Retailers acting as 3PLs: Columbus’ Abercrombie & Fitch explores new territory

Retail

Recently, Abercrombie & Fitch announced a new distribution strategy, which could be full of promise or full of problems.

Its outlined strategy will have the company using its distribution capabilities to do more than fulfill orders for its own customers — A&F will also commit to fulfill orders for other companies.

Many organizations popping up with an online presence are limited by their ability to effectively distribute their products and are in need of good partners. Based on this trend, third party logistics providers (3PLs) are an active and growing part of the distribution ecosystem.

The question is whether a company like A&F can be successful in this capacity given its rich distribution capabilities.

 

The positives

Diversification of revenue — There is no doubt that success in this model would allow A&F to realize new revenue that it otherwise would not capture. In a time where the only real measure of health for a retailer is same store sales or an increase in its own online sales, finding creative ways to generate new revenue streams is admirable.

 

Squeezing the most value out of distribution assets — Distribution centers are often built with additional capacity to allow for future growth or peak seasons. During off-seasons or other periods of stagnant growth, it is easy to observe plenty of empty areas and underutilized material handling equipment.

This investment in infrastructure is a distinct advantage and any opportunity to use latent capacity is an opportunity to improve the bottom line.

 

The concerns

Realizing margins — Third-party logistics is not an easy business model. In short, you are always at the mercy of your customers’ expectations and may not always have the best forecast of what will be hitting your dock door, and what order volumes will look like on the outbound side.

This makes it very hard to effectively plan both physical and human resources, yet service levels always need to be met. In the 3PL conundrum, it may be easy to generate the revenue, but the trick is realizing the profit on that revenue.

 

Operational focus — In this model, there is one thing A&F can’t do: negatively impact its own internal fulfillment obligations. To avoid this, attempts to segregate operations could work, but would also likely lead to an ineffective use of resources and therefore raise concerns on maximizing margin.

The real trick here will be how A&F balances the needs of its core operation while also bringing new business into the facility.

 

Fierce competition — As mentioned, 3PLs are not new to the distribution ecosystem; in fact, they are growing. Just the same, online giants like Amazon continue to expand their reach and capabilities.

Does this mean there is no room for new players? Of course not. The issue here will be how a more traditional retail organization like A&F will stack up in a competitive situation versus a dedicated 3PL model. It will need to exhibit distinct advantages through the maturity of its systems and processes, which competitors in this space may not have.

 

In a market like Columbus, with its high concentration of distribution facilities, A&F’s new model is one to watch.

It is not hard to envision how an established brand like A&F will be able to generate interest from potential customers.

The challenge will be how A&F execute and if it is able to make this a model that does more than just generate awareness and revenue, but rather improves the bottom line.

Key decisions around operating structure, the contracts A&F establishes with customers and the way in which it allocates its available resources will dictate if this turns out to be a failed fad or viable trend. I, for one, will be watching closely, and I imagine I won’t be the only one in Columbus doing so.