Is omnichannel a retail margin crusher?

Discussion
Photo: RetailWire
May 01, 2017

Through a special arrangement, presented here for discussion is a summary of a current article from the IMS Results Count blog.

On the surface, omnichannel sounds like a panacea to bolster sales. But an analysis by AlixPartners provided to CNBC suggests some channels are far costlier than stores.

Analyzing the costs involved in the sale of $100 of goods by an apparel retailer under different distribution scenarios, in-store scored the highest margin: 32 percent. The “bricks and mortar” model’s economies of scale involves shipping truckloads to fixed points (stores) and customers managing their own delivery in terms of cash and carry from the stores.

Coming in second in margin was selling online, at 30 percent. Much of the cost in pure e-tail revolve around warehousing, infrastructure and personal home delivery. If the retailer can manage inventory turns, grow the long tail opportunities and manage price elasticity/discounting, it is not so bad selling online, even with direct shipping to homes.

More troublesome is click and collect, which earned a margin of 23 percent under the analysis. While convenient for the customer, BOPIS creates incremental labor and operational costs to ensure that the specific item is in stock, plus requiring staff for the collection point in-store. If the retailer can upsell something while the customer is at the store, it might be possible to offset part of the loss in profit.

Much worse under the AlixPartners analysis was ship from store, with a margin of only 12 percent. Not only are items shipped from stores to homes shipped twice, incremental systems and people are required to pick, pack and ship individual items from stores and maintain accurate shelf inventory. Very few, if any bricks and mortar retailers can survive the burdens and low margins of ship-from-store sales.

AlixPartner’s analysis also noticed how the need to add more SKUs to support omnichannel increases investments in stock, warehouses, systems and logistics. The higher rates of returns seen online likewise results in incremental processing, non-saleable inventory and, ultimately, markdowns.

There is one sure thing in an omnichannel world — the CFO’s role and retail financials just got a whole lot more complex!

DISCUSSION QUESTIONS:  Do you agree that some iterations of omnichannel such as ship from store may just be too expensive for retailers? Which aspects of omnichannel retailing do you see challenging merchants most when it comes to absorbing incremental costs?

Please practice The RetailWire Golden Rule when submitting your comments.
Braintrust
"What retailers must do, sadly for investors, is ratchet up their IT investments and update their processes to make the whole thing more efficient."
"These developments require that you shift how you spend money and allocate resources."
"To answer the main question, yes I think there will be many retailers who ultimately fail by trying to go omnichannel."

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33 Comments on "Is omnichannel a retail margin crusher?"


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Max Goldberg
Guest

Ship-from-store would seem to offer the greatest challenges and costs. The idea was that employees would be able to easily manage inventories and handle shipping responsibilities. With many merchants this is not the case.

Shep Hyken
BrainTrust

Welcome to the new world of retail. Omnichannel, from the customer’s perspective, should be “seamless-channel.” To the customer, it should be easy to do business with a retailer regardless of how an item is purchased; in-store, online, via ship-from-store, etc. If there is a margin issue, figure out the numbers and spread it over the cost of doing business. While ship-from-store may cost the retailer a little more, it is better than losing the sale — and potentially the customer. And if cost is the only reason a customer is buying, then the retailer has another issue we can go into in another discussion.

Charles Dimov
Guest

Key point, Shep. Lacking a key channel strategy like omnichannel sends a signal to your shoppers. Either you don’t care about their convenience and ease or you have an antiquated approach. Either way, it does not bode well for a retailer’s brand.

Shep Hyken
BrainTrust

I’m in agreement with you. I believe in the omnichannel approach – making it as convenient and easy as possible to do business with the retailer, regardless of what channel the customer chooses.

Gib Bassett
BrainTrust

Another way of looking at this is the cannibalization of in-store sales by e-commerce channels. That is the flip-side of the cost problem described here. It suggests to me that retailers need a finer understanding of how their individual customers want to transact with them and design a business around that which can adapt over time. I know that’s very hard, but the future of retail seems all about greater specificity in terms of a market/demand focus that is powered by data and analytics.

Paula Rosenblum
BrainTrust

I think we’re asking the wrong question here. The better question would be, “Will omnichannel always be too expensive?” And secondarily, “What can we do to make it more profitable?”

There’s no doubt that there is a lot of profit leakage through omnichannel fulfillment today. But that’s because for most retailers a.) the technology used to solve the problem is old and woefully inadequate and b.) because retailers are inputting where fulfillment occurred, rather than where demand was generated into their merchandise planning systems, it becomes a self-perpetuating problem.

Retailers would be insane to stop any omnichannel activities. That’s the equivalent of yanking a paying passenger off of a plane because it’s cheaper to fly your crew in that seat.

