American Eagle pitches internal supply chain platform for retail rivals

Shekar Natarajan is the chief supply chain officer at American Eagle Outfitters. He came to the dealer in 2018.

Source: Julie Stapen Photography

American Eagle Outfitters wants to be more like Amazon.

Not to get started selling everything from shoes to pet food to toilet paper. But to master a business function that became critical of retailers during the Covid-19 pandemic: the supply chain.

This is where Shekar Natarajan, American Eagles chief supply chain officer, comes into the picture. Since joining the apparel retailer about 3½ years ago, the company has acquired two supply chain companies for hundreds of millions of dollars and quickly began building a logistics platform that other companies – even their competitors in the apparel industry – can use as well.

It’s a bet that American Eagle can lead the industry into new territory with vertical logistics and diluted costs. Its peers will either emulate the model and play catch-up, or lean on the American Eagle in the long run.

According to Natarajan, the goal of the American Eagles is to “unburden” the global supply chain and thereby make it a common service for retailers. His belief is that brands competing for shoppers in clothing, makeup or home goods should not also compete for things like faster delivery windows and cardboard boxes.

Instead, if enough companies work together and gather resources, a conglomerate of retailers could send out as many packages daily as the Seattle-based e-commerce giant Amazon, and hopefully with profits, Natarajan said in a recent sit-down interview.

He calls the American Eagles’ common supply chain platform the ultimate “frenemy network.”

“The only way you could actually have Amazon-like scale, Amazon-like cost and Amazon-like options – you have to share,” Natarajan said. “Together we can have the same thing [package] volume as Walmart. … And in that way, companies compete only on what they do best, namely the product, the marketing and the customer experience. “

American Eagle created a graphic to visualize how small and medium-sized retailers can cope with e-commerce giants Amazon and Walmart.

Source: American Eagle

The Corona pandemic accelerated an existing opportunity for American Eagle, which reported a record revenue of $ 5 billion in fiscal year 2021, an increase of 33% over the previous year. As sales increased, so did revenue from e-commerce. American Eagle’s digital sales accounted for 36% of total transactions at the end of 2021, compared to 29% two years earlier.

This means sending more packages to customers, giving them fewer shopping bags at the cash register and moving inventories around to meet the newfound demand on the internet.

At the same time, backlogs and shortages have narrowed the global supply chain due to labor constraints, temporary factory closures and sky-high costs of manufacturing and transporting goods – just to name a few obstacles.

The American Eagle is not immune to these challenges. As a result, under CEO Jay Schottenstein, the company set out its vision of creating a streamlined model that can offer retail partners help with everything from ensuring multi-item orders are packed together, to speeding up home delivery.

“This strategy was laid pre-pandemic,” Natarajan said. “We’ve just accelerated the whole journey by almost four years.”

‘This is really unique’

In May 2021, American Eagle purchased AirTerra, a Seattle-based parcel shipping start-up, for an undisclosed amount.

Six months later, it announced it would pay $ 350 million to buy Quiet Logistics, which operates a handful of distribution centers around the United States to help meet shipments for brands, including menswear retailer Mack Weldon, athletic apparel start-up Outdoor Voices and bedding manufacturer Boll & Branch.

These companies, along with a handful of others, remain customers of what is now known as the Quiet Platform, the internal logistics branch of American Eagle. The division is run by Natarajan and a small but growing team that stays at an arms length from the central retail division. It recently added Saks Off Fifth, the discount department store, to its customer list.

According to Natarajan, retailers are signing multi-year agreements to be part of the Quiet Platform. He declined to comment on the financial arrangements.

CEO Schottenstein said at an earnings conference for American Eagle in early March that the company’s two acquisitions were already translating into cost savings, cementing a new “growth platform” for American Eagle.

The efforts also do not go unnoticed on Wall Street.

“For the many retailers investing in their supply chain, it’s not as common to buy upstream as this,” says Corey Tarlowe, an equities analyst at Jefferies. “This is really unique.”

Tarlowe said the investment should help American Eagle over time improve its inventory management, reduce the risk of write-downs and ultimately increase margins. The greater economies of scale the company can achieve, the better, he said.

To be sure, investors are waiting to see more evidence, and this is reflected in the stock’s performance in recent months, which is lagging behind the broader industry.

American Eagle shares have fallen about 60% since the news of the AirTerra deal first surfaced in late August. Year to date, the retailer’s share has fallen around 33%, compared to the S&P 500 Retail ETF’s loss of around 16% over the same period.

‘Not equal terms’

Prior to joining American Eagle, Natarajan visited major consumer-oriented companies including PepsiCo, Walt Disney Co., Walmart and Target – often within the supply chain division.

These experiences gave him a clearer perspective on the competitive advantages that some of the largest retailers in the industry have, he said, but also the disadvantages of so-called medium-sized retailers selling less than $ 40 billion or so each year. With $ 5 billion in annual sales, American Eagle fits the bill.

“I was always worried about what was going to happen to retailers in the middle,” he said. “Because it’s not equal terms.”

American Eagles chief supply chain officer, Shekar Natarajan, wants to create a logistics network that is better for the end consumer.

Source: American Eagle

And instead of creating a network solely for the benefit of American Eagle, he worked with Schottenstein to create a company that, if it grows large enough, could stand up to Amazon’s logistics arm or at least offer brands another option. .

“The reality is that none of us own our supply chain,” Natarajan said. “We manufacture goods in factories that are shared across retail. We move them in ships that are shared across companies.

“But shared capabilities – whether they are technological capabilities, fulfillment capabilities or transportation capabilities – are the future of this industry.”

American Eagles chief operating officer Michael Rempell said the apparel retailer – including its intimate and swim-centered Aerie business – is already more efficient at managing inventory and manpower, thanks to its quiet logistics business.

“We not only send fewer packages, and it costs us less … but [orders] coming to customers 30% faster than they were before, “he said in an interview. We see it as a huge business opportunity, “for both American Eagle and for Quiet Platform as a standalone company,” Rempell added.

Bryan Eshelman, CEO of retail at global consulting firm AlixPartners, said he can see the logic behind the American Eagles’ unique approach.

Retailers trying to build supply chain capabilities on their own in the midst of the Covid pandemic saw these efforts “come back to bite them,” he said, largely because it is so expensive to go it alone: ​​”There must be a better solution. “

The American Eagle clearly made investments that were “greater than its own needs,” Eshelman said. But it is likely to put the retailer in a stronger position in the future, especially as supply chain disruptions continue, he said.

American Eagle will not compete with other dealers for space for its goods on trucks and aircraft. It will pitch its own operations to its rivals.

American Eagle has projected its logistics business to contribute about 5 to 6 points to the mid-teen revenue growth it requires in fiscal year 2022. It also expects its supply chain business to balance in terms of profitability this year.

In the coming months, Natarajan will focus on onboarding more companies. The Quiet Platform counts about 50 customers today, but Natarajan hopes to grow this base closer to 250, he said.

“I’m basically trying to create Amazon-like opportunities and cost benefits without being Amazon,” he said.

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