Source: Sweaty Betty Instagram page
Is four-wall profitability still a relevant metric?
Due to omnichannel’s influence, Sweaty Betty, the U.K. women’s fitness apparel chain, measures performance based on trade area instead of individual stores.
Speaking last week at the National Retail Federation Big Show at a session entitled, “Move Over, Globalization: Community Retail Has Arrived,” Erika Serow, president and U.S. CEO of Sweaty Betty, said the retailer, which is just getting started expanding in the U.S., “stole” the idea of measuring by “markets” instead of individual stores from a U.K. retailer she declined to name.
As an example, she notes that the company will measure sales performance of customers online and offline across Fairfield County in Connecticut rather than just its Westchester location. She said stores in general are taking on many practices including returns, pick-ups and browsing that support online purposes. Said Ms. Serow, “If you think about four-wall profitability, you start killing the value of that physical point of your customer coming in and touching your product, as you’re seeing more and more volume shifting online.”
The broader “market” measurement is part of the way Sweaty Betty aims to “think locally.” Ms. Serow, who joined Sweaty Betty two years ago after a long career at Bain & Co., said she has a strong belief that brands are global in reach, but retail is local. Ms. Serow said, “It doesn’t matter what we do in the U.K. on a retail basis because we have different customers. And frankly it doesn’t matter what we do in London if we’re sitting in Leeds and what we’re doing in New York if we’re sitting in Santa Monica. Retail is very much a local need.”
Some other observers have similarly questioned how accurately same-store sales, sales per square foot and other traditional in-store metrics measure performance amid omnichannel selling.
In its report, “Bringing Store Performance Into Focus,” Kurt Salmon said stores may also find alternative products that might be available online and fulfill online orders. The consultancy said relying on store sales as the only measure of associate workload and productivity can lead to “suboptimal store staffing decisions.”
Discussion Questions
DISCUSSION QUESTIONS: Does the four-wall contribution metric have to be tweaked or abandoned with the arrival of omnichannel or cross-channel selling? Do similar arguments apply for other traditional in-store metrics such as same-store sales and sales per square foot?
Poll
BrainTrust
Adrian Weidmann
Managing Director, StoreStream Metrics, LLC
James Tenser
Retail Tech Marketing Strategist | B2B Expert Storytelling™ Guru | President, VSN Media LLC
The concept of measuring markets has been an integral part of the packaged goods industry for a long time. BDI (Brand Development Index) and CDI (Category Development Index) are useful bench marking for overall sales development relative to market growth, demographics, etc. Other categories would do well to incorporate these metrics as indices of potential, gaps and growth beyond just the store cash register.
With omni-retail as the “new normal,” retailers need to aggressively add metrics that include the new “hybrid dynamics” like click-and-collect that measure where the purchase was made and where the customer chose to take delivery. Online sales are now transcending market boundaries and even countries.
The real challenge for retailers is not measuring the sales transaction today. The future and profitability is in the number and strength of customer relationships that can generate life time value for both product sales and services.
Agree with you Chris. Copying the CPG industry ideas might be one of the keys. Another as you note is to come back to the CLV (Customer Lifetime Value) notion, which can easily be forgotten or overlooked.
Well, first of all, Ms. Serow may have “stolen” the idea from a UK retailer but Staples was doing something very similar in this very country more than 20 years ago.
I always wondered how they were able to justify the economics of the box (store contribution) given that the stores were almost always empty. I discussed this with a friend from Staples and it turned out that catalog sales (which were not insignificant) from surrounding zip codes were attributed to the nearest store. I don’t know where they fulfilled catalog orders from, but I do know the top line went to the stores.
In other words, while omnichannel may be a relatively new term, in concept, any retailer that had catalogs and stores had similar issues a very long time ago.
But to the question at hand: Yes, I think store contribution (or four-wall contribution, the term mentioned above) is indeed a valuable metric. Online operations are not terribly profitable for any retailer I can think of. Return rates, particularly in apparel and footwear, create chaos and expense across the entire enterprise. So in the end, I think stores are the vehicles that ARE driving retailer profitability. This is ironic, but true.
The complexities of omnichannel don’t really require new metrics in themselves. They require moving the data around in different ways and, unfortunately, keeping multiple sets of “books.”
