How American Eagle Reinvented Its Fulfillment Strategy (2023)

Summary.

Faced with pandemic-related disruptions and increasing competition from Amazon, American Eagle decided it needed to take control of its e-commerce delivery. That led to two acquisitions and a new strategic question: Should the delivery companies it acquired still serve other customers, including if they were American Eagle competitors? Ultimately, the company decided that it should, opting in effect to share its supply chain with other retailers in a bid to compete with Amazon.

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The Covid-19 pandemic hit American Eagle Outfitters hard. At first, people had little interest in buying the latest fashion items while they were isolated indoors. What shopping they did do happened online, which meant retailers were even more dependent than usual on distribution channels they did not control. Then came delivery snags and price increases by distributors, as households spent record amounts on goods in response to the pandemic and government stimulus.

What started as frequent increases in shipping rates by transportation providers moved quickly into what many in the industry considered abusive price gouging and, for American Eagle and some of its competitors, a notice from UPS that they would no longer handle their shipping businesses. Yes, FedEx, UPS, and other national carriers were so inundated with parcels to transport that they started firing their least profitable customers. American Eagle, despite its history and considerable volume, was fired by UPS. That led one of us (Natarajan), who worked as EVP of Supply Chain at American Eagle at the time, to ask: “What if FedEx decides to fire us as well?”

That question was a tipping point for American Eagle and potentially for the retail industry overall. The company decided it needed to take control over its supply chain, including the ability to more cost-effectively deliver e-commerce orders. And that decision led to another change of strategy: American Eagle decided that to control its distribution, it should partner with some of its competitors and brands in markets other than fashion apparel.

Taking Control of Distribution

The shift started with the conclusion that American Eagle needed to control its transportation and fulfillment to support e-commerce orders, rather than relying on national carriers. Being a global fashion retailer, this was no easy task. Just on American soil, the company required nearly 100% of geographic coverage as American Eagle shoppers were virtually everywhere where a teenager lived.So Natarajan devised a plan to increase control of their American supply chain, first by buying Airterra, a small transportation startup, and building its national transportation network for the middle-mile logistics portion. And second, by buying Quiet Logistics, a last-mile fulfillment business.

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While it was not an easy decision, involving nearly half of one billion dollars of committed capital, the American Eagle board came around to the need to control its destiny by controlling its supply chain.

Airterra was small and not a major integration challenge. Parcel transportation is often divided into three sequential phases: first mile goes from source to an intermediary warehouse; middle mile crosses an extensive portion of the country; and last mile goes from a fulfillment center to a shopper’s doorstep. Airterra fit relatively seamlessly, handling middle-mile transportation for American Eagle.

Integrating Quiet Logistics was not as simple. Quiet Logistics is responsible for picking items off shelves in a fulfillment center, packing them, and shipping them off to last mile operators that deliver parcels to peoples’ homes. In addition to American Eagle, Quiet had 60 other customers for which it provided robot-assisted picking, packing, and shipping services across seven different fulfillment centers in the U.S. The question was what to do about these customers. Now that Quiet was a part of American Eagle, should it keep on serving its other customers? Some clients were even American Eagle’s fashion competitors. Should American Eagle fire them? If it did, it would only be utilizing 50% of Quiet’s capacity. This would result in the effective cost per item shipped to drastically increase — in effect, shooting ourselves in the foot. On the other hand, serving other companies and competitors could potentially create loss of focus, at least, or conflicts of interest, at worst.

Two realizations led to the decision that Quiet would keep serving other customers. First was the realization that if American Eagle’s competitors gained an edge in the form of lower delivery costs, that did not necessarily have to come at American Eagle’s expense. Far from it: Both parties can gain cost savings from economies of scale, which is crucial in supply chains. That meant that Quiet should keep serving American Eagle’s competitors if it wanted to benefit from the collective scale economies pooled together.

