Memo: Full Stack Retail

While many seem to be counting eCommerce out, retailers and manufacturers are preparing for a future of increased direct-to-consumer volume and the logistics systems that support it.

Over the past two years, we have witnessed disruption after disruption. A shipping canal blocked, union employees standing down en masse, the U.S. postal service slowing to a halt, an international bridge protested by truckers, and a container ship on fire with 4,000 vehicles. Over this time period, freight forwarding has increased 500% in costs, retailers have begun to acquire trucking and container resources. Shopify has invested and divested in warehouse management, and Amazon has become the number one buyer of commercial real estate. Technology and retail brands must be more than that to survive the turbulent change that defines this era of retail.

The spread of the ideals of Full Stack Retail is well underway. It’s becoming a go-to strategy for enterprise retailers who want to manage costs, quality control, and , and American Eagle Outfitters is reaping the benefits of its operational investment. Over the span of three years, we have covered: AEO’s bold pivot, two expensive acquisitions, and its big bet on expanded competency.

Deep in the archives of the company’s transactional history, American Eagle Outfitters set the stage for how it would do business nearly 25 years later. From 1997:

American Eagle Outfitters integrates its merchandise production and sourcing. When American Eagle purchased Prophecy in May 1997, it gained the ability to monitor the production of its clothing and to improve its sourcing. The company hopes the end result will be lower costs and more timely delivery of clothing to its stores.

The 45 year old, Pittsburgh-based apparel company moved to mitigate supply chain disruptions and increased freight costs by purchasing two logistics companies, AirTerra (for an undisclosed sum) and Quiet Logistics for $350 million. While eCommerce companies like Amazon and Shopify have added to their empires by bringing warehousing and shipping operations in-house, it is still surprising for a mall retailer of AEO’s size. But the unexpected decision was fitting for unprecedented times. Here’s what we published in October 2021 on the idea:

The world’s supply chains were already in a precarious state before the pandemic. Now, after a period of extreme disruption, manufacturers can’t meet demand, resulting in a chain reaction of delays and out-of-stock products. While out-of-stock inventory can signal high demand and appeal for a brand, eventually the allure runs out when there’s no back supply. This is an all-too-common symptom of our current supply chain disruption that AEO is working to minimize. Similarly, companies like Walmart, Target and Amazon are investing in cargo ships to avoid delays facing other businesses.

The AEO pattern of acquisitions breaks a decades-long cycle of reducing costs by offshoring blue collar business functions.

We predicted that more retailers would take similar steps to insulate their supply chains, improve their own ability to respond to fluctuations in demand. Now, American Eagle wants to be part of that adoption. Nine months later, and a new Business of Fashion report revealed the outcome of American Eagle’s bet on logistics. It says it’s shipping orders faster and cheaper. The next move is to spin that success into a separate business, providing logistics services to retailers as they continue to face problems as a result of pandemic disruptions.

Let’s unpack exactly what American Eagle bought that it’s in position to facilitate a logistics outsourcing business to those companies who are not yet capable of insourcing like AEO has.

Quiet Logistics uses robotics to fulfill shipping orders for eCommerce brands by sourcing inventory as close to the customer as possible, cutting down on delivery windows as well as creating a more efficient supply chain.

AirTerra is a last-mile delivery service that helps smaller-volume retailers combine deliveries in order to get access to less expensive deliveries typically reserved for the biggest retail companies.

The majority of small retailers and challenger brands still lack the ability to manage either process at a high level and now, American Eagle operates it for its own operation. This particular set of skills separates the haves and the have-nots. This was exacerbated over the pandemic, as big-box retailers with deep pockets were able to work around slow ports and delays by chartering their own ships and planes to make deliveries on time and fulfill inventory shipments. In contrast, smaller retailers were left to fend for themselves as the cost of cargo dramatically rose over the months between March 2020 and January 2022. Freight management and interest has changed drastically as a result of the pandemic.

Now, Airbus – the world’s second largest aircraft manufacturer – says that it expects its global freighter fleet to climb to over 3,000 aircrafts by 2041, to account for eCommerce outpacing general cargo over the next two decades.

Over the next two decades, Airbus estimates, world air cargo will increase by 3.2% annually from the pre-crisis baseline of 2019.

But it puts the growth rate for e-commerce at 4.9%, far higher than the 2.7% of general cargo, and Airbus expects e-commerce to account for 25% of traffic in 2041 compared with the 2019 level of 17%.

American Eagle’s plan is to boost its own business by creating delivery solutions that can help challenger brands compete. From the Business of Fashion:

American Eagle wants to use that platform to build an “open marketplace” where retailers share warehouse space, delivery trucks and more. By pooling resources, small and mid-sized businesses would pay less for logistics, making them more competitive with giants like Amazon and Walmart.

Convincing rival retailers to cooperate won’t be easy — many have already invested in their own warehouses and delivery networks and won’t want to share. But new logistics models are gaining traction as e-commerce fulfilment costs rise: Shopify has its own end-to-end fulfilment platform that promises two-day delivery and fast returns, and FedEx partnered with Salesforce last year to offer a similar service.

This is a lighter-version of Full Stack Retail in action; American Eagle saw the writing on the wall. Front office retail and back office supply chain and logistics have become equally important as retail evolves to account for growing omnichannel complexities. Companies must deliver goods quickly and efficiently, keep products in stock and meet higher customer expectations. Companies like Amazon and Shopify have helped small and medium-sized retailers to compete with incumbent brands. Now, American Eagle Outfitters is now throwing its hat into the ring to facilitate its own platform. Chances are slim that it will become a competitor on the same level as two companies that have dedicated years to perfecting fulfillment, but it’s proof that there’s space in the field for more competition. The market no longer punishes companies that own vertical systems – it rewards them.

As long as American Eagle can do both without sacrificing its core product, it appears that it’s setting itself up for a superior system of front office and back office diversification: a new profit center (a win), a fortified supply chain (another win) and a competitive logistics strategy that will get stronger over time (another win). Look for leading retailers like Nike and Adidas to follow suit. Supply and logistics management are no longer Amazon and Walmart’s territory alone.

American Eagle Outfitters is in the shipping business. And the most innovative companies are preparing for a future of increased shipping volume buoyed by a retail future where digital sales and physical sales compliment one another without stressing the whole.

By Web Smith | Edited by Hilary Milnes | Art by Christina Williams and Alex Remy