Retailers Look To Expand Warehouse Capacity, With Some Converting Store Space

Best Buy has converted many of its stores to be a combination of selling space and warehouse space. It enables them to make quick deliveries to customers. The other day they delivered a toaster in three hours to my home.

I had a conversation with Steve Ross, who is global omnisolution principal at Aptos and brings 25 years of industry experience serving big-box and specialty retailers. He told me how several companies have converted some selling space to warehouse space. He listed Under Armour, Ulta Beauty, Target, and Kroger as examples of retailers that have reallocated some store space to make room for a variety of quick omnichannel service options in recent years.

Take the upsurge in curbside pick-up that was prompted by the pandemic.

“There are two retail worlds. There are the big-box retailers, who enjoy the autonomy of operating at a larger scale of last-mile fulfillment – big-box retailers like Target have dedicated teams to solely run curbside pick-up operations. In contrast, much of specialty retail is challenged by operational and real estate restraints and must lean on the mall for operational help in many cases.”

“At Aptos, we recently ran an assessment of our own clients’ numbers,” said Steve Ross. “What we saw is that curbside commerce makes up 2-3% of average demand (higher averages are seen for big-box than specialty retail). In contrast, (save, in grocery retail, where curbside is king), we’re seeing closer to 25-30% of sales going out the back of the store, as ship-from-store for retailers. That’s where the money is, for specialty and department store retailers. The future for specialty retailers, especially, is ship-from-store, not curbside.”

If the store is located in a strip mall or is a standalone store, Ross explained, it is easy to see that merchandise can be picked up curbside. However, the mall environment makes for a tricky application of optimal curbside pickup (for store pickup, however, it’s great).

Expanded warehouse space helps stores fill orders without taking wanted merchandise from the selling floor, regardless of which type of fulfillment service is your sweet spot (such as curbside, pickup in store, or ship-from-store).

Ross went on to say, “but, be warned. Adding racks to the back of the store is not going to turn a store into a mini distribution center. You need to plan for additional inventory, manage replenishment and handle the labor to man these operations as the store acts as a DC out the back. As e-commerce sales doubled during the pandemic, serving the walk-in and e-commerce customer has become a store imperative. While these changes unfold, the retailer needs to assess overall profitability of these adjusted operations at selected repurposed stores, shifting from DCs to supplemental support at stores.

This shift is inherently less profitable. But it’s a necessary evil: The customer wants her stuff now. So what? That is where stores are uniquely positioned to aid in this last-mile journey: Curbside, in-store pickup, and ship-from-store are the answers – and now it’s about optimizing these store operations, removing any band-aid approaches applied during the pandemic.”

Ross went over with me the anatomy of the store real estate changes being experienced to accommodate this new sales/service model. In many cases, the front of an urban store could still be a typical retail selling space, but the rear has been partitioned off to allow for pickup/curbside business or delivery to home.

Curbside pick-up, in some locations, has long-staying power for certain retail sectors (grocery, for example). In contrast, for some retail verticals (as mentioned above, mall-based locations), curbside doesn’t have long-term sustainable business applications; “Retail space is often optimized to help the walk-in customer. Now, stores have to serve walk-in customers, drive-in customers (curbside), and ship-from-store customers,” said Ross.

The counterpoint to all these store-based fulfillment options is Macy’s recent initiative to build a huge 1.4 million square feet fulfillment center in China Grove, North Carolina. It is due to open in 2024 to meet the growing demands of the omnichannel business. It will have direct-to-consumer fulfillment capabilities and will employ nearly 2,800 workers. Dennis Mullahy, Macy’s chief supply chain officer, said that it will “support growth of Macy’s business as a leading omnichannel retailer.” The China Grove fulfillment center will account for about 30% of Macy’s digital supply chain capacity. It is likely that other department stores will follow Macy’s example.

Macy’s has already invested to expand the capacity of its Houston, TX distribution center by moving to a modern facility in Tomball, TX which will be nearly 1 million square feet. The fulfillment center will be completed by 2023 and will provide online fulfillment for bedding, furniture, and toys. Additionally, Macy’s has invested in automated technology in the existing Portland, TN and Martinsburg, WV distribution centers.

“The other challenge for retailers is to stay in stock regardless of channel,” Ross stressed. Store management must constantly strive to maintain a profitable selection that juggles to meet demand for both immediate in-store purchase and ship-from-store items demanded by local e-commerce shoppers (for same-day, next-day delivery).

Originally, when the pandemic started in 2020, most fulfillment was made from fulfillment warehouses. “Omni-demand has doubled for Aptos’ clients in two years, which no retailer was prepared for,” said Ross. “Retailers that were better positioned were the ones already thinking about omnichannel pre-pandemic. There’s just not enough warehouse space to meet this newfound demand. That’s where stores come in, making the retail store relevant in ways it hasn’t been in years.”

POSTSCRIPT: Aptos is one of the largest technology providers, focused exclusively on retail. I am told that it has end-to-end solutions required to support retailers’ changing fulfillment needs and unified commerce transformations, taking into account both online and in-store requirements and managing in-store demand to help retailers make better decisions. In today’s post-pandemic world where consumers now expect more diverse shopping and fulfillment options, it’s imperative that every retailer rethink how they productively (and profitably) utilize all of their physical spaces to serve their customers. Those plans will vary greatly. We see Macy’s heavy investment shows that department store companies need more space to technologically expedite merchandise to the customer. I also expect to see other retailers make more investments to expand warehousing capacity in some way. In all cases, it is speed that matters.