Customer experience · e-commerce · Omni-channel

Many unhappy returns: E-commerce’s Achilles heel

It’s a common misconception that e-commerce is inherently more profitable than brick & mortar retail. The fact that very few online dominant brands’ profit margins exceed those of “traditional” retailers is one clue that this isn’t true. But a better way to understand the longer-term outlook is to look at the underlying economic drivers.

Above a basic level of scale, online retail is largely a variable cost business, whereas physical stores succeed by driving sufficient revenue to leverage their mostly fixed costs. At the risk of oversimplification, this means that to make money online gross profit/order needs to exceed the variable costs associated with that order. The reason that many eCommerce companies (or the e-commerce divisions of “omni-channel” retailers) don’t make money is that the marginal cost of acquiring a customer, plus the supply chain cost of fulfilling that order, exceeds the gross profit (essentially, revenue less the cost of goods).

The challenges of profitably acquiring customers online is an article for another day. But even where that hurdle can be overcome, e-commerce is often unprofitable due to high supply chain costs–and a huge driver is the high rate of returns. Consider this quote from Michael Kors’ CEO John Idol in a 2016 Bloomberg story: “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…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 at home and then return them, that all is a negative headwinds for us.” Bear in mind, this comes from a brand with significant consumer awareness, a sizable online operation and a high average transaction value.

While returns are not an issue for products that can be delivered digitally–or for many commodity items–in categories like apparel, accessories, footwear and home furnishings, where fit, coloration, fabrication and the like determine whether the consumer ultimately keeps the product, return rates between 25 and 40% are often the norm. When retailers pay for free shipping & exchanges handling costs can quickly erode any chance for a profitable transaction. We must also consider that returned or exchanged product often cannot be sold at the original gross margin, either because it is shop-worn (or otherwise “defective”) or because by the time it comes back the retailer has taken seasonal markdowns.

Some analysts have taken certain retail brands to task for their failure to aggressively invest in e-commerce. Yet many dragged their feet (or were rather deliberate about how they invested) quite intentionally because they understood that aggressive online growth was detrimental to their profitability. The fact is that unless returns rates can be mitigated significantly and/or the cost of handling returns can be lowered dramatically, some retailers will continue to suffer from what I call “omni-channel’s migration dilemma.”

While outside observers may gloss over this phenomenon, brands that face this growing profitability menace are taking action. One trend flies in the face of the retail apocalypse narrative. It turns out that physical stores can be incredibly helpful in lowering both the rate of returns and supply chain costs. While it is not the only reason that formerly digital-only retailers like Bonobos, UNTUCKit! and others are opening stores, it is a key driver. Large omni-channel brands have also tried to make it easier to return online orders in their brick & mortar locations. Not only are handling costs typically lower, but–surprise, surprise!–driving store traffic often leads to incremental sales.

Another avenue for taming the returns monster is using new technology and processes. TrueFit is a venture-funded company that uses artificial intelligence (among other tools) to help consumers choose the right product during the ordering process. Happy Returns is a more recent start-up that has also attracted solid VC funding. This expanding brand focuses on reducing consumer friction in the returns process and helping lower the cost of eCommerce returns for brands by operating “return bars” in major malls. The malls may also benefit by seeing incremental traffic.

Clearly e-commerce will continue to grow at much faster rates than physical retail. And with Amazon and newer disruptive brands helping drive the share of apparel, accessories and home furnishings that is sold online, the impact of high returns rates will become a bigger and bigger issue for many brands. Industry analysts would be wise to dig into this more deeply. Consumers can continue to enjoy the free ride until some rationality takes hold. Retailers would be well served to not gloss over this growing problem.

Taj Sims

A version of this story recently appeared at Forbes, where I am a retail contributor. You can check out more of my posts and follow me here.

