Opinion: Making omnichannel pay – the next challenge
31 March 2017
Having begun by treating online as a separate start-up business, with its own resources and P&L accountability, there has been a growing recognition that this model is unsustainable.
First, it is difficult to deliver the consistent and connected cross-channel experience that customers demand if decisions in each channel are made by different teams with different objectives.
“Retailers that treat stores and online as separate businesses cannot optimise across these increasingly important cross-channel journeys”
Secondly, treating online as a business rather than a channel to market is at odds with the way customers shop today.
Many of them visit the website as part of a shopping journey that will ultimately lead to a purchase in-store – and the reverse is true too.
Retailers that treat stores and online as separate businesses cannot optimise across these increasingly important cross-channel journeys.
Finally, two separate businesses create two separate cost structures and, as channel shift has continued, this duplication of costs has become a burden that few omnichannel retailers can bear.
So many of the clients we work with have been integrating online back into the mainstream of their business, for instance by combining online and offline trading and marketing teams.
While the right thing to do, this integration is not easy because cultural, organisational, process and systems challenges abound.
But, for those who have embraced the change, the rewards have been considerable.
With a more integrated omnichannel structure in place, a new challenge is emerging, as retailers strive to make sure that their underlying business model is profitable and scalable.
Many are starting to realise that they don’t have sufficient grasp of the operational drivers of profitability, with a suspicion, and in some cases, more than a suspicion, that some sales are unprofitable.
So the challenge is how to get a better understanding of cost to serve, in order to optimise profit rather than just gross margin.
For example, an omnichannel fashion retailer can sell and deliver a blouse through various different routes – including buy in-store, buy online for home delivery or buy online for collection in store.
The profitability of a sale through these different routes may be markedly different; and it’s not just a question of different selling and fulfilment costs but also of differential return rates.
So, the blouse may have a 30% return rate when delivered to home, but only 10% when collected from store.
When you consider the costs of processing a return, as well as the increased markdown risk due to the delay in getting the product ready for resale, the implications for profitability can be huge.
“Fundamentally, the traditional retail approach of trading to optimise gross margin from a given physical space is outdated”
But many retailers do not have a clear quantified view of this so are unable to factor it into their day-to-day trading decisions.
Fundamentally, the traditional retail approach of trading to optimise gross margin from a given physical space is outdated.
In an omnichannel world, if you don’t understand cost to serve by channel and route to customer, including the impact of differential return rates, you can’t be making the right decisions on assortment, proposition and pricing.
Changing this will be an even bigger challenge than the integration of online.
For most, it will involve providing better, more granular information on cost to serve, improving the skills of buying and trading teams and creating a closer connection between commercial, supply chain and finance functions.
But for those who successfully take up the challenge, the prize will be a true omnichannel business, and one that is able to use its store network and heritage to create real competitive advantage over online-only competitors.
David Oliver is partner and head of retail consulting at PwC UK