What they’ve got to do, sadly for investors, is ratchet up their IT investments and update their processes to make the whole thing more efficient. It’s a complicated problem, but it can be unwound in very clear ways.

Sterling Hawkins
BrainTrust

I 100 percent agree with Paula. Omnichannel is becoming a new normal — I don’t think we’d project out five or 10 years and expect fewer people to be using fewer channels. The main objective for retailers is to invest in and update systems in a way that optimizes a unified channel experience for the customer at the same time as being cost effective.

Lyle Bunn (Ph.D. Hon)
Guest

Note that all the margins are positive and reflect consumer purchases. Even when the juice isn’t worth the squeeze, it is hard to neglect some omnichannel approaches. At least a baseline of business value is provided, and optimization can be undertaken even as communications to customers are undertaken to direct them into preferred service and fulfillment approaches.

Dave Nixon
BrainTrust
Dave Nixon
Retail Solutions Executive, Teradata
4 years 1 month ago

Some of the new shipping and delivery options ARE very expensive for retailers to build and maintain, for now. But as retailers generate revenue from the new models, and they mature their infrastructure, costs will come down. Retailers will need to balance costs between outsourced and owned services. It’s expensive for now but will transform retail over the near-term future and costs will drop and will be distributed across different parts of the enterprise.

Tom Dougherty
Guest

The economies will change as it becomes more common. I expect inefficiencies in the beginning of any new model.

Here is the rub. I understand that the retail model of having shoppers buy at the store is the most profitable for retailers. But as the shopper numbers shrink, well, business adapts to consumer trends. It does not work the other way around.

Come gather around people
Wherever you roam
And admit that the waters
Around you have grown
And accept it that soon
You’ll be drenched to the bone
And if your time to you is worth saving
Then you better start swimming or you’ll sink like a stone
For the times they are a-changing.

Thanks Bob Dylan.

Dick Seesel
BrainTrust

I was skeptical about the analysis when I saw it reported on CNBC last week. Does the study factor in the efficiencies that might be achieved by leveraging physical stores’ payrolls and inventory levels? Does it continue to look at the silos of brick-and-mortar and e-commerce as separate expense centers? Are some retailers with negotiating leverage with the big freight carriers able to achieve cost efficiencies through ship-from-store and also save operating expense in their e-commerce distribution centers?

I’m also skeptical as a longtime (1982-2006) employee of Kohl’s, which is pushing its omnichannel initiatives hard. Kohl’s has always managed its expenses carefully, even in down times, and I doubt they would be pursuing omnichannel aggressively if it were truly an SG&A-buster.

Adrian Weidmann
BrainTrust

Being digital means a seismic shift in the status quo. While it is true that different channels require different skills, different processes and present different challenges to retailers and brands — the simple truth is that digitally-empowered shoppers want a seamless shopping landscape. They don’t identify with “channels.” They just want the easiest, most convenient, most comfortable, best value and a seamless shopping experience regardless of the products and services they are seeking and purchasing. The burden is on retailers and brands to design and implement processes and workflows that optimize the digital (and analog) shopping landscape on behalf, and for the benefit, of all shoppers and customers.

Charles Dimov
Guest

What does the shopper want? If you are the laggard retailer who does not offer a seamless brand experience across a number of channels, you will start losing customers. What you need to add to the margin erosion calculation is the level of sales lost due to a lack of capabilities. What happens if every other retailer has it except your chain?

On the topic of operations, what’s important is that each retailer has to plan out exactly how they are going to approach their omnichannel strategy. Retailers need to do more than merely add ship-from-store without properly planning their approach. Without planning, any new process will fail, be more costly or erode margins. If a retailer shifted their strategy to in-store shipments and closed down a DC in the process, you have to wonder what that scenario might look like.

Gene Detroyer
BrainTrust

Ship-from-store is the antithesis of both the brick-and-mortar and pure e-tailer business model. Could someone design the worst of all worlds better? One of the great benefits of e-tailing is the concentration of inventory. It costs less, you need less and it provides easier balancing. Sending inventory to stores defeats that.

Hiring people adept at handling customers and having them handle shipments? It’s bizarre.

And what do you gain relative to the customer? Nothing. Does the customer care if the item comes from a store or a warehouse?

Lee Peterson
BrainTrust

There’s a learning curve for every new facet of operations and omnichannel elements are no exception. The problem/challenge with omnichannel right now is that you can’t NOT do it. That’d be like handing your business to the 900-pound gorilla. “Here Amazon, thanks for serving our customers, because we can’t afford to!” Which is ridiculous. Retailers are by nature fighters and they’re just not going to give up on this for the mere reason of cost.

This study is analogous to doing a study on the cost of prototype stores when they first open. Yes, they’re much more expensive. But after a few rounds you find out what works and what doesn’t and the costs eventually come in line. I’d look for the same from omnichannel. It’ll get to profitability. It has to.

