Can omnichannel be as profitable for retailers as in-store sales?

Discussion
Photo: Target
Apr 16, 2021

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?

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Braintrust
"The path to omnichannel profitability really hasn’t been changed by the pandemic at all."
"Shoppers have the visibility to decide whether to visit the store or pay more for shipping."
"The challenge will be stocking the DCs with the right mix of products with real-time holds for online shoppers."

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40 Comments on "Can omnichannel be as profitable for retailers as in-store sales?"


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Suresh Chaganti
BrainTrust

Target also identified how valuable the omnichannel customer is, compared to a store-only or digital-only customer. The key then for omnichannel retailers is to make sure the investment pays off by ensuring that customers come back more frequently, to buy more. Without a deliberate, holistic approach to the investments like BOPIS to tie to overall marketing and customer experience, it will erode the margins.

Yogesh Kulkarni
BrainTrust

Suresh – I totally agree with the need to understand the customer holistically, irrespective of the channel and focus on share of wallet.

Neil Saunders
BrainTrust

Online profitability has improved, especially as it has become more connected to physical stores. I believe it will improve further as volume grows and more investments are made, particularly in technologies that automate processes.

That said, online fulfillment is – for the most part – more expensive than having people come and shop in the store. Picking, packing, last-mile delivery, and returns, all come with costs attached. But that is simply the price of doing business! If retailers don’t play online, they will lose both sales and, ultimately, profits.

The way to look at this, therefore, is holistically. Online may have pushed up costs, but there are ways of rebalancing that, such as reducing overheads by shrinking down stores that do not need to be as large as they once were. We look at sales in a multichannel way, costs should be looked at similarly.

Jeff Sward
BrainTrust

I’m surprised that in a discussion about omnichannel profitability the subject of returns is not mentioned. I understand the needed efficiencies in supply chain and fulfillment, but surely returns, and the way “free” delivery and returns affects the whole equation, is a big part of the discussion.

Yogesh Kulkarni
BrainTrust

Jeff – great point on returns, especially when it comes to categories such as apparel, where she can order 2 sizes and return the one that doesn’t fit. Returns have ballooned during pandemic and reverse logistics costs are a big challenge.

Natalie Walkley
BrainTrust

Agreed! Returns are paramount to profitability and retailers are getting creative at how to turn a historic liability line item into a profitable one. (I.e. Holding a credit to leverage before processing a return, incentivizing a repurchase, etc.)

The good news is that 92 percent of consumers say they will buy from a retailer again *if* the returns process is easy.

Venky Ramesh
BrainTrust

The unplanned boom of e-commerce last year left retailers scrambling to get in on the bandwagon with scant regards to cost. As the dust settles, they need to step back and redesign their end-to-end business process to cater to the new normal profitably. They will also need to develop their owned-media programs and membership programs to augment their bottom line.

Yogesh Kulkarni
BrainTrust

Venky that’s absolutely right. You are seeing so many retailers scramble to open and consolidate DCs this past year, while many others converted stores to be able to support online demand. This has indeed led to unplanned cost increases.

Gene Detroyer
BrainTrust

Unplanned costs now. But in the long run, high efficiency.

Bob Amster
BrainTrust

Of course it can! It is going to require some adjustments to current models. For example, same-day shipping would have to go away; returns cannot be free. If the retailer has to pay for both, return shipping and restocking, the consumer has to pay also. It is not unfair. If retailers cannot make a profit, they will find a way to either do away with parts of it or will find a way to charge the customer elsewhere.

Verlin Youd
BrainTrust

And/or they need to find a way to be more efficient in other parts of the business, maybe in how they staff and support the store team across the board.

Yogesh Kulkarni
BrainTrust

The challenge for many retailers is that Amazon is setting the benchmark on speed of delivery and cost of returns too! But yes, they have to think about how they are going to offset the real costs of doing business.

