Being Remarkable · Bricks and Mobile · Frictionless commerce · Omni-channel

The future of omni-channel will not be evenly distributed

While many brands were slow to drink the omni-channel Kool-Aid, failing to recognize a fundamental shift in consumer behavior that began over a decade ago, most are now throwing gobs of money at various cross-channel marketing and “seamless integration” initiatives. Breathless pronouncements fill industry presentations and press releases. CEO’s throw around terms like “channel agnostic” and “the blur” as casually as they talk about the most recent quarter’s earnings per share. Many have even created new positions with “omni-channel” featured prominently in the titles.

As someone who has been beating the one brand, many channels drum for a long, long time, I’m hardly one to criticize the thrust of these efforts. Yet as many brands invest people, technology and dollars in search of a cohesive blended channel, frictionless commerce strategy, one very critical consideration must be kept front and center. I call it omni-channel’s migration dilemma.

The growth of online commerce and digital marketing impacts different brand’s marginal economics differently. We know for sure that building out e-commerce, mobile and other digital capabilities is expensive. Investing in consumer friendly technology like order online and pickup in store requires costly technology and process redesign work. If all that happens is that companies spend a bunch of money to merely spread the same amount of revenue over their traditional and digital sales channels, profits gets worse not better.

The story is even more depressing if a company sells lower priced items. In most cases, the marginal profitability of selling an item online is lower than selling it in a physical store. Every sale that migrates from a brick and mortar location to e-commerce not only lowers the productivity of the store that lost the sale, but it erodes total company profitability. This can actually be the start of a cycle of store closings and assortment narrowing that is almost certain to end badly.

Some companies clearly understand this phenomenon and have either gone slowly into digital commerce and cross-channel integration or have basically sat on the sidelines. H&M and Primark are some examples. While this may have short-term financial benefits, long-term it’s hard to imagine how these brands can ignore a fundamental and profound shift in consumer dynamics.

The implications of all this are two-fold.

First, most retailers must think of enabling their omni-channel strategy as necessary, but not sufficient. And rather than blindly embracing all things omni-channel, they need to have a deep understanding of their core customer segments priorities and their relative competitive position against those needs. Armed with this information–and rooted in an understanding of the underlying economic drivers–a phased, multi-year and well-reasoned roadmap can be implemented.

Second, and by far most importantly, if a brand lacks a compelling value proposition that generates above average, incrementally profitable future growth, moving into the omni-channel future will only portend lower returns on investment and, potentially, a trip to the retail graveyard. The dynamics of an omni-channel world can be a source of competitive advantage, but only if the underlying brand promise and delivery is relevant and remarkable. Far too many brands are treating omni-channel capabilities as a panacea, when in fact it may ultimately be poison. Unless you’re Amazon (and let’s remember Amazon has never earned a profit) you can’t and shouldn’t avoid being thrust into a blended channel world. But how you do it matters a great deal and you can’t use au courant new tools and technologies to mask problems with your core business model.

The future of omni-channel will not be evenly distributed. Those brands with strong value propositions and compelling economics will use leadership in customer-centricity and frictionless commerce to extend their competitive positions, create strong brand advocates and generate extraordinary financial returns. Those brands that already suffer from a lack of customer connection and relevance will only see their weaknesses made more obvious by the sea changes that are sweeping the industry. Investing in omni-channel may allow them to continue to tread water for a bit, but eventually they will go under. Brands that are stuck in the vast, undifferentiated middle need to pick a lane and get busy. Without breaking out from the pack, investment in omni-channel may allow them to hold serve, but they will never win the game.

 

 

16 thoughts on “The future of omni-channel will not be evenly distributed

  1. you’ve articulate the many risks well. other factors to consider are; are you selling private label proprietary brand goods or are you competing for mass distributed brands that are not price maintained and are easily price shopped at every low price and potentially unprofitable (amazon) dotcom? another big issue is homogenization vs specialization by channel. brick and mortar, traditional catalog and e-commerce have many inherent differences in customer behavior, experience and expectations. I’ve worked in all three channels back when the companies I worked for were all only a single channel. providing “Omni channel” capabilities is one thing. managing it well for customer satisfaction and profit is entirely another. budgets, reporting structure, systems, inventory management, sales attribution are some of the many areas that remain cloudy in most organizations…

  2. A lot of good points here – and I mostly agree. What ecommerce, and to a similar extent “omnichannel,” do is magnify the premium of a strong brand, which is the result of terrific customer experiences/relationships. Companies that aren’t able to build those will lose disproportionately.

    That said, something here puzzles me: “In most cases, the marginal profitability of selling an item online is lower than selling it in a physical store.”

    Why is this necessarily the case? Isn’t that a symptom of a supply chain and fulfillment system that sipmly isn’t actually built for ecommerce, rather than any fundamental economics? Retail stores are expensive. Warehouses are cheap. If you can market and sell items online at a similar price point as you can in-store, then it would seem obvious that you’d want to do that. Indeed, what we’re seeing is that ecomm-only entrants are seeing disproportionate success, particularly with high-value demographics, while companies that try to do both struggle.

    Also, I just wrote a post on this topic too: http://www.bullishdata.com/2014/12/03/taylor-swift-model-ecommerce/

    1. Thanks for taking the time to comment.

      The reason a channel shift of lower priced items from brick and mortar to e-commerce will result in diminished profits owes largely to the fixed cost nature of stores and the variable cost nature of a direct to consumer business.