Jon Polin
BrainTrust

Retailers must start with the customer: what does the customer want? Even though different channels incur a range of costs, if customers want to interact with and buy from a given channel, the retailer must figure out how to optimize that channel or risk losing that customer to another retailer who is willing to figure it out.

Shawn Harris
BrainTrust

Digitally-driven fulfillment options need to be viewed through a different profitability lens than traditional fulfillment (the shopper grabs an item off of a shelf) classically has. Last year, I wrote a piece on this topic, “Is Omnichannel Even Possible?” It’s complicated. Also, generally I think because of the digital shift there is a “reset” underway in retail, which I try to depict here. These are not cyclical shifts, they are structural; far too many are not accepting this fact.

Doug Garnett
BrainTrust
Doug Garnett
President, Protonik
4 years 1 month ago

From the consumers’ point of view, much of omnichannel is loved. But as an industry we seem to have let ourselves believe that was enough. And sometimes omnichannel means pursuing low-margin, low-volume opportunity. Obviously we need to be smarter.

So what’s a retailer to do? As in other areas affected by digital, consumer expectation has been raised for service which can never deliver profit. (We should note that the above analysis does NOT include expenses of returns — which take a big chunk out of online selling profits.)

At this point, retailers should pay attention to these margin studies and, while perhaps needing to support all options, stop promoting heavily those options which are money losers.

That said, we should be concerned at how late in the game we are finally taking a hard look at costs. Investors in potential unicorns may not care about profits, but retailers must — our investors follow more quaint business school training and ask us to deliver profit.

Mohamed Amer
BrainTrust
Mohamed Amer
Independent Board Member, Investor and Startup Advisor
4 years 1 month ago
This just goes to show you that having smart people in the room is necessary but not sufficient to create breakthrough strategies and approaches. You also need to be able to frame the situation properly in order to generate the right questions worthy of being tackled. If the shopper changes the way she buys and you maintain the current (and optimized) selling process intact, you’re going to lose out on top-line. So you work to adapt it to the emerging shopper reality, but discover that these tweaks drain your margins. The choice set quickly turns to an either/or situation of pursuing the top-line growth or protecting the bottom line; neither is a healthy approach. By falling into the sunk cost fallacy, we let prior investments anchor us to outdated operating and business models — and ask the wrong questions. How you frame the situation is important. If you do so in terms of profitability, then you lose sight of the reality of today’s shopper behavior. Don’t let the measurements drive you into short-termism syndrome. Investments… Read more »
Naomi K. Shapiro
Guest

I believe that Mohamed has the “complete” answer: Recognizing the need and importance of the consumer balanced with the bottom line, aided by investments in IT systems, people, and processes.

Cathy Hotka
BrainTrust

Unified commerce is here to stay, and actions that might have been seen as margin crushers before (think: two-hour shipping) will continue to address customer preferences. Traditional retailers need to repurpose their IT spend away from expensive legacy technologies and toward process innovations that meet consumer expectations.

Ricardo Belmar
BrainTrust
Ricardo Belmar
Retail Transformation Thought Leader, Advisor, & Strategist
4 years 1 month ago

There’s no question today that retailers need to embrace an omnichannel experience for their customers, not because they are demanding it but because they are expecting nothing less after being spoiled by online experiences. Analyses like this one are highlighting a fact many retailers may be ignoring for now — not that omnichannel is less profitable, but that omnichannel exposes all of the legacy systems and processes internal to most retailers as inefficient for modern fulfillment. In some cases, retailers may be measuring the wrong metrics as well. We’ve seen plenty of studies that show us an “omnichannel customer” spends more and brings in more profit to the retailer. Cost models need to adapt to this new world and internal systems will eventually be updated and replaced over time. While this may upset investors, the key for retail success will be to invest more in IT and replace all of these old legacy systems that introduce inefficiency in fulfillment and the supply chain.

Peter Charness
BrainTrust

New methods probably require new measurements and somehow I doubt it’s fair to saddle all omnichannel fulfillment with a brick-and-mortar cost model. Things that look like variable costs may in fact be fixed. Changing the store backroom space and facilities and the inventory model for a store may all be things tip the cost model in a different direction. If the past 10 years were the era of optimizing the supply chain, the next 10 years will need to be the era of optimizing the fulfillment chain balancing cost and service levels. The one thing that is certain is that not addressing these capabilities will be fatal for a brick-and-mortar retail.

Tom Redd
Guest

It is simple — times have been and are changing faster. Technology is the base of the change along with shoppers’ use of the said technology. So retailers, let us move on to another topic.

Get smart — LEVERAGE TECHNOLOGY. Using technology the RIGHT way saves margins. Screw Wall Street — save yourselves! Invest in the new technology, dump the old stuff and the ones in your shop that do not like the change.