The Future of Retail Metrics: Traditional benchmarks no longer give full picture

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The Future of Retail Metrics: Traditional benchmarks no longer give full picture

By Rod Sides, Deloitte LLP - 09/05/2019
The retail industry at times seems to revolve entirely around the release of annual and quarterly reports. That’s for good reason: These reports should offer insight into how key retail players are surviving and thriving in a moment of constant disruption. But in an industry changing so drastically and rapidly, are the same benchmarks we’ve used for decades up to the task of accurately explaining the modern marketplace?

If we continue to measure success by running the same numbers and analyzing the same metrics we always have, we may not be seeing a complete, accurate picture. Traditional operational metrics like same-store sales and sales per square foot do not fully capture the ways your competition, your consumer, and your business have evolved. We shouldn’t ignore this reality: convergence, digitization, new profit models, and increased consumer choice are transforming retail. It’s time for industry analysis to change with it.

A growing number of executives agree — in Deloitte’s recent survey of retail CFOs and finance executives, 88% said they are rethinking metrics to better reflect cross-channel operations. This reimagining has emerged in response to widespread dissatisfaction with existing data: Only a third of the executives said their internal metrics “really align” with external reporting, and only 8% believe their metrics are well-positioned to help them succeed amid all the changes in retail. So, what are the metrics financial leaders really want insight on?

Defining value
First, consider the consumer; they demand choice, convenience, and good value. The start-up and the established player begin on an even playing field in these categories, and the deciding factor is one foundational question: who offers the best value proposition? As a result, many retailers have expanded their business models to drive profit from new sources that meet additional consumer needs including subscriptions, fulfillment as a service, in-house media networks, and more. Shouldn’t all competitors in these spaces be held to the same high standard and evaluated against the same performance metrics? What if we looked at how all companies leverage their consumer base, deliver on their core business, and create a sustainable profit model?

Defining new metrics
After conferring with executives from leading retail companies, interviewing representatives from trade groups and start-ups, and researching annual reports, it became clear that no single “silver bullet” metric can capture the challenges and value proposition of all of today’s retailers. The industry needs a series of new metrics that work in tandem to capture the major themes that retailers are interested in: growth potential, the consumer, profitability, investment thesis, and ability to invest in the business. We need more comprehensive metrics that are:

• Channel agnostic

• Inclusive of all business models, retail formats, and fulfillment methods

• Focused on value-driving components of the business

• Operationally relevant and not just based on financial ratios

• Balanced between growth and profitability

Putting these findings into practice, we knew that the new metrics should emphasize value capture and value creation. While inspired and informed by longstanding measures such as customer lifetime value and enterprise value, the new metrics could provide a clearer look into the specific areas of businesses that impact performance, value, and organizational health. Bringing together our research and calculations, we’ve imagined a potentially more suitable set of metrics for the retail industry that are as relevant for an organization’s leader as they are for an analyst.

These new metrics focus on what is most operationally relevant to growth and profitability:
• Retail profit per transaction. Captures the profitability of companies’ retail operations on a per-transaction basis. It is channel-agnostic and applies for all methods of fulfillment. This measurement allows for a like-to-like comparison across companies to see which organizations are most and least efficient in managing retail profitability in each consumer interaction.

• Sales per unique customer. Addresses how much wallet share retailers can drive across their consumer base, through multiple purchases per year or less frequent, large-scale purchases.

While this existing information provides a more complete top-line, bottom-line, and investment efficiency perspective:
• Revenue growth. Provides a top-line view that accounts for how a company is growing across its various operations and revenue streams, including both core retailing and ancillary models.

• Revenue on invested capital (ROIC). Focuses on the importance of investing in modernization of current operations to keep pace with changes in the industry.

• Free cash flow (FCF). Provides insight into an organization’s controllable cash flow reflective of its current investments. This helps identify how much money is available to return to stakeholders and invest in future operations.

The beauty of these metrics lies in their connectivity. Each metric is significant on its own but when examined together, they can provide a transparent and holistic picture of company performance. More than traditional metrics did, these metrics also take into account the investments that companies make when trying new approaches to create consumer value. This means leaders across the organization can make strategic decisions with the knowledge of how those actions directly impact KPIs.

It’s impossible to predict all the future twists and turns of the retail industry rollercoaster. That’s why accurately assessing where one stands in the competitive landscape is so crucial to adapting to current disadvantages and paving a path to continued success. Stakeholders and leaders should champion an industry-wide movement to develop and adopt detailed, modern performance metrics, like those proposed by Deloitte. These can give companies the insights that they need to successfully analyze revenue streams and identify new sources of income.

Implementing and upholding a new standard of metrics could lead the entire industry to increased effectiveness and accuracy around value capture and value creation. At the very least, a more comprehensive measurement of performance could boost resilience in the face of the industry’s next (inevitable) disruption.

Rod Sides is vice chairman of Deloitte LLP and U.S. retail, wholesale and distribution leader.

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