As a clear example, we talk a lot at RSR about insuring that planning systems are seeded with data on where demand is generated, rather than where it is fulfilled. Doing this should reduce the amount of cross-channel fulfillment activities. Not doing it creates an endless cycle of buying the wrong product for the wrong place. And a majority of retailers are not doing it.
So first things first. I don’t know how you evaluate whether or not to open or re-model a store if you don’t look at the amount of money it throws off for the enterprise. The question is, how do we make omnichannel more profitable as well?
The metric, same-store sales (four-wall contribution), that Wall Street uses to measure retailers’ success and the expectations and shopping journey of today’s digitally-empowered shopper is not aligned with the reality of today’s retail landscape. Measuring performance, particularly for Wall Street, needs to be aligned with today’s shopper journey. It simply makes mathematical sense. If a retailer is actually addressing the needs and wants of the local shopper, the product mix will change dynamically to meet localized expectations and, by definition, same-store sales are no longer an accurate reflection on performance. The role of the physical store is rapidly morphing to meet the confluence of all the different shopping channels and journeys being taken today — online, on-the-go, click and collect, mobile … All of these channels need to be addressed within the new store. How successful a retailer becomes in serving their local customer should be the measure of their success.
Excellent points Adrian. One of my key takeaways from NRF2017 is the urgency that providers of retail support tools are placing on benefits attribution. As dynamic signage, for example, attracts traffic into the store and makes a positive influence on sales, mobile/online engagement and customer experience, providers of that product category are ramping up performance assessment toward broader use and optimization. Products that do not offer impact analytics (shelf-level display for example) are stalled at the starting gate.
There is clearly a symbiotic relationship between stores and online retailers in geographic markets. This fact strongly motivates more accurate measurement of performance at the territorial level, as well as at the in-store level.
Still, I think that the problems with out-of-store metrics (e.g., territorial-level sales) are many. First, it is still hard to attribute a given online sale to a specific store when more than one store exists within a given neighborhood. A second problem is that a pure-online sale can be mistaken for a store-originated sale. We can think of technology-based solutions to both problems but I know of none that is effectively used.
While several brands such as Giant Manufacturing or Trek (in the market for bicycles) are already measuring territorial sales and crediting local stores for assisting them, the aforementioned sales-attribution problem compromises the practicality of such compensation schemes.
With the advent of omnichannel retail, we step closer to a holistic digital retail model. The online element is digital — without a doubt … but the store, pop-up locations, etc., are still in the analog (physical) world. What we need to start thinking about are “assisted conversions.”
Similar to view-through conversions in digital marketing, in retail we need to start thinking about how to measure when a customer comes into the store, looks over (touches, tries on, feels) the product, then purchases online or on their mobile. The physical store might have been the element that led them to the purchase and needs to be noted. Otherwise, you might end up closing stores that are really driving the critical step in the sale.
How do we measure assisted conversions? That is a golden question that IoT, Bluetooth beacons and other technologies will answer. For now, regional customer surveys will help.
This may be the wave of the future in determining overall sales and profitability. the retail store may become more of a “cost of doing business” and will have to be re-evaluated in the overall context of how a retailer does business and measures success. The stores may be morphing toward a sales and support model in the future.
I agree that retail is a local market. It’s necessary to mine data based on region, including both online and in-store purchases, to get a realistic view of what works for different selling locales.
The four-wall metric is inadequate for cross-channel selling. Although same-store sales and sales per square foot are still relevant for individual stores, retailers with a limited data budget might focus on regional numbers.
Sourcing the right inventory and using effective marketing for various consumer cultures will have a bigger payoff than running numbers with which to harass employees in individual stores (which are irrelevant due to the shift towards omnichannel consumerism).
Metrics that lead to improving the productivity of places, processes and people are the foundation of business-building. Each retailer needs to start from where they are and derive new analytics for their decision support and investment validation toward achieving their priorities. When vendor advice is applied it can accelerate industry benchmarking.
While it is important to know how well the selling is doing, there will always be a need to know the profitability of each store too. We are moving more and more practices to the stores, making it even more important. This is not about swapping metrics but more about adding metrics.
But that’s just my 2 cents.
Edwards Deming warned (and I paraphrase, of course) that aggressive management by metrics leads to the perfectly managed company that fails. And over-emphasis on store comps, dollars per square foot, etc. all fit his warning perfectly. This is especially true since the financial markets focus on these numbers.
