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Do retail metrics need to be reinvented?
Retail’s traditional core metrics — same-store sales and sales per square foot — aren’t channel-agnostic and fail to account for the significantly more choices consumers have in a digitally-enabled economy, Deloitte relates in its “The Future Of Retail Metrics” study.
They also don’t offer a way for traditional retailers to compare themselves to newer models – including subscriptions, marketplaces, fulfillment as a service, in-house ad and media networks and web and cloud services – that are taking retailers’ traditional wallet dollar.
In surveys and research, Deloitte finds that rather than traditional metrics, retailers are more focused on a few common themes: growth potential, the consumer, profitability, investment thesis and the ability to invest in the business.
Deloitte has come up with five metrics it believes are: Holistic, Inclusive, Value-driving, Operational and Balanced. The first two metrics focus on “Creating value,” which is similar to customer lifetime value, and the last three on “Capturing value,” which focuses more on balancing top-and bottom-line performance with investment efficiency.
The metrics are:
- Retail profit per transaction. This metric captures how profitable companies’ retail operations are, on a per-transaction basis. It is channel-agnostic and applies to all methods of fulfillment. This measurement allows for a like-to-like comparison across companies to see which organizations are most and least efficient in managing retail profitability in each consumer interaction.
- Sales per unique customer. Addresses how much wallet share retailers can drive across their consumer base, through multiple purchases per year or less-frequent, large-scale purchases.
- Revenue growth. Offers a top-line view that accounts for how a company is growing across its various operations and revenue streams, including both core retailing and ancillary models.
- Return on invested capital. Focuses on the importance of investing in the modernization of current operations to keep pace with changes in the industry.
- Free cash flow. Helps identify how much money is available to return to stakeholders and invest in future operations.
Deloitte wrote in a statement, “Implementing and holding true to a new set of metrics should allow the entire industry to more effectively assess value creation and value capture.”
Discussion Questions
DISCUSSION QUESTIONS: How should retail’s traditional metrics be modernized? What do you think of Deloitte’s approach?
Poll
BrainTrust
Dr. Stephen Needel
Managing Partner, Advanced Simulations
Gib Bassett
Director, Solutions Marketing with Alteryx
I agree that since the nature of retailing interactions is changing it makes sense to consider new metrics to understand and measure business outcomes. However, the list of “new” metrics suggested by Deloitte are hardly new. Revenue growth? Free cash flow? Return on invested capital? These are all well-established metrics used in retailing and business in general. The idea of drilling into transaction profitability and sales per unique customer offers potentially new insights retailers may not yet have considered, and that may have merit. However in order to calculate some of these new metrics, retailers will require additional data that many do not have today, for example, sales tracked to the unique customer.
I would love to have seen three retailers evaluated using these criteria. How exactly would you use a transaction for a product at full price versus a promotion or clearance sale? The profit potential is huge to start, minimal to end. Rolling up on transaction versus product would seem to blur the lines of understanding for time-strapped executives.
Very simply, the key retail metric should be what we have for years referred to as “comp customer” which is exactly what it sounds like: rather than retailers measuring same-store sales, they should measure same-customer sales. It easily extends to margin and as a baseline, reflects the strength of the brand and its customer marketing and how well that translates to monetizing the business’s key asset: customers.
Measuring comp customer sales and margin reflects the true health of the business, including its ability to acquire and grow customers. It reveals trends across channels, transactions or subscriptions and likewise it allows for a company to easily build a customer P&L.
Not surprisingly, very few companies measure or publish these metrics. Among those that do are Amazon and Schwab.
Any or all of the metrics Deloitte suggests can be relevant measures of retailer success — though RIC and FCF are more geared to investors than to success in capturing the wallets and minds of consumers. The tougher question is, how do you break down these broad, holistic measures into actionable measures that direct the efforts of individual line managers? For example, sales per unique customer (share of wallet) is an output of the individual efforts of every channel the retailer uses to reach consumers. Does the line executive in charge of online shopping get a bonus if that measure meets targets — even if the online business is losing share to other online competitors in the same category? Get the executional measures aligned and the holistic metrics will follow.
Right on, Ben. Deloitte’s proposed measures are useful for company valuation but less so for company operation. As its report states, same-store-sales and sales-per-square-foot (which have long been poorly applied by financial analysts) are even less relevant in the digital era. Measures of customer relationship value and share of customer are harder to pin down, but are ultimately more indicative of a retailer’s true health. So is “attribution” or an understanding of the complex factors that precede and influence each purchase. I’d add a few operational measures to the mix, especially Inventory Availability, which I regard as a keystone measure of retail competency.