The other realization — a higher order, strategic one — was that the imminent risk was not that any of these competitors served by Quiet could one day put American Eagle out of business. The bigger, more existential threat was from Amazon and the possibility that its delivery cost advantage would keep growing and consumers would shop more and more on the Everything Store.

These two realizations solved the dilemma. Not only was Quiet going to continue serving other businesses, it would also actively search for new customers to join. The hypothesis was that, as each new customer brought their scale in the form of shipments, all current customers would equally benefit from lower average shipping and fulfillment costs.

The Three C’s of Distribution

The other of us (Teixeira) was, until a few years ago, a full-time professor of marketing at Harvard Business School. In his Introduction to Marketing MBA course, students learned about the well-known 4Ps of marketing, one of which is place (or distribution). At this point in the course, students are taught about the iron-clad law of distribution. The three key decisions managers must make in distributing anything, from cars to clothing to canned pears, are (1) whether to retain full control of the distribution process or give some of it up by, for instance, hiring a logistics company; (2) the level of coverage, i.e., distributing their products expansively, regionally, or locally; and (3) the acceptable costs of delivering products.

Ideally, a supply chain manager would like to fully control all the operation, have the lowest costs, and the highest geographical coverage possible. Unfortunately, that is never possible. At HBS, students study case after case of companies in various industries and markets to come to the realization that, if you want full control and low cost, you have to give up on coverage; if you want control and high coverage, you have to give up on (low) costs; if you want low costs and extensive coverage, you have to give up control (i.e., hire another company to do it for you). As an efficient supply chain manager, you can choose two out of the three Cs to maximize, at most. You can never have all three. This law, mind you, applies only to manufacturing companies and retailers, not to logistics firms such as FedEx or UPS.

In theory, in order for retailers to get the lowest possible distribution costs, with the highest level of coverage in the U.S., all companies needed to give up some level of control. For American Eagle to have full control over its distribution, it would have had to stomach higher costs. Instead, it chose a different set of tradeoffs: Gaining only some control and aiming for lower costs and better national coverage by sharing a distribution network with other retailers.By sharing distribution, American Eagle found a balance between the Three C’s that better suited its strategy.

The Limits of Sharing

In addition to giving up some control (as compared to individually owning and operating your supply chain), there are a couple of challenges to sharing supply chain assets and collaborating in the delivery of e-commerce orders. First, it requires a certain degree of trust among partners. We have come to learn that that trust comes from operational transparency over time. Second, sharing happens more easily when what is shared is better than what one owns. Think of Airbnb. Home sharing works because people want to vacation in homes that are better in at least some respect than their own. Supply chain assets are no different. Managers will only share if they see a better, more resilient, technologically smarter, and less costly infrastructure than their own. Consequently, Quiet Platforms has been investing heavily in interoperability of all assets and in software to orchestrate the entire collaboration.

When some people hear “cooperation among competitors,” antitrust-related alarm bells go off in their heads. We remind them that there is nothing wrong with collaborating with your competitors if (a) it is not related to price fixing or (b) there is no harm to consumer welfare (e.g., loss of options or higher prices). In sharing supply chain assets, on the contrary, the goal is always to reduce consumer prices and shipping times. Preliminary resultsfrom the company’s analysis show significant value creation for all parties involved.

Global supply chains have provided consumers with low-cost products of endless variety. But, more recently, supply chains have buckled under their own weight and need more than marginal improvements to survive. Among the challenges is the threat of dominance by one or a few e-commerce giants — Amazon most of all. The experience of American Eagle and Quiet suggests an alternative future in which sharing supply chain assets allows small companies a fighting chance against the e-commerce behemoths. Their survival will help preserve consumer choice and provide for a healthy price competition. In fairness, this new paradigm does require a major change of mindset. It requires abandoning the private individual ownership model of supply chains for a more collaborative and sharing economy mindset. But forward-thinking retailers are realizing that shared problems require a shared solution.

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