Being Remarkable · Customer experience · Digital · e-commerce · Frictionless commerce · Omni-channel

Omni-channel is dead. Long live omni-channel 

“Omni-channel” has been one of retail’s favorite buzzwords for years now. At last week’s excellent ShopTalk conference, several speakers challenged the relevance of omni-channel. This conversation is long overdue.

The shift from a “multichannel” strategy–being active in multiple channels such as physical stores, catalogs and e-commerce–to omni-channel, suggested some form of profound change. It created a veritable cottage industry in related buzzphrases like “seamless integration,” “frictionless commerce” and “being channel agnostic.” To be honest, I’ve been known to throw some of these terms around in blog posts and keynote talks with reckless abandon.

Yet five years or so into this journey, it’s increasingly obvious that omni-channel isn’t all it’s cracked up to be. Many of the retailers at the forefront of omni-channel evangelism–Macy’s being the most glaring example–have only delivered quarter after quarter of disappointing performance. Many struggling retailers have problems that go far beyond merely drinking the omni-channel Kool-Aid. But the fascination with, and massive investment in, all things omni, have in many cases made matters far worse. A recalibration is needed. Perhaps the term needs to be buried.

The first problem is that retailers have been chasing ubiquity when they need to be chasing relevance and differentiation. Clearly, customers are engaging in more channels as part of their shopping journeys and retailers must respond accordingly. But in trying to be everywhere many brands have ended up being nowhere when it comes to a compelling offering. Undifferentiated product, less than remarkable customer service and uncompetitive pricing aren’t helped by extending their reach.

The second problem stems from investing in e-commerce and digital marketing with insufficient focus and prioritization. The majority of retail purchases in virtually all categories start online and, despite conventional wisdom, digitally influenced physical store sales are far bigger than online sales. Many traditional retailers made their e-commerce offering better while underinvesting in their physical stores, seeming to forget that the lion’s share of shopping is still done in brick & mortar locations. Not every aspect of e-commerce or embracing a “digital-first” strategy is important.

The third problem is that a lot of e-commerce remains unprofitable and many digitally-based customer acquisition strategies are uneconomic. The future of omni-channel will not be evenly distributed. Retailers need to have a well-sequenced roadmap of digital marketing and channel integration initiatives rooted in a deep understanding of customer behavior and underlying economics. Too much of what has been done thus far has been more shotgun, rather than laser-sighted rifle, in its approach, and the generally poor results illustrate this quite dramatically.

The fourth problem is somehow thinking that customers care about channels. Customers care about experiences, about solutions, about shopping with ease and simplicity. At the risk of advocating yet another buzzphrase, “unified commerce” is far more descriptive of what needs to happen than “omni-channel.” “All channels” never suggested a meaningful consumer benefit. And it never will.

Of course, engaging in semantic arguments doesn’t ultimately accomplish very much. But neither does continuing to plow mindlessly ahead, chasing a once bright and shiny object that is rapidly losing its luster.

A version of this story appeared at Forbes, where I am a retail contributor. You can check out more of my posts here.

Being Remarkable · Customer experience · Customer Growth Strategy · Engagement · Omni-channel · Retail · Share of attention

Coffee is for closers

Coffee may be for closers, but that’s about all the rewarding we should do. The relentless focus on transactions, conversion rates and closing statistics is well past its expiration date.

Sure you could get married on a first date, but I’ll wager that’s not the best idea.

Today the shift must be toward building relationships–and that starts with earning attention and establishing trust, not making a quick deal.

In a new model of retail KPIs we start first with awareness, which is mostly about breaking through the noise and achieving share of attention. We then focus on engagement that is intensely relevant and remarkable in the truest sense of that word. And we accept that one transaction doesn’t count for much, particularly if it’s achieved through uneconomic and unsustainable discounting. What does matter is continued engagement and interaction that, overtime, leads to loyalty (not mere frequency) and brand advocacy.

Brands that adopt this mindset and plan of action will be far better positioned for a digital-first, customer-in-charge world.

