How Nordstrom uses robots and shelves inspired by ants to deliver lipstick faster

NEWARK, California — If you're in retail these days, you're likely trying to solve these two problems: how to cut costs, and how to get products to your customers as quickly as possible.

Nordstrom thinks it has found a solution that will help it do both. And it starts at a warehouse in Newark, California.

The Seattle-headquartered company has tapped two new partners, robotics supply chain company Attabotics and parcel-sorting provider Tompkins Robotics, to test a more modern facility in the San Jose area. If successful, the retailer could expand its use to Nordstrom's eight other U.S. distribution centers.

Nordstrom hopes a speedier and slimmed-down supply chain will help it rise above other department store operators that are struggling to win customers over the likes of Amazon, Walmart and Target. Nordstrom's online sales are growing, up 16% in fiscal 2018, and make up 30% of total net sales, which were $15.48 billion last year. But revenue is meantime shrinking at its core department store business. So it's looking for ways to keep stoking this growth engine.

In Newark, California, Nordstrom has stocked row after row of shelving with all of its beauty merchandise to fulfill online orders for Chanel perfume, Kiehl's facial rubs and Yves Saint Laurent lip kits up and down the West Coast. Nordstrom is also using the center to help stock its stores in the area.

"We recognize that the supply chain is a critical component of being able to deliver on [our customers'] experiences," Ngoc Phan, vice president of supply chain at Nordstrom, said in an interview at the Newark facility earlier this week. "So we've been looking for solutions that fit inside our broader strategy. ... It's about opportunities to get product closer to customers ... and avoid extended shipping and fulfillment delays."

The combination of Attabotics' and Tompkins Robotics' technologies uses 90% less space than other alternatives, and allows the company to be more nimble and stock more inventory, Phan said. The Newark facility, which has been up and running since the spring, is roughly 340,000 square feet, while a traditional warehouse can span upward of 1.5 million square feet, she said.

Nordstrom currently offers same-day delivery for certain ZIP codes in California, Colorado, Illinois, New York and Washington, according to its website. But it plans to grow that option.

Nordstrom started working with Attabotics and Tompkins Robotics with its beauty products because that represents one of the company's top categories.

"And what we've learned, is that often when our customers are buying the product, they will order with another [beauty] product," Phan said. "And what it means for us, is that we're moving one of our top categories closer to the customer, which means that we can deliver their product to them faster, as well as ... it will also reduce the amount of packages that we're shipping to customers."

In the coming weeks, Nordstrom will install this same system in a new facility in Torrence, California, where it will hold inventory and process orders for its Local shops in Los Angeles.

When customers visit a Nordstrom Local, they aren't actually taking the merchandise they buy home with them. Instead, the stores are inventory-free locations for fittings and other services like manicures, pedicures and stroller cleanings. When placing an online order from home, customers can also select a Nordstrom Local as a spot for curbside pickup.

"Our hope would be to expand product categories, along with expanding this type of solution in other markets," Phan said. Nordstrom's eight other U.S. distribution facilities are in Portland, Oregon; Dubuque, Iowa; Cedar Rapids, Iowa; Ontario, California; San Bernardino, California; Upper Marlboro, Maryland; Gainesville, Florida; and Elizabethtown, Pennsylvania.

Nordstrom knew it needed to bring in outside experts to make its logistics vision a reality.

Attabotics, which was named to CNBC's Upstart 100 list earlier this year, is a 3-D robotics provider for fulfillment centers that replaces the traditional row-and-aisle configuration seen in warehouses with a patented storage structure inspired by ant colonies, which store items vertically. The Calgary, Alberta-based company says it can reduce square-footage needs, allowing companies to bring fulfillment centers closer to high-density, urban areas.

Warehouses have long been placed in more remote locations, where the cost of land is less expensive. But smaller buildings can get closer to metros.

Tompkins Robotics, meantime, has developed a parcel-sorting solution it calls t-Sort Plus, which uses autonomous robots that travel the shortest route possible to grab boxes and deliver them to their appropriate destination. Additional robots can be added during peak seasons, like the holidays, the company said. The Tompkins International unit is based in Raleigh, North Carolina.

With the two technologies, Nordstrom can store thousands of items in crates in one of Attabotics' so-called matrices, which tower more than 20 feet high. When items are needed, they're electronically picked and pushed toward Tompkins' conveyor belt, where more robots help Nordstrom workers sort the merchandise.

Phan said the combo — a first in the retail industry — is saving workers from walking miles and miles each day.

