Director, New York
US retail sales improved 0.4% last month, signaling consumer demand was off to a firm start this quarter.1 Big winners were clothing & clothing accessories stores with 1.4% year-over-year growth, while department stores expanded only 0.2%. Electronics and health & personal care stores had the toughest month and were down -0.1% and -0.4% respectively. But even with demand up, the fact is nearly 7,000 stores closed in 2017, and 3,900 have closed year-to-date in 2018.2 Is closing always the right answer though? You need new metrics, or you’ll never really know.
Think about this: People come into a store, look around, get acquainted, then buy online. Or, they buy online and use the physical store as a place to pick up a purchase or make returns.
The store plays a valuable role in both cases. Yet for many retailers, these activities are not being considered in determining store performance.
Retailers have been organized the same way for a long time. Regions and districts use four-wall earnings from their stores as the metric for defining success or failure. Meanwhile, distinct channels – store, online, wholesale – operate and are assessed as separate streams, even though these areas significantly affect one another.
Online sales are growing and account for 13% of total US sales – or up to 35% for some specialty apparel retailers.3 But digital isn’t the only channel that should get love. Stores contribute to online growth, so retailers need to get out of the (big) box ways of measuring their success.
To close or not to close:
A Sales Transfer Profitability Model (fig. 1) can help in understanding the relationship between online sales and store profitability. Our work with clients shows that when online sales cross the 30-35% barrier, stores appear to be less profitable under traditional measures, which often leads to a set of counterintuitive decisions about location decisions.
The role of the store is evolving. Stores are becoming mini distribution centers (Macy’s ship from store), mailboxes (Amazon lockers at CVS), return centers (Kohl’s for Amazon), customer service centers (Apple’s Genius Bar), education or information gathering points (Best Buy), service centers (Warby Parker’s eye exam center), and guide shops (Bonobos).
Stores also serve as a marketing vehicle to keep retailers top of mind. When a physical store closes, only 58% of customers are likely to shop the retailer online or at another location, according to a recent AlixPartners consumer survey.4
The time has come for management to take a holistic look at performance in a market and blast the old ways of looking at profitability and customer experience (fig. 2).
What does this look like?
Example 1: Get out your pen, redefine goals
Problem: Store sales decline as more customers move online.
Traditional Thinking: Reduced sales hurt profitability, so District Managers reduce staffing to match lower sales. Existing employees spend time cashiering and stocking, leaving little time for customer service, education, or being a brand ambassador. Poor customer experience causes customers to leave without understanding the brand or why they should see it as relevant.
New Thinking: Put the focus on total sales, not store profitability. Associating online sales in a region to local stores ensures stores are aligned. For example, using store associates to educate consumers and drive online sales would not come at the expense of lower in-store sales. District Managers would be measured against metrics that track engagement such as customer service, new customer acquisition, and repeat shoppers.
Example 2: Focus on the bigger picture
Problem: Store traffic declines lead to increased in-store inventory, which central office merchants decide to clear through online promotions.
Traditional Thinking: Online sales take off, causing in-store staff to become occupied by picking, packing, and shipping from store to move inventory. Failure to credit stores for these incremental sales keeps staffing levels at a minimum. As a result, the store looks picked over, sales associates are tied up supporting online orders instead of assisting customers or restocking, and customers then abandon ship. Store sales, store profitability, and customer satisfaction all decline.
New Thinking: Understand everything a store does to support digital sales and incorporate this into store planning and profitability measures. Taking a holistic look at the business and the trade-offs between in-store labor for store sales vs. for online sales ensures that management evaluates activities. Changing metrics for margin rates, aged inventory, and payroll percentage of sales to stretch across both channels for the whole market would lead to better asset utilization.
Stores that really know their worth
What does the future look like? It’s not a world without stores, as some doomsday predictors might have you believe. Retail is not dead, and neither are physical locations. But unless you’re measuring them properly, you’ll never fully understand the value they bring to your bottom line. Your metrics need to change with the times.
For our complete data pack of retailer and macroeconomic data including many of the key economic indicators discussed above, please contact email@example.com.
1 census.gov/retail/index.html; Seasonally adjusted March & April retail sales exclude motor vehicles, gas, food services, and drinking places
4 AlixPartners 2017 holiday retail survey