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2021 was a year of supply chain disruptions. It was also the year American Eagle Outfitters (AEO, Inc.) embraced the role of supply chain disruptor.
With the digital side of its business growing, the company turned heads in the retail world with a pair of acquisitions to strengthen its supply chain.
- In August, AEO acquired AirTerra, a logistics startup that aggregates packages from multiple shippers, and uses a “point-to-point” network to ship packages across certain zones. This enables cheaper and faster delivery.
- In December, it acquired Quiet Logistics for $360 million in a move designed to enable same-day and next-day shipping from American Eagle stores. The third-party logistics company specializes in order fulfillment and returns management services.
The two moves were key components of a remade supply chain for AEO. The company started to put the pieces in place prior to the pandemic, COO Michael Rempell said at ShopTalk this week. Previously, the company had an effective model that was set up for a traditional retail approach, with distribution centers, technology and ship-from-store.
But EVP and Chief Supply Chain Officer Shekar Natarajan told company leaders that owning the supply chain and distribution, just like the largest retailers, would be critical for the future. Executives soon embraced this. As the company looked to make changes, it was focused in three areas:
- Making inventory more productive by pulling it out of stores and keeping it closer to customers at distribution centers.
- Making labor more productive so that employees at stores were not fulfilling orders.
- Improving deliveries to make them faster, more predictable and cheaper.
AEO had the plan. Then the pandemic arrived, and the company had to put it into action quickly. By cutting SKUs and opening more distribution centers, it made fast strides. It also partnered with other companies to support specific components of the process. Yet to achieve "hyperscale" that Natarajan said would be necessary, the company’s leaders decided that making the acquisitions was the best way to get there.
It underscores the importance of supply chain investments for growth in ecommerce. The acquisitions added fulfillment centers and capabilities. They also added more retailers using the company’s supply chain services. As of the time of the acquisition, Quiet Logistics worked with Outdoor Voices and Mack Weldon, while AirTerra remains an independent brand. Now the compny is partnering with others, offering a path for brands to work with them. AEO sees a "massive unmet need," said Rempell.
"There's a supply chain revolution happening and we want to lead it,” Rempell said. “We want to work with other retailers and brands. We think it’s leveling the playing field and allowing like-minded companies to compete with Amazon, Walmart, Target - the biggest retailers in the world.”
It's a classic case of how a part of a business that is not a company's primary product can become a growth center if it effectively solves a problem for others. American Eagle wasn't founded as a supply chain company, but it is now a meaningful player in the business. With supply chain challenges and the continuing growth of ecommerce, American Eagle sees this infrastructure only becoming more important.
“We’ve always been customer focused,” said Natarajan. “During COVID, we also realized supply chains are a customer-facing function.”
Trending in Operations
"Fashion ecommerce is one of the most cumbersome customer experiences that exists," said Rent the Runway CEO Jennifer Hyman.
The rise of generative AI is bringing with it a groundswell of interest and concern about how the capability to automatically synthesize information and create something new will change how we work.
Given that AI will sit within the architecture of our digital lives, it’s also worth considering how the technology will introduce new tools for other aspects of life, as well.
For two ecommerce innovators in the apparel space, it’s a time to explore how it will transform shopping. Rent the Runway is set to roll out new AI-powered search capabilities, while Stitch Fix is drawing on a long history with data science and machine learning to personalize the inventory buying process.
Here’s a look at the initiatives underway at each company, and their visions for the future:
Rent the Runway: From search to concierge
Rent the Runway is putting a focus on the customer experience this year as it seeks to retain more subscribers and continue a yearslong push toward profitability.
This is resulting in the introduction of a variety of new initiatives, from the addition of an extra item to all orders to speeding up page load times. Yet as CEO Jennifer Hyman zooms out, she sees change being necessary on an industry-wide level in fashion. Beyond adding new features, AI can play a transformational role.
“I think that fashion ecommerce is one of the most cumbersome customer experiences that exists. You are searching through pages and pages and pages of content to find the items that you like and no one likes doing this,” Hyman told analysts on the company’s earnings call this week. “As an industry that still is selling physical products, AI is going to be -- fashion is going to be a major beneficiary as an industry.”