We’ve seen the market downside for years when retailers report healthy profits but “weak” store comps and the market punishes their stock … while aggressively rewarding the unprofitable pure-play online retailers. It baffles the mind.
These efforts to develop many ways to look at sales in order to try to get a better handle on what’s happening are absolutely in the right direction. But we ought to, also, pay attention to another Deming observation: what’s most important is often hidden in the things that cannot be measured.
Retailers looking to be healthy need to shift their relationship with numbers — to create new numbers for evaluation AND remember that numbers are just indicators and not the entire story.
John Muth is said to have originated “rational market theory” which morphed into “efficient markets” in the early 1960s. It assumes quite a lot in terms of an “all-knowing” market (i.e., market makers, analysts and participants) but it has worked out pretty well so far. My point in bringing this up is your comment about the markets punishing retailers with strong profits but weak store comps while rewarding “the unprofitable pure-play online retailers.” Paula contends up-thread that online operations are not terribly profitable for any retailer she knows of. But later Peter Deeb says ” … the retail store may become more of a cost of doing business … ” While those three sentiments seem incongruous at first, I don’t think they are. Markets valued stores based on sales because the profits eventually follow the sales. Markets are forward-looking. And the sales are going online.
Appreciate the thoughtful comment. I disagree about the markets. Markets are often quite irrational and the past decade has proved quite thoroughly that it’s possible for new “innovations” to attract shiny bauble investment yet end up delivering nothing.
Are sales going online? Some percentage. Things are still stuck about 10%. And it’s not likely that’s going to dramatically accelerate — rather it will slow down as percentages. Not clear what the stasis point will be.
Retailers need to evolve. But they also need to be careful how they evolve. I can argue that Amazon’s end game is brick and mortar (with online mixed in) — their only opportunity for profit on the majority of their sales.
It seems likely to me that the future is an evolution from old retail integrating online and an evolution from old Amazon integrating brick and mortar. And that demands entirely unique metrics as well as tremendous caution developing them.
In today’s environment in the U.S., any limitation on measuring successful retail is prohibitive. In today’s omnichannel “neighborhood,” data regarding retail metrics should be locally focused yet regionally and nationally inclusive. Who is doing the purchasing, rather than where the purchase is done, is becoming the most important fact regarding our retail efforts and how we define not only our consumer focus but all of the metrics which align with this, including customer service, inventory management, pricing, logistics, etc. Profitability and the cost to acquire and keep loyal consumers are the true metrics upon which all retailers are measured.
This discussion meshes nicely with the adjacent one on data scientists in retail. Tapping into the loads of data available and relying solely on the resulting metrics gives the retailer only half of the story. It essentially provides the what but not the why. The why is hugely important given consumer behavior in an omnichannel environment.
So for the purpose of trying to support the customer journey with a good store experience, four-wall profitability is a nice-to-know, but to gain a more accurate view of performance I go with trade area metrics.
No, I really don’t believe that physical store metrics should be merged with omnichannel or abandoned. There are too many factors unique to stores that need to be captured to determine accurate performance. The costs associated with stores can be leveraged across channels, as they are currently in most organizations. However, throwing too many elements of the business into too few “buckets” can cause misleading results.
Metrics exist to help managers compare performance across time and place; they are a best-effort attempt to eliminate variability, make valid comparisons and eventually investment decisions. They also reflect the current business model assumptions (stated and implicit). Years ago in business school, case studies were used to emphasize looking for and using what I call “short-cut” metrics to quickly assess a company’s health — these abstractions rise above the noise and help managers cut through the haze of complexity. Same-store comps, sales per square foot and order size were all key indicators of future success and levers by which to run the company.
Today the retailer- or product-centric model of efficiency and asset utilization is giving way to a technology-fueled consumer-centric one. That doesn’t mean the existing metrics are worthless, but they do become incomplete and can easily mislead management into faulty decisions that solve the wrong problem.
As long as majority of retail sales takes place in the store, it is not advisable to abandon four-wall contribution. While new metrics are needed, the bottom line is that future success requires that you understand what activities inside those four walls (and outside) really mean in an omnichannel business — the synergies across physical and online will only get stronger leading to even more difficulties for those desiring to view and manage these separately.
