Yesterday, Fifth & Pacific (NYSE:KATE) announced a new alliance with eBay (NASDAQ:EBAY) in which eBay will provide most of the logistics that sit behind Fifth & Pacific's brands. The company will be providing "fulfillment, warehouse, and order management systems, payments, freight, and customer service solutions." The point of Fifth & Pacific's move is to work toward a true omnichannel sales system, where customers see almost no distinction between being in-store or shopping online.
This week also saw Gap (NYSE:GPS) reiterating its plan to move from a traditional retail distribution model -- manufacturer, distributor, store -- to what it calls a seamless inventory model. Both retailers are looking for new ways to generate income and trim operational costs.
Why move from the classic model?
Here's the problem with the traditional inventory management model -- it's slow. Lead times for the normal model can run up to a year long, meaning that businesses have to make choices now for fashion that's going to sell in fall 2014. The first solution to this problem was the creation of fast fashion, which focused on making cheap, quick-to-get-to-store products. The model has been close to perfected by Spanish retailer Zara. The company can allegedly get a shirt from mannequins to Main Street in two weeks.
Two weeks. If another company takes nine months, Zara is getting it done in about 5% of the time of that other company. That's given Zara a revenue stream of over $10 billion a year -- Fifth & Pacific is making $1.5 billion.
Now, not all of that is because Zara is faster, it's also meaningfully bigger, but the value is clear for other retailers to see. Fifth & Pacific has seen that success, and it's decided that the best way to speed things up is to outsource operations to a company that specializes in operations.
What Gap and Fifth & Pacific are doing
The subsection of eBay -- eBay Enterprise -- that Fifth & Pacific is working with specializes in these sorts of operations. It operates 3 million square feet of fulfillment space and fills 20 million packages every year. It also operates e-commerce platforms and provides customer management services. The outsourcing means that Fifth & Pacific can focus on its brands, instead of worry about how long it's going to take to get tis products out to customers.
Gap's move is even more in the vein of Zara's fast fashion strategy. Seamless inventory management skips classic distribution centers, shipping product directly to the stores where the product is most needed. That means that instead of stocking a store with merchandise based on square footage or the kind of layout the store has, Gap can ship directly to stores that are selling more of a product type.
How better operations affect the bottom line
While getting things done faster is helpful to sales and planning, the reason both these companies are changing their operational systems comes down to margins. With Fifth & Pacific paying another company, it can scale up sales at a faster rate than its costs scale up, meaning that additional sales result in increased margins. Likewise, Gap can get products that are selling in Town A to the stores in Town A, where they sell for full price instead of spreading them around to other towns where they might have to go on promotion to move.
Both companies are going to see a lot of this play out over the next year. Gap plans to have its inventory management in place by 2015, and Fifth & Pacific has signed a multiyear contract. Next year, investors should watch for an increase in spending as both companies make the transition. After that, look for costs to decline and margins to increase. These are both excellent strategies, and they allow the retailers to grow by focusing on costs, something precious few companies ever do well.
Fool contributor Andrew Marder has no position in any stocks mentioned. The Motley Fool recommends and owns shares of eBay. Try any of our Foolish newsletter services free for 30 days. We Fools don't 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.