Andrew Blatherwick
BrainTrust

Target have it right. It is not just about margins and if retailers back off from omnichannel activity to protect margins, they will end up with a good margin of nothing. It is about understanding the mix and making sure that each element of the operation is as profitable as it can be. Yes, online delivered to the home is less profitable than selling in-store and BOPIS is somewhere in the middle with curbside just behind.

Retailers can look at how they use the various channels and promote them to their customers accordingly. Is same-day or next-day delivery free of charge necessary? Can they cross promote to drive slightly more traffic in one direction or the other without losing sales? Quite possibly. Do they need to run the same promotions online and in-store? These are all parts of the retail strategy that will need to be considered but do not use margin as a reason for not fully engaging in omnichannel activities. That is the short road to going out of business.

Yogesh Kulkarni
BrainTrust

Well said Andrew! The efficiencies have to come from all parts of business.

Bob Phibbs
BrainTrust

It’s about conversion. Unless someone buys something, you failed. Online returns are huge, costs of acquisition are huge and conversions are 1 percent to 2 percent. The main channel – still – is the store. Yet stores are being starved of associates and those who are there are unable to add value making the whole experience worse and worse. Many retailers are killing themselves with a myopic view of digital only.

David Naumann
BrainTrust
David Naumann
Marketing Strategy Lead - Retail, Travel & Distribution, Verizon
5 months 1 day ago

Succeeding with profitable omnichannel transactions depends on a lot of factors that all need to be executed flawlessly. It starts with a solid order management system (OMS) that enables enterprise visibility of real-time inventory to make more inventory available for online orders and facilitates profitable inventory fulfillment decisions. Demand forecasting and allocation systems need to integrate demand from all channels for a full picture of consumer demand. Another key ingredient for profitable omnichannel transactions is an extremely efficient process design for BOPIS, BOPAC and ship-from-store.

Yogesh Kulkarni
BrainTrust

David, I completely agree that developing a very granular understanding of demand is going to be critical in serving that demand profitably. Retailers will be forced to understand demand not only down to location but also at fulfillment models too (in-store vs. curbside vs. ship-from-store etc.). That is the only way you can plan the inventory and labor and keep the costs down.

Dave Bruno
BrainTrust

The path to omnichannel profitability really hasn’t been changed by the pandemic at all. We see it all the time with our clients: profitability requires a careful analysis of both the product lifecycle and the customer lifecycle. First, fulfillment options must be prioritized against the desires and expectations of each unique customer base, and then logistics, inventory and allocation can be aligned to those priorities. The customers must come first, and when we really understand their expectations, then we can optimize our logistics to match.

DeAnn Campbell
BrainTrust
The focus on e-commerce is driven by the fact that it has been an underdeveloped piece of retail for years, and that neglect came home to roost when the pandemic hit. Retailers have swung the pendulum all the way over to e-commerce to make up for lost time. But remember that 80% of 2020 retail sales still happened inside of brick and mortar, so this pendulum swing to digital came at the cost of profit margins. Finding balance is going to be the next frontier for retail – making e-commerce the transactional center of the business, but leveraging physical stores as the experiential and operational support system, and the prime connector between the business and the community. An important strategy (and tactic) will be to increase physical presence, but in smaller ways that are more affordable to the retailer and more personalized to the consumer. Pop-ups, shop-in-shops, vending machines, temporary storefronts, kiosks and partnerships will all help maintain control over brand experience, offer local placement for BOPIS and micro-fulfillment, and build customer loyalty and engagement… Read more »
Peter Charness
BrainTrust

Omnichannel can be profitable for retailers as fast as CFOs are willing to look at the business with a view of “total cost to customer.” While cost allocations between online and in-store are often being logically allocated to the origin of the sale or the location/method of fulfillment, the reality is that the customer uses all of the retailer’s touch points. I know that a view of DPP (direct product profitability) is logical and somewhat easy to account for, but the other reality is that selling and delivering to the customer requires efficiency across all retail processes.