I like Deloitte’s approach to creating new metrics that can be applied across channels. The metrics allow for an apples-to-apples comparison of retailers. However, I don’t feel any of the new metrics provide a retailer (regardless of channel) with an understanding of the retailer’s share of the consumer wallet. The “creating value” metrics don’t address any calculation of market-share or share of wallet. In other words, a retailer can have very positive numbers, but no clue if they are gaining on their competition for a bigger share of the pie. The retail industry will always need some sort of a market-share calculation to understand how retailers perform in the marketplace.
The metric that is missing is revenue by market area. With the prevalence of showrooming and webrooming, measuring sales by store and online separately doesn’t take into account the dynamic customer journey. Not taking this into account may lead to wrong decisions to close stores that actually drive significant online sales.
In today’s world of massive revenue and even more massive losses, it’s clear that we need some measure that quantifies the actual and potential value of a business for an apples-to-apples comparison. But I’m not sure that it’s possible to get to a set of cross-channel metrics that make sense. Sales per square foot are unique to brick-and-mortar, while sales per unique customer are online-centric, and not readily available in physical stores. Deloitte’s suggestions are an interesting start, but it’s going to take more than digging up some current metrics and calling them new to solve this question.
Let’s begin with this – if e-commerce is about 10 percent of sales, then re-writing the book is not quite necessary yet. I think the question is, what are you trying to accomplish with the metrics? If you want investment, then I would think profitability and/or growth potential is key, and at the investment entity level, not the individual transaction level. If you want to understand your business, then any metric which is consistent will be useful and you probably need a group of metrics to understand what’s happening.
Agreed. Investment and ROI will still be at the heart of any metrics, new or old. What are the metrics for for a digitally native brand to open a store? The build out costs “X.” What are the components of the ROI calculation? How will they measure success? Do any of the current metrics matter? Or just if it makes money (4 wall)? Or if it only loses “X” amount (4 wall), but still provides some level of lift or boost the the ecomm business? Measured how?
Retailers do need new metrics, but the key is focusing on metrics that put the customer at the center, just as we keep saying the customer should be at the center of the shopping experience. Deloitte’s suggestions are nice, but do they really put the customer at the center across all metrics? I’d say the key is to look at new customer sales and transaction values, lifetime value as a measure for existing customers, and then new metrics for measuring customer acquisition – these are important as they will blur the lines across channels, but emphasize the mix of channels needed to gain new customers.
Deloitte’s report introduces a solid need to change the direction of tracking metrics. Deloitte has done a good job looking at the dilemma, but the practicality of it is not within the scope of these two key metrics they’ve outlined. The catch here is that these metrics are difficult to determine outside of the online experience. These metrics are designed for a CFO, not for operations, marketing or even commerce. They will be difficult to use for organizations to determine direction or make decisions. Even Deloitte suggests that profit per transaction “allows for like-to-like comparison across organizations…” not for the improvement of the firm.
Profit per transaction has limitations in understanding the entire value chain of a product from when it was sourced through fulfillment. Most of this data isn’t there at the level of granularity needed across multi-product baskets to use in operational changes — it would be no walk in the park to leverage this.
For the sales per unique customer, this becomes a different challenge in determining customer identity in-store and online and also becomes a broad aggregate corporate metric for the CFO. Operationally and marketing-wise, Long Term Customer Value is far stronger in delivering results understanding the customer.
These metrics were designed for the online business and try to accommodate the 85 percent of the business that’s offline, but they don’t replace same store sales or even sales per square foot. Most importantly, they don’t measure or track to customer experience. Deloitte’s new measures miss the ability to expand store value — missing the point that each store is different with different demographics and focus points. Although earlier metrics are outdated, they still enable operational changes and some level of efficiency. Deloitte’s metrics can supplement the metrics list, but these won’t be the key metrics to look at for a retailer – except maybe by M&A teams.
I think the P&L metrics should not really change. As the store format is evolving and retailers are using a combination of brick-and-mortar, online, and pop-ups, metrics move away from the store (like same-store sales) and more towards the consumer (like average price per unit, total transaction size) etc.
Full disclosure: I am founder and CEO of Envirosell, which has been a testing agency for prototype stores and bank branches for over 30 years. We have worked in 47 countries and tested retail concepts for more than a third of the Fortune 100 list. Over that time period we have used roughly 1000 different measures. Today, across all channels we have settled on 30 basic measures, based on the channel and the degree to which cyber-spaces intersect, we add to that list.
About 40% of the measures we gathered 20 years ago in analog — we can get digitally today. Still, gathering data in 2019 is easy — figuring out how to apply it is tough.
