Is In-Store Pickup of Online Orders Becoming Important?

By Markets Fool.com

In-store pickup has become a way retailers can distinguish themselves from Amazon.com(NASDAQ: AMZN), and it has been used by a growing percentage of consumers. It's something that Wal-Mart Stores(NYSE: WMT) and J.C. Penney (NYSE: JCP), to name two, have been aggressively marketing.

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In this segment ofIndustry Focus: Consumer Goods, Motley Fool analyst Vincent Shen is joined by Fool contributor Daniel Kline to discuss whether this is a real change in how we shop or a short-term holiday fix. In addition, the pair explain how pre-orders and in-store pickup helps chains manage inventory.

A full transcript follows the video.

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This podcast was recorded on Nov. 22, 2016.

Vincent Shen: One thing I want to talk about is in-store pickup. We have mentioned Wal-Mart a few times already during this episode. In the past year, they've been promoting various in-store pickup initiatives. A big one was curbside grocery service. They have expanded that into new and established markets this year. In terms of the penetration that has seen -- Target(NYSE: TGT) says about 15% of its online orders get picked up at stores. Overall, the big benefit of something like in-store pick up is that it helps drive traffic to stores, where people will hopefully make other purchases. Even a J.C. Penney, I was really impressed to hear that consumers pick up as much as 40% of their online orders from J.C. Penney department-store locations. That is a relatively new capability for the company. Management has commented that the best part of that is that 40% of those shoppers who pick up orders in stores end up making an additional purchase when they're there anyway. What do you think? Have you seen more companies marketing this?

Dan Kline: I think it's very important during the holidays. As a shopper, I don't want to brave the traffic, leave my house, to hope I get whatever device it is, or coffee maker, whatever ridiculous thing I'm going to buy for myself this holiday season. I want to know I'm going to get it. So if I can't order it on Amazon, and I'm going to buy it at a physical retailer, from Wal-Mart or Target or J.C. Penney, I want to be able to place the order and know that when I get to the store, it's going to be there. Now that I'm going to have to wait in line or fight through it. That is a really strong positive. I don't see it being an issue the rest of the year. The rest of the year, it's a lot easier to just go to the shop and pick something up than to wait in a customer-service line and pick up your online order. I've done that a few times, as we've talked about on the show before, and it's not the easiest system in the world -- though I expect they will be throwing more people at it for the holidays. But it's going to be very important for those companies, because it's going to put people in stores. They still have to check out, they still have to wait in line. They're going to see a lot of stuff, they're going to spend more money.

Shen: Yeah. Something with that as well that's another perk that comes along with an initiative like this is how it impacts how the companies manage their inventory, how they can clear out their inventory without taking hits, in terms of being forced to put on major discounts or markdowns. The idea basically is, if your local J.C. Penney location can fulfill that online order by basically pulling that item off the shelf, the company can avoid that shipping expense -- so, that's already benefiting their margins and their profits -- and, also, it will help them clear out their inventory, so they don't have things sitting around that they need to clear out for new products, and they take a hit by having to put it on clearance later down the road.

I want to talk a little bit about how other companies are approaching this with inventory management. This is something that I've had several episodes recently talking about, something like with SKU rationalization, stock-keeping units, how people are trying to simplify what they keep on their shelves, making their overall business, their operations, much more efficient and profitable. The thing is, that can mean not just simplifying product lines, but also being more cautious about the amount of inventory you keep on hand. Dan, you'll remember, last year, for example, a lot of people were still wearing shorts and flip-flops well into November. And a lot of apparel retailers got hit.

Kline: I'm wearing shorts and flip-flops as we speak.

Shen: OK, so not quite fair, with you down in Florida. But even here, only this past weekend in Washington, D.C., has it really started to get very cold. And last year, a lot of apparel retailers got hit holding on to tons of their cold-weather apparel, and eventually having to discount that, put markdowns on that in order to help clear the inventory. DSW (NYSE: DSW) was one example, where they're approaching this year much more cautiously.

Kline: There's always going to be things you can't predict. We've talked about, I'm in Southern Florida. If you go to Target right now, there are no warm-weather clothes, because they have basically decided -- even though it's still 75, 80 degrees some days -- they have decided it's fall, or, our version of fall, so there's long-sleeved t-shirts, there's pants. That's an inventory bet. That's them saying, "Well, we could keep the shorts around, but we might get stuck with them, so let's take a longer season." That's why it's always hard to buy gloves in the middle of winter, because they have already moved on to summer. As a retailer, the more you know about what people want, the better you can manage your inventory. That goes back to store pickup. If I know 36 hours in advance that I've sold 17 espresso coffee makers, that tells me something about buying patterns. You could probably project that out to how many are going to get picked up in the store and know how much inventory. It all becomes data that can let you manage your products more efficiently.

Shen: Absolutely. Going back for a second to some of the apparel retailers that got hit with the crazy warm weather that we saw last year, and we're seeing a little bit of this year as well -- with DSW, for example. I really wanted to point DSW out because I like this description that management has given for their stores, in the idea that, basically, their stores are just warehouses or fulfillment centers that happen to open their doors to the public every single day.

Kline: And that's the model Wal-Mart is moving toward, where you're leveraging the fact that you have these giant stores. And sure, you're going to get some walk-through traffic. But it's all about what you sell, and having the thing someone wants, when they want it. Amazon actually does that better than anyone, making sure they have in a local fulfillment centers, the razor blades you're going to order, because you ordered them seven weeks ago, and it has an algorithm that shows you're going to order them again on that eighth week.

Shen: Absolutely. In the end, if they can, with the local in-store pickup, avoid the shipping expense, or reroute orders that are shipping from -- one of these DSW stores that have excess inventory on hand -- well, they effectively help to clear that inventory out without resorting to some kind of clearance or markdown and can help preserve some of their profitability.

Kline: Apparel, for DSW, for shoes, for clothes, there's a huge advantage to in-store pickup in that I'm at least going to look at it, if not try it on. There's always the possibility, if I order from DSW online -- which my wife does all the time, and I would say she sends back nine out of 10 pairs, because it's not quite what she wanted, it doesn't quite fit right. If she does the in-store pickup, she has the ability to pick it up, try it on, and give it back.

Shen: And if it doesn't fit, try on the next size up or down.

Kline: Absolutely. That applies to pretty much any product. How disappointing is it when you get your new 56-inch television and the bezel on it isn't what it looked like in the picture, and it's not what you want, so you have to go through the whole trouble of putting it back in the box and sending it back. Driving people to stores, but also using digital technology, is what physical retailers can do that Amazon can't.

Daniel Kline has no position in any stocks mentioned. Vincent Shen has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Amazon.com. The Motley Fool recommends DSW. Try any of our Foolish newsletter services free for 30 days. We Fools may not 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.