Full index and research is on Glossy’s sibling publication Modern Retail.
Table of contents
Introduction
Customer expectations of ultra-fast delivery speeds, free and flexible returns, on-demand package tracking and convenient payments are on the rise, changing the game of e-commerce fulfillment. Recent consumer surveys have also made it clear that customers prioritize online shopping for its convenience, while they consider the overall shopping experience when shopping in-store.
Likewise, as e-commerce sales in the U.S. increase year over year, so does the need for retailers to build stronger distribution networks to fulfill these online orders. To compete with e-commerce titans like Amazon, it’s important for each of these retailers to have a strong omnichannel experience.
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Glossy’s sibling publication Modern Retail recently released the annual Modern Retail Index (MRI), which analyzes retailers’ e-commerce fulfillment services. The data compares retailers’ ease of fulfilling e-commerce orders to provide a ranking of each retailer’s capabilities. The index found the following:
- Specialty retailers like Sephora, Ulta and Dick’s Sports Goods have a wide array of online shopping and delivery options for their customers — on par with big box and department stores.
- Big-box stores Target and Walmart continue to lead the march on speedy local deliveries through expanded distribution centers and delivery options like curbside pick-up.
- Department stores Macy’s, Kohl’s and Nordstrom are hoping to weather rocky economic waters by providing shoppers with more convenient ways to shop, including new store concepts and easier online returns.
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Beauty and fashion specialty retailers focus on easy returns and new fulfillment centers
Sephora ranked the highest among the eight retailers included in this study, above Target and Macy’s. Ulta and Dick’s Sporting Goods ranked right below among the top five of the eight. Even in Modern Retail’s extended list of 30 retailers, the specialty retailers all ranked among the top 10. This can largely be attributed to the fact that specialty retailers make it easy for customers to try out products and return them online, as well as the speedy delivery options available for online orders through expanded distribution centers and in-store fulfillment capabilities through third-party delivery services.
Beauty products, books, sporting apparel/gear and pet products are easier to display for online shopping than larger merchandise like furniture, with less risk of product confusion from bad imagery and fewer returns. However, these retailers are taking a risk by allowing a heavy intake of returns, which can be expensive for a retailer.
In the case of returns, specialty retailers performed well. These retailers offer various free options for returning online orders, including in-store and prepaid shipping labels. For instance, Sephora offers returns for new or gently-used products, even for items bought on third-party sites like DoorDash or paid through services like PayPal, Klarna or Afterpay. Customers can shop knowing that if they don’t like a new product they decided to test or if they chose the wrong makeup shade from available product images, they’ll be able to return it.
Along with simple and free returns, specialty retailers also offer various speedy delivery options to get online orders to consumers as fast as possible. All three specialty retailers offer free shipping, with online order value minimums as low as $35, and one-day expedited shipping available at all of them. And all three have buy online, pick-up in store options.
To increase Ulta’s capacity for online orders, it partnered with Target to build more shop-in-shop locations and merge supply chain operations — a benefit for Ulta to take advantage of Target’s extensive supply chain network and store footprint. Target also gets to expand its beauty business and attract more shoppers like Ulta’s Ultimate Rewards members, which is reported to have had 42.2 million members by the end of 2023.
In Ulta’s second-quarter earnings call, CEO Dave Kimbell emphasized the retailer’s commitment to strengthening their e-commerce fulfillment operations. Its distribution centers are filling more e-commerce orders than ever before, resulting in an expansion into faster fulfillment centers dedicated only to e-commerce orders and ship-to-store capabilities. As of January 2022, only 115 Ulta stores had ship-to-store operations — by August 2022, this number had jumped to 276.
Target and Walmart expand their stores’ local fulfillment capabilities
Retail giants and veterans in e-commerce, Target and Walmart, have continued to hold down costs and increased the speed of delivery. As a result, the two retailers have better positioned themselves to ride the financial storm of high inflation costs and slower customer spending.
Walmart and Target have largely undertaken a race to build up their fulfillment and delivery infrastructures to keep up with online giant Amazon’s expansive same-day delivery network and membership programs. Part of their plans to cut down on last-mile delivery costs have included building more micro-fulfillment centers and large-format stores that act as fulfillment hubs for online orders, including drive-up and same-day local deliveries.
To help with local deliveries, Target Corp. invested $100 million to build a larger network of supply chain hubs, dubbed “sortation centers,” near Target stores to sort, batch and route orders that store staffers pack. With more sortation centers close to stores, Target can deliver more packages the next day. By January 2026, Target plans to have built 15 of these facilities. Target executives believe the store-based fulfillment model boosts inventory and supply chain capacity, and the retailer can fulfill demand across any of its omnichannel offerings, whether that’s drive-up, in-store sales or online orders.
Along with the new centers, Target also saw good growth with its third-party delivery partnerships. The number of orders through same-day services for Target — including order pickup, drive-up and delivery service Shipt — grew by more than 8% by the end of the third quarter of 2023 in comparison to the prior year. Drive-up orders, in particular, grew by more than 12%, according to the company’s third-quarter earnings release. The retailer recently added drive-up returns and Starbucks beverage delivery. “We’ve long said that drive-up receives the highest satisfaction rating of any service we provide,” said John Mulligan, Target’s evp and chief operating officer, during the company’s second-quarter 2023 earnings call.
