Here’s a thought exercise for retailers as consumer behavior continues to blend channels: “What if you thought of yourself as an online retailer that also has stores, rather than a stores-based retailer that also has a website?” It’s a provocative question that could hold the main clue to the puzzle of slowing profits as e-commerce becomes an increasingly prominent part of overall sales.
The rapid growth of online shopping in the early days of the pandemic forced retailers to scale omnichannel operations very quickly and with a priority on service over cost. While the pace has slowed since, the growth continues because of the pandemic’s lasting effects on consumer behavior. E-commerce accounted for 19.1% of total retail sales in 2021, up from 15.5% in 2019. In an AlixPartners survey of more than 100 retail executives, almost 80% said they expected their online penetration to increase in 2022 relative to 2021. Whether at 15% or 40% or more, every retailer must reassess its operating model in light of this expected growth as we have reached a tipping point. The dangers of not doing so are clear from the inverse relationship between e-commerce penetration and EBITDA over the last few years (Figure 1).
As noted above, profitability has been challenged because most retailers were forced into making significant immediate omnichannel improvements as almost every single transaction was pushed to a digital channel during global lockdowns. While these investments were essential, they were also very expensive. Moreover, consumers who forgave missteps during the height of the pandemic are not going to continue to do so two years in. Today’s me-centric consumers are all-powerful and dictate the nature and quality of their relationship with companies. This means that any retailer hoping to thrive in this changed world must take a completely new perspective into its operating model – including processes, organization, and technology.
This brings us back to the original question: What if you thought of yourself as a digital-first retailer, an online business that has stores and not a stores business with a website?
To clarify, being a digital-first retailer does not mean being a digital-only retailer. In fact, for many, stores may end up playing a much bigger role depending on the retailer’s goals and network composition. A digital-first retailer will never look at its stores the same. Four-wall profitability used to be a useful metric but in today’s world it fails to calculate the true value of brick-and-mortar locations. Every store belonging to a digital-first retailer is a node in the network with a completely different set of costs and benefits. These may include benefits from faster omnichannel delivery, rebuys of online returns, and the billboard effect of a physical location, among others.
Being a digital-first retailer also does not have to mean prioritizing one channel over another. A digital consumer experience doesn’t have to take place only in an online channel: it can happen in the physical world through location-triggered loyalty programs or kiosks that infinitely extend store aisles. And it can happen through the ratings review and price-comparison engine in every consumer’s pocket while at a store: their phone.
Instead, it’s a shift in mindset that resets how the organization thinks about everything from customer acquisition and customer lifetime value to the relationship between marketing and sales and where the buying team sits and to whom it reports. In practice, this means changing conventional KPIs for every part of the business into digital-first benchmarks. For merchants and planners, this may mean taking customer acquisition and loyalty into account in assortment decisions. For the supply chain, it’s the difference between simply prioritizing cost per unit to including customer lifetime value in order management system algorithms.
This reassessment can be broken down into four broad but connected areas:
- Customer: How are you tracking and growing your most profitable customers and channels?
- Experience: Do you provide a meaningful, frictionless, and personalized experience at every touchpoint?
- Offering: Is your operating model designed to curate relevant products, pricing, and services to the consumer?
- Fulfillment: Are you maximizing your store network, distribution centers, and inventory placement for profitable digital growth?
With the consumer increasingly more demanding, every retailer should be prepared to rethink its operating model in a way that caters to how today’s customer typically first experiences a brand: digitally. While increased operational costs reflect an immediate need for correction, the risks of not meeting consumers where they’re going are much larger and can be much more detrimental.
Learn more about the Digital-First Retail philosophy and services on our website here.