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Prior to the mid- to late 1990s, consumers did business with a retailer through one shopping channel: the store. As use of the Internet became widespread, they began shopping through two channels: stores and websites. More recently, explosive growth in the use of smart phones and tablets has created what is essentially a third channel: mobile commerce. In response, virtually every major retailer has spent the past few years developing what is known in the industry as an omnichannel strategy. The goal is to provide the customer with a single, seamless, branded experience, whether she is shopping from a PC, on her phone, or at a sales counter—or, increasingly, in some combination. A recent market study from Deloitte Digital1 projects that digital interactions will influence 62 cents of every dollar spent in U.S. retail stores in 2015, for a total of $2.2 trillion. This marks a 29% increase from the $1.7 trillion in in-store sales by digital interactions in 2014, and is six times the 2013 figure of $0.33 trillion. According to the study, this is uniformly good news for retailers: a third of consumers who use digital devices say they spend more because of it. Morever, shoppers

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CASE STUDY: LARGE-SCALE OMNICHANNEL RETAILING

How Macy’s adapts its technology, resources, and business structure to deal with 21st centrury customer expectations.

The goal is to provide the customer with

a single, seamless, branded experience,

whether she is shopping from a PC, on her phone, or at a

sales counter.

1 “Navigating the New Digital Divide: Capitalizing on digital influence in retail,” Deloitte Development LLC, 2015. http://www2.deloitte.com/content/dam/Deloitte/us/Documents/consumer-business/us-cb- navigating-the-new-digital-divide-v2-051315.pdf

who use digital devices while in-store convert—go from visiting the store to actually making a purchase—at a 20% higher rate than those who do not.

Which means a successful omnichannel strategy is not just a good idea: it’s a business necessity. To provide it, retailers are having to both integrate their operations in new ways and significantly accelerate their response times. Since retail is, at its basest level, about the movement of physical objects from point A to point B, this gets harder as the retailer gets bigger. In what follows, we’ll look at some of the steps a very large retailer, Macy’s Inc., has taken to convert itself into an adaptive omnichannel retailer.

Room to Grow

First, a little background. When Macy’s started selling online, in 1996, it was a radical innovation; R.B. Harrison, Macy’s Chief Omnichannel Officer, says, “As anyone knows who has tried to do it at scale, innovation in many enterprises is treated like an invasive disease: the main body of the enterprise gathers its forces and attacks it.”

To avoid this corporate immune system response, Macy’s evolved MCOM into a separate operating division, not only with its own tech staff—as the entire corporate world learned during that period, running a traditional IT department and running an ecommerce website are not at all the same thing—but with its own leadership, logistics and inventory operation, sales, marketing, accounting, and so on. Sheltering this new venture from the Macy’s mother ship, says Harrison, turned out to be the right decision. “We had a dedicated team, and we started to get traction and get growth.”

Beginning in about 2009, the company launched what it called an accelerated growth strategy. “Internet sales,” says Harrison, “had been growing at a nice steady rate from the beginning, but we saw an opportunity to really go after it. We made a coordinated commitment of hundreds of millions of dollars of capital to start building our model differently.”

One of the linchpins of the accelerated growth strategy was the construction of a network of very large direct-to-customer fulfillment centers, known in

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A successful omnichannel strategy

is not just a good idea: it’s a business

necessity.

the company as mega-centers, designed to expedite delivery of inventory to customers ordering from the website or from stores other than the one where the customer was currently shopping. This led to an increase in efficiency, but it also began to blur the lines between Macy’s the department store chain and Macy’s the ecommerce operation. By then the company was well into its cross-channel phase, offering, for example, the option of buying something online and picking it up at a nearby store. (This is known at Macy’s as BOPS.)

By then it was clear that as far as the customers were concerned, the boundary lines between the department store chain and the website weren’t blurred at all: they were nonexistent. On the one hand, this was good news; the cross-channel branding strategy was working. On the other hand, you still had two separate operations. If a customer came into a store wanting to return an online purchase, the store couldn’t just say thank you and put whatever it was into its own inventory; somebody in accounting had to re-credit the item to (and un-credit the sale from) whichever division it came from in the first place.

This was not only an accounting and inventory control issue, it was also a customer relations issue. “At the beginning,” says Harrison, “our store associates were not particularly friendly about taking back a dotcom return, even though it had been bought from Macy’s. ‘Well, ma’am,’ they’d say, ‘you didn’t buy it from the store.’ It was a completely un-customer-centric view.”

The Need to Restructure

And as we said, the goal of an omnichannel retail strategy is to give the customer a single, seamless experience, whether it takes place online, through a phone, or face-to-face in the store. What had been an effective business decision twenty years ago—running one business for the store chain, another for ecommerce—was now an obstacle to achieving that goal.

Early in 2013, Harrison was named to the newly created post of Chief Omnichannel Officer, reporting directly to the Chairman and CEO, Terry

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As the customers were concerned,

the boundary lines between the department store

chain and the website weren’t blurred at all: they were

nonexistent.