As a rental service, Rent the Runway has a distinct niche in fashion that lends itself to AI’s advantages, Hyman said. As opposed to a retailer that a consumer may visit a couple of times a year, RTR is used frequently by customers. So Hyman said there are opportunities to turn Rent the Runway into a “utility” by creating a more seamless experience.
This frequent use also provides a “highly unique” dataset, Hyman said. They know what a customer is planning to do based on what they rented. They know whether she liked or disliked an item, and many customers are reviewing 10 items per month. They know her size and how an item fits. This can be put to work in tools that allow customers to ask questions, and find answers.
The first application that combines AI and these advantages will appear in the coming weeks, when Rent the Runway plans to launch a beta of AI-driven search. The tool will allow customers to search for common terms or use cases for an item. So a person will be able to write “Miami vibe,” “‘clambake in Nantucket,” or “tropical motifs,” and receive results about what to wear for such an occasion.
The goal is to help customers sift through the endless aisle, and instantly finds what's right for them.
“I think that across all fashion sites, all over the world, the way that people are searching for product is fairly vanilla, it's fairly functional, right?" Hyman said. "You can go to a site and search for a T-shirt, you can go to a site and search for a black-tie gown. The fact that we're going to be able to enable our customers to search how they actually want to use this closet in the cloud, to search for items to wear to my beach bonfire this weekend, that is a completely different way to search, and I think that it really brings out the value proposition of what a closet in the cloud is all about."
Hyman sees this as a first step in the company using AI models to improve the product experience, and expects more tools to appear in the coming months. RTR is also introducing an SMS concierge experience for onboarding that allows customers to text with a member of the customer service team. The company is already exploring ways that AI can be incorporated into that tool, as well.
In the longer term, Hyman said the company has a vision that will leverage AI to allow customers to communicate with Rent the Runway asynchronously across different modalities, and have a stylist that is constantly available to recommend items, pick out new inventory and answer questions.
“If we are utilizing AI appropriately over the next few years, I see no reason why someone even has to come to our website,” Hyman said.
Stitch Fix: Inventory buying and beyond
Stitch Fix has long married AI with human curation to provide outfits on a subscription basis.
“For years, we have utilized capabilities in generative AI, injecting scores and language into our personalization engines and, more recently, automatically generated product descriptions,” CEO Katrina Lake told analysts. “We have also developed and implemented more advanced proprietary tools such as outfit generation and personalized style recommendations that create a unique and exciting experience we believe is unmatched in the market.”
A new area where the company is applying AI is inventory buying.
“We have historically utilized a number of tools to make data-informed decisions with our inventory purchases,” Lake said. “Now, directly leveraging our personalization algorithms, we have developed a new tool that creates an exciting paradigm shift, which will utilize math scores at the client level to drive company-level buying actions. We expect the clarity of demand signals at the individual client level to drive more proactive and efficient inventory decisions as a company. And because of this, we expect to see higher success rates on fixes and drive increases in keep rates and [average order value] over time.”
Early results are promising. When compared with existing buying tools, testing showed a 10% lift in keep rate and AOV. By the end of this quarter, Stitch Fix expects 20% of all purchase orders to be algorithmically informed.
With experience using AI and a team in place to build, Stitch Fix is investing in the technology. Like Rent the Runway, it also has a unique dataset that offers an immediate advantage.
Here are Lake’s thoughts about how Stitch Fix’s AI strategy:
One of the things that I love about our experience is that we have generative AI that's really in more of a visual format. And so, the outfits that we have in our app, those are actually taking into account your preferences, what we know about you, and then in combination with what we know that you own in your closet. And to be able to kind of continue to push that technology and to be able to continue to give people more value in their experience with Stitch Fix, that's a really good example of, I think, a capability that is, firstly, really aligned with our capabilities around data and personalization and really unique to us.
And then I think it's also really compelling because I really think that pushes us as we think about what that addressable market is. I think if we can push outfits to be something that can be an asset to everybody, I think that is a universal thing that people would love to be able to have, is to have access to advice on a daily basis around what to wear and how to wear it.
While these are distinct companies, their plans lead us to a common conclusion: While the talk around generative AI might be new, many technology-forward companies already have assets sitting inside them that can be leveraged to build new tools. Uncover what’s already there, learn about the AI’s capabilities and develop a solution that's right for your organization. Then, talk to customers to determine how to improve it. It might mean commerce looks different, but that’s okay. The point is to create a better experience.