Macy's Takes a Page From Amazon's Playbook

Guess which retailer just broke ground on a new $170 million fulfillment facility?

May 28, 2014 at 12:27PM

If you heard that a well-known retailer had just opened a brand new state of the art fulfillment facility, you might be tempted to think that this facility was owned by top online retailer Amazon.com (NASDAQ:AMZN) -- but you would be wrong. In fact, the $170 million facility is being constructed by none other than department store retailer Macy's (NYSE:M). Recently, Macy's broke ground on this facility in Owasso,Oklahoma. This not only has ramifications for Macy's, but for retail in general as retailers adapt to the increasing importance of e-commerce.

Stores may become a thing of the past
This move represents a major shift in how Macy's business works. For almost its entire history, Macy's has been a simple department store. However, this has changed over the last decade as the Internet provides more avenues for announcing promotions and further increasing sales. In addition, the benefits of growing the top and bottom lines by adding more stores are becoming increasingly smaller. Just look at Macy's store counts over the last three years:

Macy's

FY 2010

FY 2011

FY 2012

FY 2013

Total Store Count

851

842

841

840

It is no doubt a surprise to many readers that Macy's store count has actually shrunk since 2010. It seems that J.C. Penney (NYSE:JCP) and Sears Holdings (NASDAQ:SHLD) aren't the only department stores that are shutting down locations. However, as you can see from the table below Macy's is doing this from a position of strength:

Company

Est. Sales Growth FY 2013

Sales Growth FY 2012

Sales Growth FY 2011

Sales Growth FY 2010

J.C. Penney

-7.6%

-24.7%

-2.8%

1.2%

Macy's

1.3%

4.8%

5.6%

6.4%

Sears Holdings

-8.9%

-4.1%

-2.6%

-1.6%

Of these three national department store chains, Macy's is the only one that is currently profitable and has the highest growth rate. This has all been done without increasing its store count. Clearly, the company's management sees more opportunity in opening large fulfillment centers for more efficient product distribution than it does in opening new stores. Instead of opening new stores, the retailer is opening a massive fulfillment center as part of its e-commerce focused omnichannel plan. According to its latest 10-K annual filing:

The Company's omnichannel strategy allows customers to shop seamlessly in stores and online, via computers or mobile devices. A pivotal part of the omnichannel strategy is the Company's ability to allow associates in any store to sell a product that may be unavailable locally by selecting merchandise from other stores or online fulfillment centers for shipment to the customer's door. Likewise, the Company's online fulfillment centers can draw on store inventories nationwide to fill orders that originate online, via computers or mobile devices. As of February 1, 2014, 500 Macy's stores were fulfilling orders from other stores and/or online, as compared to 292 Macy's stores as of February 2, 2013. During fiscal 2014, nearly all Macy's stores are expected to be fulfilling orders from other stores and/or online. Also in 2014, nearly all stores are expected to be fulfilling orders for pick-up related to online purchases.  

Long-term shopping trends
The reason retailers are choosing not to open more stores is simple -- e-commerce and online shopping is where society is headed. There will always be a need for physical stores, but what if they don't have a particular clothing item in your size? What if you know exactly what you want and don't need to try it out? This is where the company's fulfillment centers will come in handy. This is also exactly why Amazon has been so successful over the years.

Amazon.com Total Revenue:

 

2011

2012

2013

Total Revenue

$48.08 billion

$61.09 billion

$74.45 billion

As you can see from the table above, Amazon's sales have continued to increase strongly and steadily over the last few years thanks to consumer trends playing in its favor as well as its success in managing its fulfillment centers. Amazon is aware that in the world of e-commerce, its fulfillment centers are a big key to its profit gains. Its annual report even has a legal disclaimer to that effect which states the following:

If We Do Not Successfully Optimize and Operate Our Fulfillment Centers, Our Business Could Be Harmed.

If we do not adequately predict customer demand or otherwise optimize and operate our fulfillment centers successfully, it could result in excess or insufficient inventory or fulfillment capacity, result in increased costs, impairment charges, or both, or harm our business in other ways. A failure to optimize inventory will increase our net shipping cost by requiring long-zone or partial shipments. Orders from several of our websites are fulfilled primarily from a single location, and we have only a limited ability to reroute orders to third parties for drop-shipping. 

Foolish takeaway
This fulfillment center marks a great move by Macy's and shows why it is ahead of other traditional department stores. It may not seem like a big deal now, but as Americans shop more and more online they will be doing it through the likes of Macy's and Amazon. Given its latest move to further its ability to fulfill customer orders online and quickly get needed inventory to its physical stores, Macy's is worth a closer look by Foolish investors looking for a strong retailer that will continue growing in the future thanks to its investments in e-commerce. 

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Natalie O'Reilly has no position in any stocks mentioned. The Motley Fool recommends Amazon.com. The Motley Fool owns shares of Amazon.com. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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