The Elves Go High Tech: Toys R Us and the New Logistics of Christmas

Stores used to be physical locations where you went and looked at what they had to offer, selected an item for purchase, bought it, waited while the clerk or a special holiday worker wrapped it - and then you took it home.

Fix that image in your mind's eye, because you may outlive it.

Increasingly, stores are becoming fulfillment centers where products already selected via the internet are ordered for delivery from a warehouse hundreds or thousands of miles away. Not infrequently, the warehouse and the services it provides may not even be owned by the store. And the inventory may be owned by the manufacturer. The store serves as an order-taking intermediary.

While malls and stand-alone stores still exist - and are, in some cases, doing decent business this Christmas season, the following article explains how and why that model may be doomed.

Amazon has demonstrated the viability of the of the alternative model and others are scrambling to follow suit. While some may bemoan the passing of of shopping as theater, the crowds on Black Friday suggest that there is still plenty of life in it for discounters and luxury items. To remain competitive, however, many other merchants are having to experiment with more innovative approaches. This will almost certainly benefit the consumer. The marriage of convergence and convenience may well result in better selection at lower cost with more efficient delivery.

The cost - of homogenization of desire - is a trade-off that cash-strapped consumers seem willing to make. It is, conceivably, a transitional phase to a permanent solution: holographic booths rather than stores with physical inventory, perhaps. How the accounting, legal and organizational imperatives will adjust or lead is not entirely clear, but in the battle to lower costs, the tangible will probably cede to the ephemeral. JL

Ann Zimmerman reports in the Wall Street Journal:

The world's largest toy chain earlier this year began turning stores into online order-fulfillment centers where workers pluck toys from shelves and ship them to customers, part of an ambitious but complicated plan to use its inventory more efficiently and gain an edge over online-only competition As Toys "R" Us Inc. courts shoppers with a range of options for online purchases or in-store pick-ups, it is counting on a former U.S. Army logistics officer to make sure the presents arrive on time.

Marie Robinson, who helped supply soldiers with food and ammunition during the first Gulf War, now oversees the movement of Barbie dream cars and Furby talking dolls from shipping ports to the chain's 600 U.S. stores. She also makes sure $1 billion a year in Internet purchases reach customers' doors.

It is an increasingly important job at retailers—perhaps nowhere more so than at Toys "R" Us, which faces mounting threats from online rivals such as Amazon.com Inc. AMZN -1.06%and is under pressure to improve delivery speeds as well as lower prices to maintain market share.

"When I got this job, my younger son, who is 17, his face lit up and he said, 'My mom is the new Santa Claus,'" Ms. Robinson, said as she led a tour of the cavernous distribution center here that feeds 140 stores and, during the peak holiday season, 11,000 daily Internet orders in the Northeast.

"When you think of Santa's workshop, a nice wooden Swiss chalet comes to mind," Ms. Robinson said. "But today it looks more like NASA Mission Control."

Being a retailer's Santa isn't easy.

Despite robust Internet sales, total revenue at Toys "R" Us has remained roughly flat at $14 billion over the past two years while profit has declined, suggesting that it is merely shifting sales from stores to online instead of expanding its customer base. As the toy chain headed into the holiday season, U.S. sales were down 4% in the third quarter ended Oct. 27 in stores open at least a year.

After superstorm Sandy slammed the New York region in October, Toys "R" Us had a big logistics problem: 30 containers filled with playthings slated for sale on Black Friday were stuck on a ship at sea.

After learning that a shipping company was diverting the vessel from New Jersey to the Bahamas, the 45-year-old Ms. Robinson, a petite blonde who formerly worked for Wal-Mart Stores Inc., WMT -0.20%convinced the shipper to make an unscheduled stop in Baltimore instead so the cargo could be delivered on time to stores.

Toys "R" Us Chief Executive Jerry Storch said he believes the future of retail belongs to companies that can offer compelling physical stores as well as online portals that allow customers to shop from phones or computers, and pick up the merchandise in stores as well as at their home.

"Soon Internet-only companies will be physical or they will have service problems," Mr. Storch said. Other store chains, including Wal-Mart and Macy's Inc., M -0.37%are attempting similar all-things-to-all-people transformations.

Retail experts say the shift, if done right, can give store chains a competitive edge over online-only rivals, allowing them to ship longer during the holidays and save costs, and to possibly achieve the holy grail of e-commerce: same-day delivery.

"There is a strategic advantage to those who do it very well before everyone does it," said Al Sambar, a retail strategist at consulting firm Kurt Salmon Associates.

But the current systems need fine-tuning. If a store does too much packing and shipping it could disrupt in-store shoppers. If it doesn't do enough, it can be more expensive than shipping from a distribution center where workers are doing it all day. "It can be three to five times more costly," Mr. Sambar said.

Filling orders from stores also adds new layers of complexity. At Toys "R" Us, analysts have to determine whether it is ultimately more economical to ship from a company distribution center or a store, depending on how much inventory is in each and how fast it is moving.

For example, it might be more profitable to ship from a store farther away from a customer, if it has slower-selling inventory that might otherwise be marked down.

"It's just math," said Ms. Robinson, playing down the challenge. Much of her time, she said, is spent "breaking down the silos" between the facilities that exclusively filled Internet orders and the depots, like the Flanders, N.J., warehouse, that formerly shipped only to stores.

For the stores, the biggest challenge is not knowing how many daily Internet orders they have to fill, said Troy Rice, executive vice president of stores at Toys "R" Us. Still, the stores managers like the program, because "it helps meet their overall sales objective," he said.

Mr. Storch said the undertaking will ultimately pay off because it will increase the amount of inventory the company can offer online, and increase its overall profit.

It also makes use of retailers' giant stores as sales shift to the Web.

Toys "R" Us attributes its middling results in recent years to a global slowdown in videogame sales, economic weakness in Europe and children's increasing preference for digital playthings. The closely held company filed to go public in May 2010 but has yet to move ahead with an initial public offering.

Ms. Robinson prefers to focus on parts of the business she can control, such as the ability to track down Furby dolls, a coveted toy this holiday season, within its far-flung store empire and ship them in time for the holidays.