      Since a store has a lot of largely fixed costs (real estate, utilities, basic staffing and the like) the marginal profit of an incremental sale is pretty close to the gross margin dollar contribution of the item. So with a 40% gross margin a $15 shirt results in about $6 in incremental profit. That same item sold through e-commerce has direct variable cost associated with taking the order, picking and packing the order and shipping the order, which easily run in the range of $3-6/order. So the incremental profit is the $6 in gross profit less these direct variable costs. The cost per order may be offset by the ability to collect shipping charges and the potential bundling of orders. But in most cases, lower priced items simply don’t generate enough variable contribution $/order to make them more profitable at the margin compared to retail orders.

      The converse is true with very high priced items, which is why at Neiman Marcus we experienced a profit benefit from the growth of e-commerce. A $600 handbag might generate $240 in incremental gross margin dollars and only have $10 or so in pick, pack and ship costs. So we made $230 on each one. That same item sold in the store would have sale commission paid so the marginal profit would be be more like $200 for an item sold in the store.

      Obviously this gets complicated when you try to assign marketing costs and considerations like the lifetime value of the customer, but the dynamics are pretty clear in my experience, which is why you haven’t seen Walmart, Michaels, Charming Charlies and a whole host of other low AUSP retailers tripping over themselves to push e-commerce.

      Hope this makes sense.

      1. Ah ha – yes it does. Thanks for the clarification.

        Yet this still begs the question – over the long term, everything is a variable cost. It remains true that retail space is expensive, and warehouses are cheap (even accounting for shipping). Amazon, for example, has had a good deal of success selling low-margin/contribution items on its platform, because it saves on retail costs & has a high degree of automation. (Ex. see today’s announcement about Amazon going all Kirkland.) Look at pure ecommerce plays like Jackthreads, Nasty Gal, Warby Parker, etc. No legacy retail store costs, so much lower fixed costs, selling price pretty similar to what you see in-store. And better margins.

        So does your analysis above mostly relate to large, legacy retail chains who are considering the economics of opening up online channels, or do you believe that the pure ecom plays just aren’t that significant a threat? (Yet?)

      2. It appears that this year is the culmination of the economic pressures mentioned in your article several years ago. While pure ecom plays eschew fixed costs, some of the norms such as free shipping or unsustainable return policies continue to be significant barriers to online profitability. This doesn’t even take into account the significantly higher rates of return and the loss of in-store impulse purchases with ecom.

        For you, which mass retailers are the most successful at omni-channel in today’s market?

  3. You are right everything is variable over time, which is why multi-channel retailers that have no top line growth, are investing heavily in technology and trading higher margin transactions for lower margin transactions are in big trouble. So to answer your question, my analysis mostly relates to large retail chains.

    Pure ecom plays have and will continue to be a threat to stealing revenue from industry incumbents, the problem is virtually none of them make any money. The struggle for many of the cool niche players (like some you mention, but many, many others) is that what I call the obsessive core drives the business in the first couple of years, but the customer acquisition and marketing maintenance costs to get the business beyond a certain size prove to be uneconomic. So it’s great to have high gross margins, but not if you’re spending $50-75 to acquire a customer that shops very infrequently. This killed virtually all the flash sales guys and certainly pounded players like Fab.com.

    The moves made by Bonobos and Warby Parker are interesting, sensible and inevitable. One of my favorite conversations was with a CEO of one of these high-flying brands over 4 years ago. I told him they should really look at opening physical locations. He told me they would never open brick and mortar stores. Now he’s in magazines and on CNBC because everyone things their bricks and clicks strategy is brilliant.

    Anyway, brick and mortar is a great way to acquire a tentative online customer, which it why I thought it was inevitable. The 4 wall economics of these stores will get way more challenging beyond the first dozen or so stores that are in no-brainer locations with a concentration of core customers. Some will make it, most will not I suspect.

  4. 1. Omni-channel’s genius is it converts a yesterday “lost sale” to a today “saved sale” albeit with lower margins for the extra labor, shipping, and a system to arrange the marriage of product we own somewhere and the customer
    . The ultimate winner will be in-stock; converting the information value of the demand signal we now see via an “omni-channel sale” versus the estimates we were once forced to make for lost sales. For them, omni-channel will be a marginal activity, not a “we do it!” flag waving one….focusing on low velocity items more economically fulfilled from a central location(s).

  5. 2. Amazon? For the other 24 of the Top 25 US Retailers, they average over 3800 stores in their national network, making them TEN TIMES closer to the customer than Amazon’s warehouses and the cost of building out a terrific system to help the 24 get smart is A LOT CHEAPER than a new warehouse. Even if Amazon built 50 more centers over the next 20 years, they would still be 3 hours away from the average customer, while the other 24 top competitors already average 30 minutes or less. “Same Day” delivery for Amazon will be their Waterloo. Forcing all their competitors to realize the competitive advantage they already have is a really, really bad idea.
    They remind me of the old joke of an unprofitable entity making it up with volume….see Amazon’s 3rd Quarter forward looking projections about their coming 4th Quarter….”we will either lose $500 million or make $500 million”. That’s some coin toss.

Leave a Reply