July 16, 2007

Multichannel Retailing Week: The CFO

As we complete the transition from catalog and retail to "multichannel retail", we find we don't have the technology solution or marketing strategy necessary to meet the needs of our customers.

This is where the multichannel CFO comes into play.

The multichannel CFO determines the investment strategy for the business. The CFO has a set budget, one largely determined by the growth trajectory of the business. As sales increase, investment can increase (though hopefully at a slower rate than sales, yielding more profit).

In the early days of the internet, some incremental sales were being added to the business. Coupled with competitive pressures, multichannel CFOs invested tremendous amounts of capital building and improving e-commerce enabled websites.

However, in our post-Google multichannel environment, things have changed. Direct-to-consumer sales are growing at subtle rates. This introduces risk in the investment portfolio of the multichannel CFO.

Take the traditional catalog CFO. This individual likes to look at the 'ad-to-sales' ratio on the profit and loss statement. If you sum catalog advertising and online advertising, and calculate the ad-to-sales ratio, you will likely see an increase in this ratio over the past five years. This means that the introduction of e-commerce has not grown sales at a sufficient rate to offset the increased advertising expense necessary to support multiple channels.

The traditional catalog CFO, armed with the information, is likely to challenge the CMO or Database Marketing executive to "mail smarter", and better leverage online marketing strategies, shifting dollars out of catalog and into paid/natural search, affiliates, portal advertising and e-mail.

Until ad-to-sales ratios improve, it will be difficult to convince traditional catalog CFOs to invest in multichannel solutions.

The traditional retail CFO has a different set of concerns. To please shareholders, the CFO must grow comp store sales, and must increase the number of new stores in new markets.

Ultimately, the traditional retail CFO has to decide whether it is a better to invest in multichannel technology improvement, multichannel advertising increases, new stores, remodeled stores, and all other internal investment needs necessary to run the business.

This is where we really fail the traditional retail CFO.

The traditional retail CFO has several "knowns":
  • If the CFO invests in a new 6,000 square foot store, the business will probably get $2,000,000 of net sales per year. It might cost $1.7 million dollars to build the new store.
  • If the CFO invests in remodeling a 6,000 square foot store, the business will probably get an additional $400,000 of net sales per year. Maybe it costs $0.7 million dollars to remodel a store.
  • If the CFO invests in catalog or online advertising, there is a known incremental rate of return for the increased investment.
For multichannel investments, the CFO has a great big "unknown".
  • Say the multichannel CFO invests $1.7 million in inventory systems and point-of-sale systems to facilitate "buy online, pickup in stores".
  • What are the incremental sales that will be generated by this strategy? Will the incremental sales be more than what is observed in a store remodel? Will the incremental sales be more than what is observed when a new store is built?
The CFO depends upon the multichannel advocate (the CMO or the Database Marketing executive or the catalog/online executive) to "prove" that a multichannel investment will generate a better ROI than a new store or remodeled store.

So, the multichannel advocate uses research reports, anecdotal information, 'our competitors are doing it so we have to do it', 'our customers demand it', and the time-honored "multichannel customers are 'x' times more valuable than single channel customer" metric to "sell" the multichannel strategy.

CFOs don't like flimsy comments like these. CFOs want to know, with certainty, that multichannel investment yields a competitive ROI that exceeds the internal cost of capital.

It is my opinion that this relationship, as described above, limits the pace at which multichannel organizations implement true multichannel solutions.

This would be a great place for a vendor, research organization, or consulting firm to provide actual facts that help the CFO. The CFO is going to look at Circuit City, the poster child for 'buy online and pickup in stores', and say 'Gee, that strategy hasn't helped them financially, why should I make the same mistake?' The vendor, research organization, or consulting firm is going to have to provide actual facts, positive and negative, if they want the CFO to advance shared objectives.

The Database Marketing team has to view the business differently, illustrating the long-term impact on the customer file. The potential long-term impact on the customer file is what fuels the investment in multichannel strategies.

Over the next decade, your multichannel CFO is going to become even more critical of the ad-to-sales ratio, and will demand that total net sales increase at a fast rate. If total net sales do not increase at above-average rates, it is unlikely we'll see CFOs supporting multichannel initiatives at the level we'd all like to see happen.

Your turn: Does your multichannel CFO have the right information necessary to make multichannel investment decisions? What information does your multichannel CFO need to improve multichannel systems and strategies?