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Lundgren. He had previously been Executive Vice President for Omnichannel Strategy, in which capacity he was responsible for, well, omnichannel strategy: integrating the company’s stores, online, and mobile activities. In his new post he added responsibility for systems and technology, logistics, and related operating functions.

In the spring of 2015, Macy’s folded together what had been separate merchandising and marketing operations for online and the stores. With direction over these functions, the digital division in San Francisco, and all the inventory logistics everywhere, Harrison was positioned to aggressively drive the omnichannel strategy. This strategy has both business objectives and customer-oriented goals—personalized digital experiences for customers, accelerated fulfillment and delivery, and transformed in-store technology. Improved inventory leverage alone is expected to produce more BOPS and same-day sales, faster turns, better gross margins, and lowered shipping expenses.

A Lot of Stuff

This, says Harrison, is one of the major challenges that his company—and any retailer seeking to do omnichannel marketing at scale—is confronted with. “We will do about $28 billion in sales this year,” he says, “which means that more than $35 or 40 billion worth of stuff has to flow through, in one end and out the other.” The stuff comes in three flavors: small-ticket, which goes to the stores; big-ticket, things like furniture and mattresses, which they keep at a big-ticket distribution center and deliver to the purchaser; and direct- to-consumer, i.e., what’s sold online. Direct-to-consumer fulfillment is done from the mega-centers.

As you can see, executing something like Macy’s (or any other retailer’s) omnichannel strategy is very different from executing a similar restructuring in, say, a software or service company. Parts of it are the same: integrating two marketing and merchandising operations is, though potentially uncomfortable, not hard. You move everybody into the same building, rewrite the org chart, give them all new business cards, and tell them to deal with it. Integrating the inventory management, however, is another matter.

4

What had been an effective business

decision twentry years ago — running one business for the store chain, another

for ecommerce — was now an obstacle

to achieving that goal.

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The vision is simple: over here you have a customer who wants to buy something. Online, mobile, standing at a sales counter, doesn’t matter: this is omnichannel, remember? One seamless customer experience. Over here you have the thing she wants to buy. When the customer and the thing are in the same place at the same time, it’s a no-brainer. If it’s in the store, you smile, accept payment, say thanks, wrap it and put it in a bag, and hand it to her. If she’s online and the thing is currently in stock at a mega-center, it’s also a no- brainer. The website accepts payment, confirms the order, and schedules the shipment. But what if they’re not in the same place at the same time?

If We Own It, She Can Buy It

“Our philosophy”, says Harrison, “is, if we own it, she should be able to buy it from anywhere she is.” Making that possible progressed in stages. Stage one was giving the stores access to inventory in the mega-centers. By integrating inventory with the POS systems (in itself no small undertaking; this is one reason the San Francisco operation keeps hiring engineers), Macy’s enabled an associate to do a search to find, say, the right color Alfani blouse in the right size in a distribution center, and ship it direct to the customer. “I’ve solved the customer pain point,” says Harrison, “and I’ve expanded my ability to serve the customer. Good idea.”

The next iteration came about six months later. Same scenario—a customer walks into a store wanting to buy something the store doesn’t have—except this time the POS system comes up empty. You don’t have that particular blouse in any of the fulfillment centers.

“Well, okay,” Harrison says, “I don’t just have fulfillment centers, I have more than 600 locations around the country, all with inventory in them. Why can’t I take it from another store and give it to her? So we created the ability to do that. Next was, okay, the fulfillment centers are big buildings, but they do run out of things. If I need to, why can’t I pull from stores to fulfill onsite demand? So we created the ability to do that, too.”

Out of all this has come—or, more accurately, is coming—a combined omnichannel and digital strategy that is, as Macy’s and Harrison see it, the key to continued success. Referring to the Deloitte study cited above, Harrison says, “The sixty-two cents figure may actually be a little low.

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Our own research and experience say that somewhere between 50% to 70% of in-store purchases have some sort of digital component. So if you don’t play digitally—and if you don’t play with a fairly congruent inventory, meaning what you sell online you sell in the stores, so you can do that kind of search—it’s going to be a fairly difficult game for you to play, because frankly, the customer now demands it.”

The Need for Speed

According to the 2015 listings compiled by the National Retail Federation and published in STORES Magazine2, Macy’s, with 2014 sales of just over $28 billion, is the largest department store chain and 15th largest retailer in the United States. “Large often comes with slow,” Harrison says. “A lot of the stuff I worry about is how to handle scale and growth. Just managing the ecommerce is a challenge. Many industry statistics say that digital is growing mid- double digits, ten to fifteen percent. We’re doing better than that, and that constant growth cycle is very hard to keep up with.”

The Macy’s approach to keeping up, as Harrison describes it, relies first of all on a kind of carefully planned incrementalism. “You don’t have to get it all in one big swoop,” he says. “If you build too big a project, it takes too long to deliver, and by the time you get there, the customer’s moved on and so has the technology.”

