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 

Member Brief: What Walmart Signals For eCommerce

The next months of retail holidays will determine eCommerce’s resilience against rising recessionary pressures. So far, it doesn’t look great for short-term eCommerce growth. Amazon is focusing on its strengths while reducing costs associated with those efforts. Walmart’s actions are emblematic of the direction the digitally-secondary retailers will steer in the coming months.

This member brief is designed exclusively for Executive Members, to make membership easy, you can click below and gain access to hundreds of reports, our DTC Power List, and other tools to help you make high level decisions.

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Memo: Middle Class Opportunity

In what can only be characterized as a leading indicator for shifting economic tides in retail, the middle-class brand is beating the S&P and leaving a trail of upper-scale competitors in its wake. It’s emblematic of the slowing bifurcation of consumers and the retailers that support them. This is from our report on the Gilded Age 2.0, a period that seemed to last for about four to five years (2017-2022). 

While history doesn’t repeat itself, it does rhyme. The economically-disadvantaged deliver food, novelties, alcohol, and commodities to urban sprawls and gated suburbs – within the hour. Across the country, the net worths of the top 1% have become noticeable as conspicuous consumption of products and services have risen; the rise of platforms like StockX, Hodinkee, and Uncrate demonstrate this. For the top .01%, there are more 40,000+ square foot homes than there were in the Roaring 20’s. Retail is responding to economic realities of today. Wealth is galvanizing; retail strategies should adjust to meet the shifts head on.

As well-funded resale sites like The RealReal, thredUp, and Poshmark battle it out online, spending big money on marketing while rapidly losing valuation, a decidedly offline company is quietly winning. Its success is emblematic of the power the long middle wields in retail today. That power is only growing as bifurcation trends putters out.

Winmark owns franchises of secondhand shops across the United States to include: Plato’s Closet, Play It Again Sports, and Once Upon a Child. You’ve probably never heard of its parent company but you have at least driven by one of the shops in a suburban strip mall. Forbes profiled the company, which is a profitable, public, billion-dollar business that goes so far under the radar that it doesn’t do earnings calls. Twenty investors own 80% of the company:

Call it the tortoise of the resale wars. The company, which went public in 1993, before hardly anyone was shopping on the internet, has taken a slow-and-steady approach. New stores are opened at a modest pace, allowing the company to be selective about the franchisee applicants it accepts. It hasn’t overspent on splashy marketing.

The resale industry (formerly known as second-hand shops) is growing fast. The segment could double to $82 billion by 2026, according to an industry-funded report—fueled by a generation of young shoppers interested in buying unique pieces in an affordable, environmentally friendly way. It’s getting an added boost at a time of soaring inflation and supply chain issues, with many shoppers flocking to thrift stores after encountering high prices and out-of-stock items at big-box retailers.

Winmark’s business model is the right one for the moment. It offers affordable, practical goods for middle class Americans who, as Once Upon A Time franchisee Diane Hubel says, need to be efficient with their dollar as inflation has spiked and wages remain stagnant for most. It even offers them a way to make money in return by selling off stuff they no longer need. And because the products are secondhand, the supply chain problems plaguing other retailers don’t exist within Winmark’s portfolio of retailers. The stock isn’t guaranteed, which can be a disadvantage, but it’s reliable in that it can typically provide some option, even if it’s not the first preferred.

Then there’s the profitability. Winmark will not build an unprofitable operation.

Winmark has dabbled in e-commerce, but only when the prices are high enough to make it profitable. For instance, at Music Go Round, which sells things like used saxophones and electric guitars, the average order value is over $250, so it launched a website to sell goods online. It has no such plans for clothing stores like Plato’s Closet or Once Upon A Child, where the average item costs under $10.

As laid out by Forbes, Winmark’s online competitors are not profitable and their valuations have been sliced their IPOs. It’s likely that if they were still private, they would avoid IPO altogether:

These DTC competitors were revolutionaries of an antiquated secondhand market but the business mechanics are hard to make work. They’re learning that now, and the boom times are over. Winmark is leaner — it doesn’t have to invest in the extensive process of listing secondhand items for mass consumption.

All of this makes for a story of a retailer who is winning in difficult times. It’s not flashy. It hasn’t raised venture capital. But it’s there for a middle class that is finding themselves against market forces working against them. It’s a bleak outlook right now for many — meaning simpler, down to basics businesses are finding themselves in better position than the recent years defined by consumer bifurcation and the companies appealing to a luxury consumer.

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

Also read: Sak Pase, a reflection on our last several weeks and the recent missionary trip that I was fortunate enough to embark on.