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Leveraged Returns: How Big Box Retailers are Using In-Store Fulfilment Centers to Bring Consumers Back to Brick-and-Mortar
The growth of e-commerce over the last two decades has forced traditional brick-and-mortar retailers to rethink their operations in order to remain competitive in a rapidly evolving market. For some, this means developing websites and mobile apps to entice consumers with an omnichannel shopping experience. However, a few large retailers have recently pioneered a new trend by remodeling a portion of their existing brick-and-mortar locations as fulfillment centers for products purchased online.
A fulfillment center has typically been a warehouse that locates, packs and ships orders, both at wholesale from business-to-business, or through e-commerce directly to customers. Recently, large retailers, like Macy’s, have discovered that using a portion of existing brick-and-mortar stores as smaller scale fulfillment centers allows them to gain a competitive advantage by offering faster delivery and in-store pickup for e-commerce sales. Similarly, Target now has about 460 existing stores with online order fulfillment capabilities with an astounding 55% of online orders fulfilled by local stores. This strategy allows Macy’s and Target to compete with e-commerce rivals like Amazon without having to build numerous new distribution centers around the country.
Having an e-commerce fulfillment center located in a brick-and-mortar store is attractive to consumers as part of a true omnichannel shopping experience, however, there is also an added benefit for retailers: unanticipated in-store purchases. An “impulse purchase” is typically one made by a customer in the spur of the moment, often appealing to a sense of instant gratification. A recent study found that 84% of Americans admit to making this type of unplanned purchase, with one out of every five Americans reporting an impulse buy in excess of $1,000. More importantly, the study found that 68% of U.S. consumers said their primary location for making impulse buys was “in person in a store.” Thus, fulfillment centers that offer the opportunity to pick up online purchases can generate additional revenue through purchases that the customer might not have made shopping exclusively on the website.
While in-store fulfilment centers have been advantageous for retailers, the transition has not been without a few bumps in the road. Aside from the cost of physically renovating existing brick-and-mortar stores, these locations now have less square footage designated to product display. Additionally, employees must be re-trained to accommodate hybrid roles balancing in-store sales and e-commerce fulfillment, and some retailers also report issues tracking online inventory management. From a legal lens, landlords and tenants are still working to address the impact of e-commerce sales and returns on percentage rent clauses in retail leases. Specifically, there has been debate about whether products purchased online, but picked up at physical stores should count toward that store’s annual sales, and whether e-commerce returns made to store locations should count against that store’s sales. Furthermore, designating a portion of a store as a fulfillment center requires looking into whether such use might be prohibited by the Shopping Center or other land use restrictions. Despite these growing pains, in-store fulfillment centers are a good example of how brick-and-mortar retailers can adapt to survive and flourish in a world driven by e-commerce.
As an Associate in the firm’s Real Estate Group, Donald “Zach” Mykulak focuses his practice on land use matters and the financing of commercial real estate properties. Zach also drafts and negotiates retail leases on behalf of landlords at shopping centers throughout the United States.
While in law school, Zach was a judicial extern for the Honorable Marianne B. Bowler at the U.S. District Court for the District of Massachusetts, as well as the Honorable Alexander H. Sands, III at the Massachusetts Land Court. Zach also served as a legal intern at the Capital Division of the Texas Innocence Network where he drafted habeas corpus petitions and counseled death row inmates during the appeals process. Prior to attending law school, Zach taught 8th grade at the Orchard Gardens K-8 School in Roxbury.