But even if you’re taking small steps, you need to take them quickly, and they have to lead where you want to go. As part of its commitment to drive business results and innovation at the same time, Harrison and his colleagues have set up MacysLab, which is connected to the digital division in San Francisco and is tasked with getting from perceived problem to idea for solution to go/no go decision to prototype and testing very quickly.

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2 Schultz, David P, “Top 100 Retailers 2015,” STORES, July 2015. https://nrf.com/2015/top100-table

“Our own research and experience say

that somewhere between 50% to 70%

of in-store purchases have some sort of

digital component. So if you don’t play

digitally — and if you don’t play with a fairly

congruent inventory, meaning what you sell

online you sell in the stores, so you can do

that kind of search — it’s going to be a fairly

difficult game for you to play, because

frankly, the customer now demands it.”

“We try to make educated guesses about what somebody wants,” Harrison says. “We come up with an idea, we figure out how to put a little investment behind it—we call it minimum viable product—and we put it out there to get customer reaction, to see if it works. If it works, you try to figure out the pain points of scaling it. If it doesn’t work, you ultimately throw it away. It’s a way to figure out how to get to market as quickly as possible.”

A recent example he gives is called zTailor, which focuses on an obvious omnichannel pain point: if you buy something like a suit online, how do you get it tailored? The MacysLab team figured out how access a network of tailors who can be dispatched to the customer’s home or office, do the fitting, and get the clothes back to the customer in a week—at the same price as an in-store fitting. Another example is e-Gifting. Say you want to buy your aunt Jane a sweater; you know she likes blue, but you’re not sure what size she is, or whether she’s maybe allergic to wool.

You pick out a nice blue sweater, and Macy’s sends Aunt Jane an email: Your loving niece or nephew just bought you a gift, i.e. this lovely sweater. Would you like us to send it to you, or would you maybe like it in a different size or color? Or exchange it for something else. “These services are both pretty popular,” says Harrison, “because they address a real customer need. What excites us about them is that with zTailor we went from concept to production in about a hundred and fifty days; with e-Gifting it was half that. That’s much, much faster than we’d have been able to do it before we had MacysLab.”

Looking Ahead

So far, the Macy’s approach to omnichannel retailing seems to be working pretty much as planned. Comparative sales (a given month for X store vs sales for that store in that month the year before—known as “comps” and a standard industry performance metric) have risen steadily for five years, and the overall business is growing. Over the last year or so, the company has been praised for narrowing the gap between marketing and technology by Fast Company, Forbes, Accenture Retail,

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As part of its commitment to drive business results and

innovation at the same time, Harrison

and his colleagues have set up MacysLab, which is connected to the digital division in San Francisco and is

tasked with getting from perceived

problem to idea for solution to go/no go

decision to prototype and testing very

quickly.

and WWD, among others. Macy’s is making significant capital investments to enable itself to do this; Macy’s is now ranked as the seventh largest online retailer in America.

Like many of its peers, such as Kohl’s, Nordstrom, J.C. Penney, Dillards, and Neiman-Marcus, virtually all of Macy’s sales are domestic. Retail is increasingly an international industry—domestic sales as a percentage of total revenues are 59.2% for Amazon, for instance, 64.5% for Starbucks, and 25.0% for Trader Joe’s3—and Macy’s is evaluating international opportunities as an avenue for long-term growth. Carefully: insufficiently planned overseas expansion has been a trap for a number of major retailers, and Macy’s is apparently not interested in falling into it.

Meanwhile, Macy’s is conducting an ongoing and aggressive talent search, both for its digital operation and for the company as a whole. In this it is competing with the rest of the retail industry, which, as the largest private- sector employer in the United States, hires more financial workers than Wall Street, more engineers than Silicon Valley, and more photographers, web designers, marketers, and writers than practically anyone else. Here too Macy’s is holding its own; it is consistently ranked among Universum’s top 50 most attractive employers in the U.S.4, as well as in the National Retail Federation’s Top 10 E-Commerce Retailers for Millennials.

8

Macy’s is conducting an ongoing and

aggressive talent search, both for its

digital operation and for the company as a

whole.

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³ lbid. ⁴ “United States of America’s Most Attractive Employers—Business student 2015,” Universum Global, 2015. http://universumglobal.com/rankings/united-states-of-america/student/2015/business/

Topics for Further Discussion

1. One rapidly developing field of technology is the “internet of things,” i.e. machine-to- machine communication (M2M). Given the amount of technology in today’s stores— handheld wireless point-of-sale systems, interactive mirrors, beacons, surveillance cameras, near-field communications, etc.—what impact might M2M have on the in-store experience in the near future?

2. Macy’s and other major retailers are rolling out same-day delivery. What other services should retailers be developing?

3. With Macy’s recent reorganization in mind, what other currently common business organizational structures might prove to be impediments to growth?

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© 2016 NRF Foundation, Inc. Use restricted to academic learning and research purposes and to publication only on nonpublic websites. Any other use requires the express permission of NRF Foundation, Inc. and the retail subject of this Case Study.

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