March 01, 2016

Omnichannel Costs


Pundits misunderstand the cost structure of channels. There is a reason certain merchandise is sold online, and certain merchandise is sold in stores.
  • Retail has horrific fixed costs.
  • E-commerce has horrific variable costs.
The omnichannel thesis, then, is highly dependent upon one key customer behavior ... without this behavior, the thesis crumbles under a mix of fixed and variable costs.
  • Existing customers must spend more, and there must be more new customers who are willing to shop each channel, in order for the omnichannel thesis to deliver incremental profit.
To date, neither has happened. Existing customers tend to spend less over time (ask Macy's, the omnichannel flag bearer), and new customers (Millennials) choose merchandise/experiences over channel experiences.

When neither happens, all you do is transfer sales from one channel to another, and that doesn't work for anybody.

So, today, we sit here with increased expenses (variable) and decreasing store sales (as customers move online) causing stores to de-leverage (fixed costs).

This will cause stores to close (ask Macy's and/or Wal-Mart, for instance).

When stores close, fixed costs disappear, but debt remains.

When stores close, the sales do not all shift online and/or to other stores. You are lucky to recoup 30% of your sales, on average. The fixed costs are gone, the debt stays there, and the sales that are left are largely variable in nature (if they go to other stores, you cover fixed costs ... if they go online, they are tagged with added variable costs).

Without a dramatic gain in merchandise productivity, the math simply doesn't yield growth ... the math can yield increased profit, in some instances, depending upon how poorly the lower quarter of stores perform and how sales shift when the poorly performing stores close.

Only the very best retailers know the math, and understand the right path into the future.

It is highly unlikely that anybody who doesn't work at a retail brand truly understands the math and the dynamics, unless they've written tens of thousands of lines of code to thoroughly understand the dynamics.

2 comments:

  1. Terrific write-up and great article from Ramit.

    We know that omnichannel doesn't work (thanks to you), so how can a traditional retailer expand to sell online profitably?

    ReplyDelete
  2. The omnichannel experts tell my industry we have to sell the same stuff at the same price in every channel. They say this, of course, because then my clients have to purchase expensive software to make the dream come true.

    You do not have to sell the same thing in every channel.

    When I worked at Eddie Bauer in 1998, we sold extended sizes online. We found there wasn't enough square footage in the store to carry XXL or XXXL or XS. So we carried the core assortment, and then, if the customer said "Hey, you don't have XXXL", the customer ordered the item in the store and the item was shipped to the customer.

    That sounds a lot like omnichannel theory ... and that was back in 1998.

    The key is that the sizes didn't compete ... each channel had a purpose.

    There are countless examples like this. Not every channel need be a clone.

    If an item generates $4 of gross margin, and that gross margin is wiped out by $10 of free shipping, then why not just make that item available in a store?

    There are countless ways to make the math work. Just not the way the pundits tell us.

    ReplyDelete

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