Can omnichannel be as profitable for retailers as in-store sales?
The pandemic has accelerated the growth of online sales three to five times depending on the vertical and, even as in-store comes back, no one expects online to regress to pre-pandemic levels. COVID-19 has hastened digital initiatives by as much as five years, meaning retailers now need to leapfrog their intended technology and process development roadmap just to stay even with customer expectations and competitors.
Target saw its operating margin drop last year even as digital revenues more than doubled.
“The biggest factor in ’21 was the supply chain and digital pressure, about 110 basis points of pressure on the year from that, but I think that’s actually a good place to illustrate some of how we think about rate because to me, it’s all about the dollar impact, not the rate impact,” said Target CFO Michael Fiddelke on the company’s recent earnings call. “Digital is a perfect example. If you would have told us we could double the digital business and only see 110 basis points of pressure last year, I think we all would have taken that outcome.”
Even Target’s sales success, however, leads to the question of how to build back profits. The answer is not only about improving supply chain efficiency for distribution center or store-level fulfillment. It is also not just about creating quick fix alternatives, such as buy online, pick up in-store (BOPIS) or ship from store. Retailers now have to think about where to allocate merchandise so it’s in the right location — distribution center or store — to most cost effectively meet demand. And they need to rethink assortment, as consumers will buy differently online versus in-store.
In addition to demand fulfillment and product assortment, retailers need to adjust their pricing and promotion for profitable customers and away from nonprofitable ones. This means changing out the old algorithms with new ones that shift at least partly to increasing margins.
Retailing has changed forever and so has how retailers make money. Companies can either work toward an omnichannel future and encourage customer behavior that helps the bottom line or risk being buried in a tide of costs and competition.
DISCUSSION QUESTIONS: What are the key strategies and/or tactics retailers need to consider to change their operating model and maximize omnichannel profitability? Are there retailers that you think are nailing this or, at least, getting close?