For everyone else, well, enjoy the steak knives.

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Customer experience · Digital · Omni-channel · Retail

Pure play e-commerce’s fantastic (and unsustainable) consumer wealth transfer

“Retail disruption” has been a popular buzz phrase for several years now. In fact, most of the retail brands that have received out-sized mentions in the business press–and commanded the adoring attention of industry conference attendees–for the past 5 years or so are somehow or other leveraging digital innovation to fundamentally re-work the consumer experience, gobble up market share and attract truckloads of venture capital.

Amidst this transformative reshaping of the retail landscape three things are clear:

  • Consumers have benefitted substantially from the introduction of new business models through more convenience, greater product access and lower prices.
  • This profound shift in the consumer value equation has put enormous pressure on industry incumbents that lack either the cost structure or agility to respond effectively.
  • A dramatic rationalization is gaining momentum as traditional players are being forced out of business or pressured to close and or shrink the foot-print of their stores, make huge investments in “omni-channel” capabilities and lower costs across the board.

Unfortunately what is lost in tales of this evolution is that most of the “disruptive” pure-play e-commerce brands have completely unsustainable business models and mostly what is happening is that venture capitalists (and other investors) are funding a transfer of wealth to the consuming public. So, on behalf of my fellow consumers, thanks venture capitalists.

Alas, this is unlikely to last much longer.

While many people think digital retail is some sort of license to print money, it’s becoming clear that e-commerce is virtually profit proof in categories with low transaction values, owing primarily to the substantial supply chains costs (particularly when brands offer free shipping and returns). Moreover, while it can be relatively easy and cheap to build an initial following online through public relations,  social media and other forms of peer-to-peer marketing, scaling an e-commerce only brand turns out to be extremely costly. Many of the buzziest pure-plays are now investing heavily in expensive branding efforts (as well as opening their own stores) in the hopes that size engenders profitability. Accordingly, initial expectations of break-evens are now being pushed out several years.

As the ROI of these efforts starts to come into sharper relief, my bet is many funding sources will lose their patience.

I’ve been an on-the-record skeptic for several years now, going back to when I called into question the sustainability of the flash-sales market well before the meltdown. More recently, I’ve been pointing out E-commerce’s pesky little profitability problem. So I’m not suprised that recent valuations of several once high flying players have collapsed. And more folks are starting to take notice. Professional smart guy (and noted wise ass) Scott Galloway agrees and has been on the “pure play doesn’t work” train for some time. Expect more to join us.

To be clear, a few digital-first brands will likely emerge as sustainable value creators. Brands with high enough average order values to overcome high delivery costs are better positioned (though Net-a-porter’s inability to make money after all these years underscores how difficult this is). Those that deftly merge online and offline experiences–think Warby Parker and Bonobos–also improve the odds (though, side-note, don’t be misled by the high productivity of their initial locations and comparisons to other brands’ productivity stats. We need to understand the four-wall profitability of these new stores and make comparisons to traditional retailers averages in like locations, not overall chain averages).

Mostly, however, we need to be careful to declare a brand successful without defining what we mean by success. If we define success as having grown revenues quickly and having been able to raise gobs of capital from investors to enable subsidizing consumers on a massive scale, than clearly Amazon and dozens of others are wildly successful. If we define success as creating enormous pricing pressure and raising the cost of doing business so as to push traditional players into a double-bind than, yes, mission accomplished.

But if we determine success as having demonstrated the ability to deliver a new and better customer experience AND earn a risk appropriate return on capital than I’m not sure any pure-play E-commerce player of any size is yet successful.

I will go on the record as saying far more pure plays will go bust in the next three years (or get sold at valuations well below their most recent funding) than will emerge as truly successful.

Until then, enjoy the low prices and the free shipping, and if you get some time, send the nice folks funding Jet.com and others a sincere and heartfelt “thank you” note.

