June 3, 2013, 3:19 PM

Repackaging stores

Fulfilling web items from stores is not cheap, but it yields benefits.

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It's about 30% cheaper, on average, for Peter Glenn Ski and Sports to fulfill web orders from a warehouse than to ship the same product from one of its 13 retail stores, says Jason Merrick, the chain's director of e-commerce. "But it's worth the extra expense, if the trade-off is losing the sale," he says.

Retailers that fulfill from stores do so for a variety of reasons.

Merchants that operate stores want to leverage the inventory they have in those stores to compete with Amazon.com Inc., the leading e-retailer in North America and virtually everyone's direct or indirect competitor. This is especially true as Amazon moves inventory closer to consumers so it can deliver quickly; the leading e-retailer will have 54 distribution centers spread across the United States by the holiday season, up from 46 now, according to e-commerce service provider ChannelAdvisor Corp. Executives of Wal-Mart Stores Inc. have emphasized that their more than 4,000 stores give them lots of inventory close to consumers. Wal-Mart now fulfills web orders from 35 stores, with plans to add another 15 later this year, using FedEx Corp. and other carriers to deliver.

Retailers also don't want to frustrate online shoppers by making them wait for out-of-stock merchandise to be replenished at a warehouse, especially if the ordered product is sitting on a store shelf somewhere. That holds especially true for apparel retailers dealing with fast-moving trends. "In fashion, it seems like a slam dunk," says Nikki Baird, managing partner of research and advisory firm Retail Systems Research LLC, of fulfilling from stores. "It doesn't take that much space [to fulfill from a store] unless you are doing a huge volume, in which case ask yourself, 'Should I have a fulfillment center?'"

The cost to set up in-store fulfillment processes can be significant, however, and retailers need to weigh that against the sales and benefits they would gain. Merchants can implement software that makes fulfilling from stores easier than it was just a few years ago, but logistical issues remain. Still, that hasn't stopped some of the biggest chains from embracing the ship-from-store method.

Peter Glenn, which sells skis, snowboards, shoes and related outdoor items, began fulfilling orders from multiple stores in 2005, just before e-commerce became a company priority, Merrick says. Back then, the fulfillment process involved calling a store to see if it had the product, then faxing the order to the store, where staff rekeyed it into the point-of-sale system. "It was inefficient and a pain for the stores, so it was costing us money and morale," Merrick says.

In 2006 the chain opened a distribution center for web orders, and in 2007 it moved to homegrown order-management software that integrated web orders with the retailer's store checkout system, he says. "By going from a manual process to a more automated one we were able to cut costs while increasing orders," he says. Store manager bonuses are based in part on the accuracy of shipments from stores. Today 80% of online orders are fulfilled from a warehouse while 20% are fulfilled from stores. Where an order is shipped from is based on an algorithm measuring store inventory levels versus sales, Merrick says.

One of the challenges of fulfilling from stores versus from a warehouse is that store stock has legs—consumers sometimes pick up a product, walk around with it, and put it down elsewhere—and staff have to track it down, Merrick says. That increases the relative cost of shipping from stores. With 40,000 labeled storage locations at its warehouse, products rarely are misplaced, Merrick says.

Price estimates from vendors of ship-from-store technologies provide a glimpse of other costs associated with fulfilling from stores. OrderDynamics Corp. says a retailer with 75 stores can expect to pay at least $100,000 to implement its ship-from-store technology. NCR Corp.'s NCR Retail Online tool, which is aimed at relatively small store retailers who want to build their own e-commerce sites and use store stock to fulfill web orders, starts at $75 per month, a NCR spokesman says. Initial setup costs start at $2,995 for the web-hosted software, which connects with the store's checkout system.

Prices for ship-from-store technology can range greatly based on retailer size; implementation alone can cost from a few hundred thousand dollars to more than $1 million, according to IBM Corp.'s Sterling Commerce. Its order management system integrates with the TCxGravity system Toshiba Global Commerce Solutions introduced in January to allow a retailer to fulfill orders from any source of inventory, including stores.

It's difficult to say exactly how many retailers ship from stores, but Sterling Commerce estimates that at least 10% of the merchants ranked in the Internet Retailer Top 500 Guide do so. The concept is gaining traction, in part because it reduces the chance a consumer will shop elsewhere to find an out-of-stock item. "If you execute this perfectly well, you have a chance to increase sales," Baird says.

That opportunity hasn't gone unnoticed by some big players in e-commerce. Best Buy Co. Inc. last month announced it will test shipping online orders from 50 stores when online inventory is exhausted. CEO Hubert Joly said BestBuy.com loses 2-4% of orders because the site shows the item as out of stock, though about 80% of the time the product is available in a Best Buy store. Sears Holdings Corp. also fulfills some online orders from store inventory, but customers have to pick them up. If a customer is open to visiting a Wal-Mart store, the chain since 2007 has offered same-day in-store pickup where store inventory is used to fulfill orders placed on Walmart.com.

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