"We can [allocate] workers to functions that provide more value to our customers, like making sure it's the right item, it's high quality and its package is at the standard of which our customers expect from us — as well as labeled to their shipping destination of choice," she said.

"And we hope that investing in these types of [robotics] solutions help employees to want to come work for us, as well as for employees to stay working with us."

Phan said the technology is also helping Nordstrom process returns at a faster rate and resell a larger quantity of returned beauty merchandise, after items are inspected and cleared, based on a quality-standard test.

California, and specifically Los Angeles, has always been a testing ground for Nordstrom.

The company has 16 stores in the Los Angeles area today, serving 4 million shoppers. It brings in $1 billion in annual sales, making it the retailer's largest market, by far. Nordstrom has called New York a potentially $700 million market, for comparison.

Los Angeles was the first city to see an inventory-free Nordstrom Local store. It opened in October 2017.

In Los Angeles, during Nordstrom's latest-reported quarter, the growth in customers shopping in stores and online was 100 basis points higher than the company average, according to co-President Erik Nordstrom. On a post-earnings conference call, he said those customers are spending about four times as much as the average customer. And sell-through rates in the Los Angeles area — or the percentage of inventory that Nordstrom sells versus what it's receiving from suppliers — are higher than in other markets, "contributing to profitability," he said.

Nordstrom declined to quantify its supply chain investments, or disclose the terms of its tie-up with Attabotics and Tompkins Robotics.

Phan said Nordstrom is primarily focused on time savings. She said the upgrades in Newark are helping Nordstrom shave "one to two days" off of beauty deliveries up and down the entire West Coast.

"Consumers have more real-time access to and understanding of retailers' supply chain-influenced offerings than ever before," Thomas O'Connor, a senior supply chain analyst with Gartner, told CNBC in an interview. "This is driving higher expectations of supply chain services and the information that can and should be made available to shoppers such as in-store inventory availability and real-time delivery tracking."

As Nordstrom retools its supply chain, it should be thinking about how to meet the "demands of the modern consumer," he said.

Nordstrom has said New York, which is the company's biggest market for online sales, will be its next focus. The company in October opened its first flagship store in Manhattan.

Nordstrom's upgrades come as department stores are fighter harder and harder for every sale. Take beauty products. Shoppers used to think about department stores first when they thought about buying eye shadows or skin creams. But now they increasingly buying these items online at sites such as Glossier or Kylie Cosmetics, or at retailers such as Sephora and Ulta Beauty.

More apparel sales have also shifted online. And newer e-commerce companies have emerged on the scene, like Allbirds and Untuckit.

Department stores need to think about how these online retailers and Amazon are servicing their customers. Amazon seemingly continues to lower its threshold for same- and next-day shipping, so long as one pays $119 a year to be a Prime member.

By all accounts, they are. Ahead of this holiday season, Macy's — as a pilot test — launched same-day delivery for certain items in more than two dozen U.S. markets. Kohl's says it offers same-day delivery in "select neighborhoods" in cities including New York, Chicago, Los Angeles and Seattle. J.C. Penney earlier this week named Karl Walsh, chief digital officer at Pandora Jewelry, as its senior vice president and chief digital officer, as it looks to stage a turnaround.

Outside of department stores, retailers like Walmart and Target are also changing shoppers' expectations. Target, for example, has found more ways than most to use the backs of its stores to either ship items same day or lure shoppers to pick up curbside.

Nordstrom's investments are already being tested to see if the retailer can handle an influx of online orders, without sacrificing too much profit.

In an analysis of about 300,000 retail transactions done by Edison Trends, Nordstrom saw the biggest increase in online sales during Thanksgiving and Black Friday compared with a year ago, at 60%. The company was followed by Walmart, with a 53% gain, and Amazon, with a gain of 49%.

Investors this holiday season are looking for Nordstrom to stem sales declines. The retailer's shares have fallen roughly 19% this year, to a market cap of about $5.8 billion.

During Nordstrom's fiscal third quarter, total revenue fell to $3.67 billion from $3.75 billion a year ago, dragged down by weakness at its full-price business. Full-price sales dropped 4.1%, while sales at Nordstrom Rack, the retailer's off-price brand, were up 1.2%. Nordstrom is calling for sales to fall 2% in fiscal 2019.

The decline in Nordstrom's stock is less steep than that of rivals Macy's, which has seen its stock fall nearly 49%. Kohl's shares are down 29% year to date. Macy's market cap has fallen to $4.7 billion, while Kohl's is valued at $7.4 billion.

Disclosure: Comcast Ventures, a division of CNBC parent company Comcast, is an investor in Attabotics.