A long-time reader forwarded this article three weeks ago (click here) about Target moving sales from in-stores to the online channel ... and hurting profit in the process. #Omnichannel!!
These days, it's almost like the worse the news gets, the louder omnichannel advocates yell to become even more digital and even more omnichannel. Those who manage the profit and loss statement don't seem to be cheering as loudly.
Let's really simplify the math here, so that you can see what is going on. Let's look at a sample trade area with $2,000,000 in sales ... $1,600,000 in a store and $400,000 online. Here is the trend.
- Next year, the "brand" will further digitize the business, causing a 5% drop in stores ($80,000) and yielding an $80,000 gain online ... the net impact on topline sales is $0.
- Next year, then, retail will be at $1,520,000 and online will be $480,000.
- The year after, the same dynamic happens, yielding $1,440,000 in stores and $560,000 online.
The industry response has been to "accelerate" this trend ... and by accelerating it, we push stores closer and closer to being unprofitable ... which is why you see so many stores being closed.
Let's pretend that "digital" didn't exist. What would you do to drive traffic in a store?
- You'd increase your marketing budget.
- You'd find merchandise that customers wanted to buy more frequently.
- You'd present the merchandise in a manner that causes it to sell better.
- You'd remodel a store so that it yielded a more modern experience (and sales would increase 20%, by the way).
So let's say that we execute the magic above, and retail sales increase by 5% in each of the next two years as a consequence. What happens?
- Retail stays flat.
- Online grows - potentially faster as there is a bigger retail base to convert to "digital".
In other words, we have to grow merchandise productivity at a rate faster than the loss of sales to the online channel. We'd have to invest in retail - at the very time the vendor industry is telling us to invest in digital.
Think of it this way ... in a field with rabbits and foxes, if foxes are eating all of the rabbits, what is needed to grow the population of rabbits?
- Fewer foxes.
- More food for rabbits.
It's time to provide more food for rabbits (retail). And here's the fun part - because customers move from retail to digital, digital benefits when retail is healthier! In our field, foxes would love it if there were more rabbits to eat. In commerce, foxes (digital) love it when there is retail to be cannibalized.
We're doing everything backwards. Truly, we are. We need to invest more in retail, grow our retail channel, and then retail will be healthier and digital will benefit because retail customers will cannibalize themselves over into the online/digital channel.
Invest in retail.
That's what we need to do.
Show of hands - how many of you think that is what will happen?