It’s “earnings report season” in retail, with many major retailers holding calls with analysts reporting out on the critical fourth quarter and the holiday season. Like every year, it’s a mixed bag – some retailers come out winners; others come out losers, so much so that a few well-known brands will undergo dramatic reorganizations.
Retailers today are under increasing amounts of pressure to perform, and to compound matters, most are struggling with new business models shaped around today’s new shopper journeys. There’s no doubt that shoppers have adopted a multichannel shopping journey, winding circuitously across digital and physical channels, and those retailers that provide a seamless multichannel experience are best positioned to win the hearts and minds – and spend – of shoppers.
There’s only one, uh, … opportunity.
While digital channels are growing each and every year as a larger part of sales, a financial fact is rising to the top: sales through digital channels suffer from miniscule margins. Said differently, there’s often no profit in online sales.
Oh, it’s true!
First, remember that prices online are typically low, low, low – the channel itself allows for easy and quick price comparisons from around the globe. Then, there are the costs – not just huge investment costs to build out the channel, but high operational costs too. Consider this quote from Nordstrom (NYSE: JWN) CFO & EVP Michael G. Koppel, as reported in Retail Information Systems:
“This business model has a high variable cost structure driven by fulfillment and marketing costs in addition to ongoing technology investments. With our increased investments to gain market share along with the changing business model, expenses in recent years have grown faster than sales.”
It’s not just Nordstrom, either. Check out what Michael Kors (NYSE: KORS) CEO John Idol said earlier this month, as reported in Business Insider:
“Unfortunately today, e-commerce generates a lower operating profit for us than four-wall brick-and-mortar. We think over time that will reverse itself, but, as you know, when the consumer requires free delivery, free return, wonderful packaging, plus there’s a new trend that people are buying multiple sizes of things to try them out at home and then return them, that all is a negative headwind for us.”
Retailers have to grow their businesses – both in sales and profits, and, for the most part, with positive cash flow. While digital channels are great for sales and shopper experience, when it comes to profits … not so much. Remember, the “king” of all online merchants, and the one that started it all, Amazon (NASDAQ: AMZN), struggles with profitability, and that’s including enormous profit contributions from its web services arm, AWS.
So, what’s a retailer to do?
Well, ignoring today’s multichannel, omnichannel reality is not an option. Success in retail starts with shoppers, and shoppers simply demand an easy, convenient blend of branded channels – in fact, they want more multichannel and want it done better, more seamlessly.
The key to retail success – at least long-term and with any scale – is to bolster up the physical channels as much as the digital ones. One of the interesting trends of the past several years has been the flood of online merchants opening brick-and-mortar stores, including the likes of Warby Parker, Bonobos, Birchbox, Rent the Runway and, yes, even Amazon.
Brick-and-mortar stores afford the opportunity to better differentiate on service and experience, plus it lends itself to appealing emotionally to shoppers. Logical, rational shopping is all about price/benefit, while emotional shopping is about how it makes shoppers feel. It’s much more difficult to operate profitably when your business model is built around an equation with “price” in it.
Emotions are where the profits are. Can you feel me?
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