December 29, 2014

Omnichannel = Fewer Stores

Give this article a read ... Walgreens is going to evaluate their store portfolio (click here).

Omnichannel and Deep Digitization is going to crush existing stores. If a store is in the bottom thirty percent of the performance ladder, it's going to be evaluated, and ultimately, closed. Omnichannel is going to skewer fixed costs, folks. 

Measure this dynamic today, immediately - take any market where you closed a store, and look to see what happens to sales in that market. You'll quickly see that online does not make up the sales difference - doesn't even come remotely close.

Logic Chain:

  1. Retail sales don't meet expectations.
  2. Become more omnichannel - digitize everything.
  3. Digital is a variable cost structure - retail is a fixed cost business.
  4. Sales transfer from fixed cost in-store to variable cost online / mobile.
  5. Fixed cost retail underperforms even more.
  6. Lower 30% of store portfolio is axed.
  7. Retail sales partially transfer online, omnichannel does not grow the business, sales shrink.

3 comments:

  1. Very interesting. And it's triggering a couple of additional thoughts! I want to take this line of reasoning one step further. Borrowing from above:
    1. Close a 'poorly-performing' retail store, overall retail sales drop for the geographic area around the store.
    2. Omni-channel tactics add some retail sales back for that specific area, but do not cover the entire drop in retail sales (which can be measured).
    So here's my question:
    3. If we can measure the drop in retail sales as a result of closing the store, does that drop also represent the marginal contribution to retail sales of the retail store that was closed (e.g., signage, location, layout, product selection, etc)?

    ReplyDelete
  2. I'm not sure I'll answer this correctly, but here's what I see in my projects.

    In 1995, a store used to generate $1,400,000 in sales, generated 30% gross margin, and had an SG&A of 25%. This left $70,000 profit.

    In 2015, a store generates $1,200,000 in sales, generates 30% gross margin, and has an SG&A of 30%. This yields $0 profit ... but the market also generates $200,000 in e-commerce sales at a 30% gross margin and an SG&A of just 20%, yielding $20,000 profit.

    Let's assume that Management doesn't want the store anymore, because it is at break-even. Management closes the store. It's been my experience that 30% of the sales are recouped ... 15% in other stores, 15% online.

    Post-closing, the market generates $360,000 of sales from the original store, $180,000 in other stores, $180,000 online. Add the $200,000 online that previously existed, and we have the following story:

    Total Market = $560,000.

    Retail = $180,000 at a 30% gross margin and quite possibly, 10% SG&A, since all the costs of the existing store are gone and other stores don't have to ramp up, yielding $36,000 profit. Online = $360,000 at a 30% gross margin and 20% SG&A, yielding $36,000 profit. Total profit = $72,000.

    1995 = $1,400,000 sales, $70,000 profit.

    2015 = $1,400,000 sales, $20,000 profit.

    2016 = $560,000 sales, $72,000 profit.

    In essence, omnichannel is going to reduce sales, eliminate inefficiency, and return profit back to levels from 20 years ago. In this case, about $800,000 of sales did not contribute to the bottom line - it was wasted, and omnichannel is going to drive that waste out of the ecosystem.

    ReplyDelete
  3. Very interesting - you answered the question I asked (is the math appropriate?), and the question I was going to ask (how does omnichannel affect profit levels?).

    Thanks!

    ReplyDelete

Note: Only a member of this blog may post a comment.

Pay 'em!!!

Two weeks ago I shared this image, created via one of my "bifurcation" projects. The image was part of a series outlining h...