How Best Buy is meeting the need for speed

LOS ANGELES – The scene looks almost like a giant 3-D chessboard. Box-shaped robots scoot across a grid high above the warehouse floor, moving up and down as they pluck items from among 30,000 bins filled with Best Buy's bestselling orders.

"They never get tired and they never get sick," said Rhett Briggs, general manager of a new Best Buy fulfillment center that opened in the Los Angeles suburb of Compton, Calif., in November. Located in one corner of an existing appliance warehouse, the automated system is designed specifically to handle the retailer's skyrocketing digital sales — and customers' need for speedy delivery.

"That's the name of the game," said Rob Bass, Best Buy's chief supply-chain officer. "How do we get closer to customers and fulfill orders faster."

Amazon made headlines in April when it said it would spend $800 million in the second quarter to make one-day shipping the default of its Prime members. Walmart followed suit, aiming to make it available to most markets by the end of this year.

Best Buy can play that game, too.

With the dedicated e-commerce center, along with its 1,000 stores and traditional distribution centers, Best Buy figures that 77% of its customers live in a ZIP code where it can now provide next-day delivery on thousands of items.

Best Buy has been working toward a goal of next-day delivery for years. In September 2017, it announced a multiyear plan to investors to add new small-footprint fulfillment centers in dense markets.

The e-commerce facility in Los Angeles was the first to go online. A second opened in February near the Newark Airport in New Jersey, serving New Jersey, New York City and Philadelphia. One in Chicago is expected to open in June.

The strategically located e-commerce operations allow the Richfield-based retailer to reach an additional 50 million customers, who can place orders as late as 8 p.m.

The company hasn't quantified how much it plans to invest in its supply chain, but the percentage of its capital budget set aside for projects in fiscal year 2019 and 2020 is at least double previous years. Three additional metro e-commerce facilities are on the drawing board.

In Los Angeles, Best Buy was able to carve out a slice of space from a 500,000-square-foot warehouse that is mainly used for large TVs, refrigerators, washers and dryers.

The compact grid that houses the bin system and about 75 robots occupies just 10% of the warehouse's footprint. In the old days of a few years ago, workers could walk 7 or 8 miles through the warehouse space to make individual picks. Now the 2-foot-by-3-foot robots bring the merchandise to employees and drop them onto a Lazy Susan of sorts, which is easier on workers' bodies.

As more people make purchases online, the need for a flexible supply chain has grown exponentially.

Best Buy opened its e-commerce facility in a location coveted by e-commerce and shipping companies for its proximity to shipping ports and Los Angeles International Airport.

Logistics has become a $1.5 trillion per-year industry, and it is one of the most complex. The increasingly rapid turnaround for deliveries requires automation.

But it takes significant investments and an overhaul of the traditional warehouse-to-store inventory model.

"The cost of fulfillment continues to be very high and it eats into profit margins," said Dan Gilmore, chief marketing officer for Softeon, a provider of supply-chain management software. "Amazon has the luxury of being able to absorb the costs and not do damage to its stock, unlike Target and Best Buy, which have at times been hammered by investors."

Indeed, investors pushed Best Buy's stock down 9% last August when the company explained that supply-chain investments and transportation costs had put a drag on the company's margins.

But Thursday, as the company reported strong first-quarter earnings, Chief Executive Hubert Joly called out the transformation of the company's supply chain as an essential investment.

Same-day delivery on thousands of items is available in 40 metro areas, with next-day in place in 60 areas, he said.

"We're still in the midst of this multiyear transformation," he said, "but we like where we're going."

Charlie O'Shea, a retail analyst with Moody's, questions whether retailers may be overinvesting in their efforts to pull off increasingly speedy delivery times.

"We don't know if consumers want same-day and how much they're willing to pay for it," he said. "It seems like retailers are moving faster than the consumer needs them to move. I have this feeling some large retail CEO or [chief financial officer] at some point is going to say, 'You know what? We overshot this. We scaled this for more demand than there actually was.' "

Jackie Crosby • 612-673-7335 Twitter: @JackieCrosby