 

 

 

 

 

Being Remarkable · Customer experience · Retail

Retail’s museums of disappointment

The retail graveyard is already quite full. Sports Authority is on its way there and surely the Sears and Kmart that we used to know can’t be too far behind. They’ll hardly be the last.

In fact, considering the rapid shift in customer behavior and the blistering pace of retail disruption, one could readily argue that far more brands will disappear in the next decade than in the last one.

And it’s not just that brands are going away entirely. Malls, Main Streets, strip and power centers, are already littered with empty boxes, big and small. Some locations quite old and dated, others still bright and shiny, opened a mere few years ago, their carcasses now hollowed out, the result of a merger or, more likely, plain and simple irrelevance.

Maybe we can blame Amazon or the failed economic policies of the Bush administration. Perhaps we can put it all on Obamacare. Maybe some totally unanticipated event came out of left field. Maybe we were just unlucky. Maybe.

More often than not, by the time a brand is buried, there are few who truly will miss it. By the time the final padlock is secured after a store closes, most folks are hardly surprised.

Irrelevance rarely happens overnight. Most often, the brand and their stores have been disappointing customers for years.

Blame Amazon, blame the government, heck, blame Canada (NSFW). Just know that the reality is the symptoms of creeping irrelevance are almost always there if you actually pay attention and if you are willing to act upon what you see and learn.

Whether our stores and malls will become exciting destinations or simply museums of disappointment is, when all is said and done, nine times out of ten, a choice.

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Being Remarkable · Customer experience · Retail

An audience or a customer base?

As we become more data-driven having an accurate, complete and actionable customer database is certainly worthwhile. Of course many brands struggle even to get the basics of this right. And that’s a problem.

Yet even when we get this mostly right simply having someone in our database isn’t necessarily all that useful. Many people we label “customers” haven’t bought in quite some time and often we have no idea why that is. Others aren’t the least bit loyal, only buying when we give them an incredible deal. Still others prefer us for only one specific thing and the potential to grow share of wallet with them is nil. Chances are there are also quite a few names in our file that were acquired through some gimmicky email promotion and those folks actual interest in our brand is non-existent. And that’s a bigger problem.

Contrast that with an audience.

Audiences actively follow what we’re up to. We’ve earned their share of attention. They eagerly await our next release. They quite willingly sign up to hear from us. They share our interesting stuff with their friends. They are engaged, not passive. Sometimes they even sing-along.

Ideally, the size of our audience is not so big that we dilute the possibility of sustained relevance, nor so small that it borders on meaningless. Done intentionally and with care, it’s just right.

Could it be we’re spending too much time building our databases and not enough time curating and growing an audience?

 

h/t to Austin Kleon for the continued inspiration.

Being Remarkable · Customer experience · Customer Growth Strategy · Customer-centric · Frictionless commerce · Multi-channel · Omni-channel · Retail

Umm, so then why aren’t your sales better?

You’ve probably heard quite a few retailers proclaim some version of “customers who shop across our multiple channels spend 2, 3, 4, even 6 times, that of our average customer.”

When I worked at Sears that is what we saw and that is what we said. Years later, when I headed up strategy and multichannel marketing for the Neiman Marcus Group, that was what our data showed and that is what we told the world. As “omni-channel” has become the clarion call of retail during the past several years, dozens of brands have employed this observation as a primary rationale for substantial investments in beefing up digital commerce and investing in cross channel integration.

But it raises an interesting question.

If it’s true that multichannel customers spend a whole lot more and all these companies have become much better at omni-channel, why aren’t their sales better?  In fact, why is it that most of the retailers who have made such statements–and invested heavily in seamless commerce–are barely able to eek out a positive sales increase?

Something doesn’t seem to add up. So what exactly is going on here?