According to a report by Bloomberg, Target is considering adding a paid membership program to compete with offerings like Amazon Prime and Walmart Plus. This subscription program would go beyond Target’s current loyalty program to provide additional money saving options to repeat customers, with the expectation that it would bring more consistent sales. Membership programs like this promote spending online, in-app and in-stores; and consumers who spend across all platforms tend to spend more overall.
To keep up with Target and its competitors, Walmart announced in 2022 that it would be building ‘next generation’ fulfillment centers slated to open by 2026. The fulfillment centers are intended to combine the manual labor of Walmart’s staffers with advanced technology and machine learning to increase shipping and delivery for Walmart.com orders. As of the first quarter of 2024, five next-gen fulfillment centers have been built. According to Walmart, these new facilities, combined with the rest of Walmart’s fulfillment network, will enable the retailer to reach 95% of the U.S. population with next- or two-day shipping.
With faster fulfillment capabilities, Walmart has also been able to expand its delivery options, like drone delivery and in-home delivery services for Walmart Plus members. Drone delivery is now available in 75% of the Dallas-Fort Worth area through Walmart’s partnerships with on-demand drone delivery providers Wing and Zipline. “Autonomous delivery is finally ready for national scale in the U.S.,” said Keller Rinaudo Cliffton, co-founder and CEO of Zipline. “Zipline is excited to enable Walmart’s vision of providing customer delivery so fast it feels like teleportation.”
In September 2023, Walmart introduced express online pickup or delivery in as little as 30 minutes and late-night deliveries at 4,000 stores nationwide. A “Live Shopper” feature has also been added to Walmart’s app for customers to quickly make substitutions or additions to their orders. Walmart Plus members have the option to add “InHome” to their membership — a white glove delivery service that delivers orders straight to a customer’s refrigerator or kitchen counter.
Department stores rethink store strategies due to closures
Department stores Macy’s, Kohl’s and Nordstrom fell behind specialty retailers with more limited fulfillment offerings. These three department stores scored lowest for online return. While they do allow for online orders to be returned, methods for returning items are more cumbersome. Returning in store is free for all stores, but Macy’s charges a $9.99 shipping fee for returns by mail. And none have options like curbside returns or partnerships with other retailers to set up drop-off locations.
At the beginning of 2024, Macy’s announced it would be closing five stores and laying off 2,350 workers, roughly 3.5% of its workforce. But the retailer has shifted focus to downsizing stores. Macy’s is tripling the number of its small-format stores, which are designed to provide a more curated product assortment in a convenient shopping format. Beginning in 2024, it plans to open as many as 30 small-format locations across the U.S. This expansion is in addition to the nearly 15 small-format Macy’s and Bloomingdale’s locations that Macy’s, Inc. currently operates. “Our small-format stores are efficient to operate, provide the customer with a shopping alternative within our omnichannel ecosystem and present a unique opportunity to target high-traffic shopping centers,” said Adrian Mitchell, chief operating officer and chief financial officer at Macy’s.
Kohl’s had expected to close stores in 2023, but the retailer was able to turn around store performance through its shop-within-a-shop partnership with Sephora. During the third quarter of 2023, Kohl’s added Sephora shops to nearly 100 of its stores. There is now a Sephora presence in over 900 Kohl’s stores. “In 2023, we have re-established our stores as a key focal point of our strategy. I am pleased with our positive year-to-date stores’ performance, driven by strong growth in Sephora, and more recently, our home and gifting initiatives,” said Tom Kingsbury, CEO of Kohl’s during Kohl’s third-quarter earnings call last November. The company said it expects the collaboration with Sephora to generate $2 billion in revenue by 2025. In the same quarter, Kohl’s saw a total beauty sales increase of over 70% from the prior quarter.
Unlike Kohl’s and Macy’s, Nordstrom’s supply is not as well developed for distributing orders quickly. Currently, Nordstrom only offers same-day delivery to shoppers in New York City, with an added $20 fee. Nordstrom closed 15 stores in 2023 — 13 located in Canada and two located in the U.S. This winding down of Canadian operations had a deep impact on Nordstrom’s sales in 2023, with the company reporting a 6.8% decrease in sales during the third quarter of 2023.
As Nordstrom works to optimize its supply chain capabilities, the company decided to eliminate in-store fulfillment for Nordstrom Rack digital orders and to raise the free shipping minimum for ship-to-store delivery on nordstromrack.com. This resulted in a 1.8% decrease in Nordstrom Rack sales for Q3 2023 compared to the same quarter in 2022. However, the decision to eliminate in-store fulfillment for digital orders on nordstromrack.com resulted in fewer order cancellations, simplified Rack operations and improved profitability, according to the company.
Key takeaways
- Investment into larger distribution facilities dedicated to fulfilling online orders is also on the rise among specialty retailers to increase capacity for digital orders, as well as speedy delivery options through third-party delivery services and big box partnerships.
- Target and Walmart have expanded their stores’ local fulfillment capabilities by building more micro-fulfillment centers and large-format stores that act as fulfillment hubs for online orders, including drive-up and same-day local deliveries.
- Department stores struggle to fulfill online orders as efficiently as specialty retail and drugstores, but they have partnered with DoorDash and Instacart for quicker deliveries and built new store formats that allow for more convenient shopping and curated browsing.
