Omni-Channels Demand Omni-Margins
Retailers kinetically, aggressively and assuredly profit-hunt. And of course, simultaneously, they are highly vulnerable to profit hurt. The S&P 500 is down 5 percent so far this year with big retailers in the index like Target, Best Buy and Staples down sharply, revealing and suggesting correction-like losses which need to be repaired. Recently, Walmart warned investors that its November through January sales could be weaker than previously expected due to two main factors: the government's reduction in food stamp benefits and winter storms that shut down stores.
In addition, the company plans to lay off 2,300 workers at its Sam’s Club stores, roughly 2 percent of the workforce at the wholesale club chain. Radio Shack, with a wonderful brand-burnishing Super Bowl TV advertisement, was reportedly considering closing 500 retail stores. Even Kohl's warned of weak sales in January, citing lower foot traffic and low sales levels derived from their retail store baskets. Macy's announced it would close five stores and lay off 2,500 employees while Target is cutting 475 jobs. Even Best Buy experienced slow, 10 week holiday in-store traffic with a 6 percent decline in CE comp sales lowering their fourth quarter and annual earnings outlook.
Through all of these physical in-store fiduciary diatribes of “doom and gloom” is a mammoth silver lining, or perhaps we should call it a profitable silver cloud. As an example, Best Buy U.S. holiday online comp sales increased 23.5 percent with revenues exceeding $1.3 billion based upon increased traffic, higher average basket orders and fast omni-channel inventory deployment.
I can offer similar good news for most other big box retailers with respect to their online commerce, in stark contrast to their physical retail store results. All while Amazon.com reported last month their best ever holiday season with as example, a colossal 36.8 million items ordered worldwide just on Cyber Monday. I personally believe our US economy and our retailing sector is poised for greater omni-channel recovery, sustainability and robust growth opportunity. In fact, the National Retail Foundation (NRF) recently reported an expectation for a 4.1 percent rise in retail sales versus 2013’s 3.7 percent gains. And yes these are absolutely global manufacturer and retail observations and discussions. According to eMarketer, e-commerce projected spending in the Asia Pacific region for 2014 will be $525 billion up year over year by 37 percent while North America is projected to gain $483 billion, up double digits to 12 percent.
As we know, the life blood for any retailer is consumer traffic and profitable baskets. Potential short and long term success registers as failure for any retailer who invests in driving traffic but cannot convert the basket into fertile, profitable cash register experiences. How much is overall declining store traffic affecting retailer success? According to a January 2014 physical retail basket and traffic frequency report from Nielson, trip frequency has declined 15 percent over the past six years while basket size has climbed a paltry 9 percent to an average of $46.76. And according to ShopperTrak, retailers had only half the holiday in-store traffic in 2013 than they did in 2011. The third party research company reported declines of approximately 28 percent for 2011, 16 percent for 2012 and 15 percent for 2013 while online sales rose by more than double the results of brick and mortar sales during our past 2013 holiday season.
Clearly, in order to ensure sustainable brick store success, it is time to end legacy retail brick-and-click margin differentiation and separation. The two different and frankly opposing margin requirements soon will become one profit smoothing omni-margin requirement. It is the dawn of omni-channel margin smoothing, which congeners physical to cloud margin equality motivated by the need to offset burgeoning brick retail costs. Of course, successful and profitable retail omni-channel strategies demand heftier manufacturer margin investments to support both physical and cloud retail infrastructures.
In-store margin demands and investments are cost-overburdening for both retailers and manufacturers. Retailers need more traffic, aggressive foot traffic with bigger baskets and more manufacturer margin participation in order to sustain physical retail locations. Based upon profit recessed physical retail-traffic to basket-reality. Gen One Ventures officially determines first that omni-channel retailers will re-justify and re-qualify manufacturer margin requirements. Retailers will no longer accept nor negotiate a higher margin for an in-store placement versus receiving a lower margin to assort the same product online.
In point of fact, retailers can no longer afford the heavyweight costs of physical stores without the higher profitability afforded through their e-commerce engines. Frankly, this makes enormous business sense as retailers will state and justify: “We require the same product margins across all our omni-channel retail locations because a sale of your product is a sale of your product. Regardless if we sell it online, in-store or 1800 number, our retail brand sold your product.” Hence, increased dot-com margins for retailers will help to support physical retail stores' heavy legacy weighted expenses. “Our margin requirements are the same in our physical stores as they are on-line” are the words I predict are forthcoming, which will dramatically help re-shape profitable retail omni-channel P&L’s.
Manufacturers hungry for profitable brand and product experiences through omni-channel retailers will be tolled and told of this new “balanced” omni-channel retail margin requirement very soon. This balanced average margin blend across ambient retail touch points for manufacturers means they will have to work harder to gain a few more pennies for their brand and products to offset higher dot-com margin requirements. The congressed, more fertile brick and click margin blend for retailers offers them the ability to offset increasing physical store SG&A’s, lower foot traffic and lower basket productivity.
Of course our smartest retailers will aggregate digital mobile tools and apps to over stimulate greater in-store traffic with more profitable baskets while enjoying a brisk, globally accelerating and highly profitable e-commerce business. Either way, agree or not, here comes the “one size fits all” omni-channel retail margin requirements designed to afford a changing physical retail landscape a new breath of profitable opportunity. Omni-channel retailers will demand omni-channel-margins, indeed they will.
Peter Weedfald is president of Gen One Ventures and author of Green Reign Leadership
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