The main thing to understand is the fallacy that becoming omni-channel somehow magically creates higher spending customers. A retailer’s best customers are almost always higher frequency shoppers who, obviously, happen to trust the brand more than the average person. When alternate, more convenient ways to shop emerge, they are most likely to try them first and, because they shop more frequently, it’s more likely that they will distribute their spending across multiple channels. Best customers become multichannel, not the other way around.

If it were true that traditional retailers are creating a lot more high spending customers by virtue of being more multichannel, the only way the math works is that they must at the same time be losing lots of other customers and/or doing a horrible job of attracting new customers–which somewhat undermines the whole omni-channel thesis. It’s also rather easy to do this customer analysis. I long for the day when I see this sort of discussion actually occur at an investor presentation or on an earnings call.

There WAS a time when being really good at digital commerce and making shopping across channels more seamless was a way for traditional retailers to acquire new customers, to grow share of wallet and to create a real point of competitive differentiation. Nordstrom is a great example of a company that benefitted from this strategy during the past decade, but is now starting to struggle to get newer investments to pay off as the playing field gets leveled.

So-called “omni-channel” excellence is quickly becoming the price of entry in nearly every category. Most investment in better e-commerce–or omni-channel functionality like “buy online pick-up in store”–is defensive; that is, if a brand doesn’t do it they risk losing share. But it’s harder and harder to make the claim that it’s going to grow top-line sales faster than the competition.

Retailers that find themselves playing catch up are primarily spending money to drive existing business from the physical channel to the web. That’s responsive to customer wants and needs, but it’s rarely accretive to earnings. It’s also a major reason we don’t see overall sales getting any better at Macy’s, Sears, Dick’s Sporting Goods and whole host of other brands that have invested mightily in all things omni-channel.

As we dissect customer behavior, as we understand the new competitive reality, as we wake up to the fact that most retailers are spending a lot of money to shift sales from one side of the ledger to the other, it’s clear that omni-channel is no panacea and that many of the promises of vendors, consultants and assorted gurus were no more than pipe dreams.

Yes, chances are you need a compelling digital presence. Yes, you had better get good at mobile fast. Yes, you need to assure a frictionless experience across channels. Yes, your data will probably show that customers who shop in multiple channels spend more than your average shopper. But so what?

If you’ve invested heavily in omni-channel and your sales, profits and net promoter scores are not moving up, could it be your working on the wrong problem?

 

 

 

 

 

 

Being Remarkable · Customer experience · Personalization · Uncategorized

Reach is not impact

This Sunday dozens of brands will pay for multi-million dollar Super Bow ads because those spots will get them in front of what is likely to be the most watched TV show in US history. The odds that more than a handful of these massive budget campaigns will accomplish their objectives sits somewhere between slim and none. Great reach, little impact.

Today, tomorrow and the next day, many thousands of brands will send out many thousands of email and direct mail campaigns to many millions of customers–and most will be ecstatic to get a 1% response rate. Huge reach, very little impact.

Each and every day many of us fret about how many friends we have on Facebook, our Twitter follower count or the number of “likes” we get for something we post. Our often fragile egos may get a temporary hit from multiple retweets or for a bunch of “likes” for our super cute outfit, some random photo of our lunch or the preciousness of our kid and/or dog. But to conflate the number of superficial affirmations we might get with making a meaningful difference is a mistake. We crave more and more reach, but substantive impact is almost always lacking.

As Bernadette so rightly reminds us: “it doesn’t matter who encounters your message, your product, or your service if they don’t care about it.”.

It’s one thing to relentlessly pursue more. It’s another to relentlessly pursue better, more remarkable, truly relevant, deeply connected.

Maybe the people in the tribes we lead want us to turn it up to 11, to increase the frequency, to go for more, more, more. Maybe average or boring is just fine by them.

Or maybe it’s about easing back on the throttle, turning down the volume and choosing instead to uncover and celebrate the people that really matter to us. And then, very intentionally, crafting a message and an experience that deeply resonates with them.

There isn’t only one right way to do this. Your results may vary.

