a fulfillment or distribution center. And customers typically can return items at any of a retailer’s locations.
The convenience that brick-and-mortar offers in this respect promotes e-commerce sales and vice versa. The customer expects a seamless experience from a brand, and will gravitate to retailers that provide that level of convenience.
Kohl’s in particular deserves credit for successfully integrating its inventory across the entire network after years of effort. It now has six dedicated e-commerce fulfillment centers and can ship directly to consumers from over 1,100 stores. Every Kohl’s store will handle returns, whether it was bought in-store, at a different location or online. Additionally, it has a partnership with Amazon.com, where any Kohl’s store will accept Amazon returns. Despite these achievements, Kohl’s faces pressure from its investors to copy Saks, with new stakeholder Engine Capital urging the company to employ a split model.
Macy’s, in the last two years, has made dramatic progress integrating an operation that at one time was quite siloed. Now one of its newer investment stakeholders has begun a similar push toward separation, lobbying management to spin off its e-commerce operation as well.
Only recently did Macy’s announce its decision to reject a proposed operational split. There are clear risks to bucking such investor pressure, including a loss of crucial funding and investor support, and the challenge it poses to the organization’s leadership structure.
While controversial, Macy’s decision is grounded in sound business logic. All one has to do is look at the number of failed retail brands that made short-term business plays at the expense of operational costs, efficiency and long-term success. On the operational level, the separation of two functioning entities with different profit margins and different balance sheets creates redundancy in human resources, physical office space and IT platforms. These redundancies create hidden overhead costs that may get overlooked amid the investor euphoria, but can ultimately impede efficiency and growth.
A split model also creates new questions for the retailer’s supply chain managers, such as, “How do I balance my inventory based on my demand?” And what happens when a company doesn’t have the items needed to fulfill an e-commerce order but has 400 of that item in retail stores? The warehouse fulfilling the e-commerce order will never know there’s inventory available elsewhere.
Using this example, the retailer will eventually send those 400 items into secondary and tertiary markets at the end of the season, leaving the e-commerce side with unhappy customers. The brick-and-mortar stores eventually get brushed under the carpet, start operating as return centers, and are shown as losing money. Next, even more stores and operations shut down, resulting in avoidable layoffs.
Spinning off the e-commerce business is a move designed to show huge profit and growth for investors. But it simply bolsters one side of the operation, creating an artificial view of performance and growth prospects at the expense of the retail brand’s overall sustainability.
It remains to be seen whether retail brand managers can devise innovative operational strategies to divide e-commerce operations from brick-and-mortar in a way that yields long-term benefits. With Saks aiming for an initial public offering in the near future, the new brand’s financials might be a catalyst for even more pressure for e-commerce spinoffs. But if the results fail to meet expectations, those companies may have just undone years of work for relatively little gain and significant operational costs.
It may simply be a function of human nature for an investor to say, “I want a quick profit out of my investment.” But as a long-term strategy, the move away from omnichannel commerce for short-term financial gain may prove to be the penny-wise, pound-foolish choice.
David Latona is president and chief executive officer of Tompkins Solutions.