November 23, 2015

This Is Why Retailers Are Being Told They Must Be "Omnichannel"

The omnichannel thesis always smelled putrid to me ... digitizing the business after catering to the needs of best (middle-aged) customers which caused store traffic to turn into online traffic which caused stores to underperform and eventually close (read retailer 10-K statements for details) or get smaller. How is that a growth strategy? 

It made no sense why industry pundits demanded a no-growth strategy.

But now, it makes perfect sense.

There is a process in business.
  1. Startups are funded by VC folks.
  2. Startup goes public, VC folks get paid.
  3. Middle-aged brand maximizes growth potential, early public investors get paid.
  4. Mature brand cashes out, late public investors get paid.
  5. Business closes, or is purchased cheaply by the Private Equity community.
Omnichannel theory satisfies (4).

All you have to do is actually perform an analysis of individual customer data to understand how omnichannel satisfies (4). Simply put, the digitization of the business caters to best customers, the customers who are most profitable. Digitization pushes traffic out of stores, into the online channel. Stores lose traffic and stores lose sales. Poor performing stores are closed. Cash is available. Cash is not used to invest in the business (i.e. new customers), but instead, cash is used to pay shareholders via stock buybacks and dividends.

Omnichannel = Shareholder ATM.

In the article, you can run charts for your favorite retailer. Run a chart for Target, Wal-Mart, Home Depot, and Lowes. In sum, they are cashing out. They are paying shareholders as much via stock buybacks and dividends as they earn in profit. And in just the past week, you've read articles promoting Target / Wal-Mart and their "omnichannel is the future" nonsense. Coincidence?

Well, omnichannel is the future if you want to close stores in an effort to free up cash to pay shareholders. It has nothing to do with taking care of "the customer". It isn't what "the customer" wants. It's what shareholders want. And that's fine ... they own the business. But don't assume that their monetization strategy applies to you.

Finally, all of this omnichannel nonsense makes sense to me. It's the end-game for extracting cash out of a mature retail business. Omnichannel is like an ATM machine for mature brands. The problem, of course, is that loyal customers are never retained, long-term, meaning that a failure to invest in new customers in the short-term will ultimately hurt stage four retailers. We see it all the time - just look at your own customer acquisition reporting.

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