Seamless Retail: Looking Toward a Profitable 2015
By Greg Caster
The 2014 holiday season has shown how shoppers’ growing preference for e-commerce can be challenging for retailers. By offering customers free shipping and ever-faster delivery, and by handling the higher rates of return that often come with e-commerce, retailers potentially face either reduced profit margins or loss in market share if they don’t keep up with customer preferences.
As they plan for 2015, many retailers will consider how they can provide a seamless customer experience that fundamentally helps them to maintain or improve profit margins. A good place to start would be to question their tried-and-tested approach to profitability. In practice, this can mean taking the following steps: re-thinking the P&L, reimagining the supply chain, embracing digital for engaging customers and running the business, and assessing emerging competitors.
Rethinking the P&L
No business can improve margins without first rethinking its structure, metrics and costs. Many brick-and-mortar retailers still have siloed structures that focus on delivering through specific channels rather than meeting customer need, which creates duplicate costs and makes little sense in today’s seamless world.
In terms of metrics, many retailers and industry analysts still rely on same-store sales to measure performance. In 2015, we would expect them to start focusing more on the drivers of their underlying business. These include the extent to which customers shop across channels, the degree of loyalty and retention by customer segment, growth of online traffic, growth of the number of departments shopped by key customer segments across channels, and the conversion rate at the path of purchase instead of at each touchpoint.
In terms of costs, every line item on the P&L needs to be scrutinized to create “room” for margin shifts as well as investment. A number of retailers are starting to do so by taking a zero-based budgeting approach.
Reimagining the supply chain
Retailers’ supply chains have evolved over many years, but most were not designed for the scale or complexity of today’s seamless retail market. For many, it may be necessary to reimagine the entire process.
One large retailer in Canada is, like numerous chains globally, undertaking scenario planning to understand how the business will shift, at what scale and over what time horizon. They are asking what percentage of their revenue for consumer home delivery over the next three to five years will come from subscription services as part of online purchases, what percentage will come through new formats for their business (such as urban stores) — and obviously, what percentage will still flow through stores. Based on the answers to some of these questions, they will need to make radical changes — from restructuring inventory management to introducing more mechanization and possibly investing in new facilities.
Embracing digital for engaging customers & running the business
Digital technologies are clearly one way for retailers to serve customers better and boost in-store sales. In 2015, personalization will still be a hot topic, with nearly all retailers doing something in this area. Nevertheless, it is critical for retailers to find new ways to save on labor costs while improving the customer experience.
There has been media coverage, for example, of major U.S. retailers trialing customer service robots in their stores. Similarly, retailers are looking at wearable devices that staff can use for inventory control or in-store picking more efficiently.
Assessing emerging competitors
As a loss in market share can have a disproportionately negative effect on a company’s earnings before income and taxes (EBIT), retailers would potentially benefit from fully understanding the new entrants to their sectors.
For many, disruption is coming in the form of innovative, smaller competitors. Blue Apron’s subscription service, for example, delivers complete ingredients and recipes for over 800,000 meals each month and is considered a challenge to many established grocers. It is essential that retailers across sectors keep their eyes open to what the ‘upstarts’ are doing and consider how they can respond.
The picture for retailers in 2015 is unlikely to be any less complex than in 2014. The good news is that it doesn’t have to be less profitable.
Greg Caster is managing director, Retail Strategy at Accenture.