But when we confuse reach with impact, we’re bound to end up in a bad place.

When we ask the question: “who cares?” and the answer is probably only a handful of the people we’re talking to, marketing to, sharing with, then the quest for reach has likely gone to far.

 

Being Remarkable · Brand Marketing · Customer experience · Digital · Share of attention

The new retail ecosystem: NRF edition 

For quite some time, we’ve thought about stores, catalogs and the internet as distinct shopping entities. Today the blended channel is the only channel.

For quite some time, we’ve run our retail businesses as a loose affiliation of vertical departments and systems. Today we see that brands are horizontal and that silos belong on farms.

For quite some time, we’ve talked about customers “going online.” Today, most customers practically live online and there is a “nowness” to marketing that we’ve never experienced.

For quite some time, we’ve said that product is everything. Today, product is clearly important, but experience has a way of making product secondary.

For quite some time, the front door of our store was literal and faced the street or the interior corridor of the mall. Today–increasingly–it is often virtual. And dynamic. And you’re probably holding it in your hand right now.

For quite some time, we started to believe that physical stores were dying and that most categories would be revolutionized by “online only” brands. Well, physical retail IS becoming different, but it’s not going away. And–plot twist–pure play retail is on its death bed.

For quite some time, we’ve evaluated store closings on the straightforward four-wall profit contribution and costs of exiting a lease. Today, a physical location is merely one manifestation of a brand, serving to fulfill a digital intent while also serving as a gateway to e-commerce–a relationship portal of sorts.

For quite some time, marketing was mostly one-size-fits-all. Today, as the world grows ever noisier, it’s harder to detect the signal amidst the clutter, the cacophony and the downright boring. The burden has shifted to becoming more relevant, more personalized, more remarkable.

At NRF, we’re already hearing some speakers make some or all of these points as if they are revelations, when they are merely after the fact observations and, more likely than not, strong evidence of a lead from behind strategy.

The new retail ecosystem has been coming into shape for more than a decade. The most salient and actionable points have been obvious for years. That is, if one were really paying attention and truly committed to a plan of action.

As much as I might hope that the really juicy and useful stuff were shared at a conference in a room filled with the competition, alas, my experience tells me otherwise.

 

 

 

 

 

Being Remarkable · Customer experience · Customer Growth Strategy · Frictionless commerce · Retail

The fault in our stores

As more and more retailers report strong growth online while their brick & mortar sales wane, it’s easy to conclude that physical retail is going the way of the horse-drawn carriage. In fact, plenty of pundits bang that particular drum every day.

But let’s not lose perspective.

Actual stores still account for about 94% of all retail sales. While this will continue to shrink, revenues from physical locations will garner the majority share for most retail categories for many years to come. Lest we forget, actual stores provide tangible customer value that is all but impossible to duplicate digitally. And plenty of research supports the notion that most consumers still prefer to shop in a physical store including…wait for it…Millennials. It shouldn’t surprise us that many of the fastest growing, most successful retail brands are investing in stores, not closing them.

Yet, there is plenty of fault in our stores.

Too many stores are drowning in a sea of sameness–in product, presentation and experience.

Too many stores still operate as independent entities, rather than an integral piece of a one brand, many channels customer strategy.

Too many stores remain laden with friction throughout the shopping experience.

Too many stores take a one-size-fits-all approach, rather than striving to treat different customers differently.

Too many stores are seen as liabilities to be optimized, leaving them as boring warehouses of only the best-selling, most average product.

Yes, there will be fewer stores in the future. Yes, the vast majority of stores will be smaller. Yes, it’s hard to paint any sort of growth scenario for all but a handful of retailers. But the reflexive answer cannot be to throw up our hands and automatically decide to disinvest in physical retail.

Brick & mortar retail is different, but not dead.

When we adopt an attitude that our stores are problems to be fixed–or eliminated–rather than assets to be leveraged, our fate is already sealed.