Of course four-wall contribution metrics still matter and of course the lens through which they are analyzed needs to be changed. The stores and the Internet are extensions of one another. It makes perfect sense to attribute online sales to physical locations. Ditto attributing store expense to online sales. The P&Ls aren’t separate and distinct — they are mushed together, to put it scientifically. But continuing to measure discrete four-wall contribution will at some point suggest a 3,000 square foot location can now be served by 2,000 square feet. 1000 square feet can now be a kiosk. A five-store market can now be a three-store market. A growing Internet-only business now needs a “sales and support” brick and mortar store in a certain ZIP code. I think it all adds up to a pretty good lesson in evolution for everybody in the retail business.
Four-wall sales, cost and profits should continue as before. Online sales, cost and profit should also be determined. From the ABC or DPP world, online sales are not getting their full operating cost. Additionally sales of endless aisle for online should be separated out for a valid comparison. Once the store and online metric has been developed they can be additive for a geographic area. This is to see how the retailer is performing against a larger customer group. For most retailers the online sales in markets where they do not have stores will be very telling.
In the Incredible Dissolving Store, many traditional assumptions go out the window and our conversions must be attributed to influences in both the physical and virtual realms.
What happens within the four walls still matters a lot, but evaluating each store as an individual selling unit becomes less and less adequate every day. Of course physical sales are heavily influenced by online interactions, and of course store personnel are increasingly tasked with various follow up services that may not add directly to the the top line.
So it makes a certain sense to combine store and online sales within local geographies to form a more complete picture of retail success. The glaring omission from this thesis, however, is the careful measurement of shopper influences and behaviors before and after the transactions themselves.
Attribution is certainly hard, and retail as an industry is certainly not very good at this yet. Every sale is the culmination of a set of influences that are partially within the retailer’s control (like in-store promotions and online merchandising) and partially outside the retailer’s control (like customer reviews, social media and the actions of competitors).
Today’s retail environment is simultaneously a building, a geography, a virtual space and an idea that resides within the mind of the shopper. “How did we do?” has become a much more intricate question indeed.
If the assumption is that consumers have gone from going to their local store to going online, then adding-in (to same store sales) online sales by ZIP code, or something along those lines makes sense. (Of course that’s rather simplistic, since people may shop near to work or while on vacation, etc. … which store should those be added to?)
In the long run though, I’m not sure how much sense this makes. Presumably — indeed it’s the whole idea — eventually customers will be gained who are completely new, and really can’t be associated with any store. In short, “yes, omnichannel will make traditional metrics obsolete.”
The ROI equation for bricks retail is as old as retail itself — but in the era of online everything and digital native takeovers, you can just throw that junk out the window in my book. One of Amazon’s leading metrics/goals for physical retail is customer information. That’s customer information. Just let that sink in for a minute. Can you imagine the CEO of a major retail chain thinking like that? I.e. “I don’t need the store to sell more product, I need new information so I can sell more than just the product I have now.” Can he/she think like that?
And therein lies the problem and why someone like Amazon will be a trillion dollar company before the store metrics are finally revised into data that matters: customer information (that helps you sell lifestyle vs only product) and brand experience — see also: Samsung, Nike, UO Spaces, Apple and oh yeah, Amazon.
Measuring bricks & mortar performance will be more important for some categories than others. In home furnishings, less important … in CPG, more important. The reason is that consumers are shopping categories in very different ways, with different expectations of each. Fast moving goods (RTE food, OTC products) will always have a strong bricks & mortar component, because of the immediate need for consumption.
It is definitely a challenge to measure the impact of the cross-channel shopping journey. The consumer purchase decision rarely is isolated to one touch point. According to Nielsen reports, 60% of consumers shop online before buying in the store (webrooming) and more than 50% of consumers browse in a store before making a purchase online (showrooming). Another impact on total sales is catalog shopping or catalogrooming — consumers shopping in a catalog and then purchasing online or in the store. RH Gallery is a US based example that has a non-4 wall philosophy with their “Source Book,” Store Galleries and the associated cross channel sales lift in the markets they serve.
Maybe we shouldn’t be even trying to attribute sales to a specific touch point like the “last-touch” model, as the consumer’s decision process is often impacted by many brand interactions — not just the last one. A better approach is to look at it from a holistic perspective. I like Sweaty Betty’s method of measuring sales by “markets” instead of individual stores. Otherwise, retailers will sometimes make decisions to close stores without understanding the complete impact it will have on total sales and profitability. Retail is getting very complicated….