The measurements divide into two distinct groups. First biological constants — 90% of us are right handed. Our eyes age at the same rate in Tokyo as they do in Albany. Our group composition — single, same sex friends, couples, nuclear and extended family — again are the same globally. What changes is digital literacy — very much in transition and different whether the market is in a digital capital (think Seattle) or somewhere else (think Dubai or Susanville CA).
Another big issue is the difference between the rich and the poor — great in Mumbai, but very different in Stockholm. Retail is a reflection of social change — that’s what makes it interesting. Yes, some measures need to change, but which?
Why “reinvent”? There’s reality and augmented reality. Why not retail metrics and augmented retail metrics? There’s nothing wrong with the old metrics other than they don’t tell 100 percent of the story like they used to. Keep them. Add the word “and.” Comps are off 4 percent AND e-commerce is up 23 percent. Healthy business! Comps are flat and e-commerce is flat. Red flag! OK, so we can’t summarize the health of a retail business in a sentence or two anymore. Now it will take three to five sentences. Deal with it. The dynamics of change will be in motion for many years to come. Investing in that change is going to be complicated and expensive. The definition of a healthy business is going to keep evolving. Let’s figure out how to use the word AND. It’s not going to get simple again in the foreseeable future.
Don’t throw the baby out with the bath water! There are some great, useful metrics of the past that are still very relevant today. Adding the dimensions of newer statistics only increases the accuracy of the viewpoint.
There are so many numbers to look at. All of the Deloitte metrics work to look at success. I would like to add one more. Does the customer come back? Want a second one? If the answer is yes, then how often? I agree that profit and sales per customer are important, but if the retailer is constantly churning customers, then there’s a bigger problem.
I have been on the warpath on this topic for years and Brent Franson and I wrote a Forbes piece on just this topic early last year.
There are two major thrusts. The first, as is alluded to, is to have the metrics be more customer-centric and less channel specific. Retailers need to both be able to measure increase in lifetime value (or a proxy) by customer and by customer segment. Comparable customer growth (sales and profits) will become increasingly important.
The second is to move from store productivity measures to trade area measures. Given (most often) the critical role of stores driving online and vice versa, it is far more useful to look at overall brand format performance in a given geography than to get hung up on channel-centric measures. This will also aid in store closing analysis.
One big implication, which I don’t think the commercial real estate industry is really dealing with yet, is how to get paid for the role of physical stores as both advertising for the brand (much of what will be consummated in an online sale) and a service center for pickup and returns where the sale may not be rung up in the brick-and-mortar location.
Operationalizing this is far from trivial, but we must largely let go of traditional measures if we are to make sense of the blurred world that is shopping today.
A different way to debate this question would be to re-phrase it as: why are boards and execs hesitant to implement more modern and accurate business performance measures? The answers to this question might span: old habits die hard, the market expects certain measures, or maybe the company has no ability to support the required analytics for new metrics.
It’s probably a bit of all this – but like many retailer challenges, I think this comes back to a lack of maturity and flexibility with regards to analytics and information architecture. Retailers need to rectify this to be able to more quickly adapt and measure their business, from the top line to all the constituent business processes. Without it, how is any executive to have confidence in being able to accurately implement any form of new measurement system?
When I see a new set of metrics proposed, presumably because marketing and retailing have changed in a technology enabled age, and ALL of the metrics could have been used 20 years ago, it seems like the thinking is not bold enough. If the world is changing, the metrics should be very different.
How about breaking down the silos across physical and digital and then calculating metrics like these:
Products have a sensory profile. If a product is purchased by a consumer and not returned, this is a new metric, individual customer sensory-preference intelligence — intelligence a retailer can use in real-time to continuously tweak and amend products in the supply chain and retail product assortments.
Both Deloitte’s new approach and traditional metrics are a linear view of retail transactional data. These metrics will soon become antiquated under new technologies leveraging AI to translate macro linear data into individual customer and product micro intelligence, affecting the entire supply chain and customer experience.
In other words, focusing solely on topline metrics misses the point. Under topline metrics lie the real metrics, a dynamic range of interactive customer and product intelligence able to signal actionable retail insights in real-time, on the fly.
Yes, retail metrics do need to be reinvented, but not as a “new” version of the same traditional metrics outlined by Deloitte in their “new” study.
How about this one: how much money are you making? OK, I jest (a bit) but a few observations:
1) Traditional metrics were wanting even before online, since inflation has long made “same (whatever) growth” numbers misleading.
2) There’s no one measure that’s “best” for all companies or situations: are you a small company trying to grow? A mature one trying to hold onto market share? In each case, different things would be important.
Back to the main question: although it’s simplistic to use profit, per se, as your main measure — since it’s an “end” rather than a “means” — it’s nonetheless good to still remember it (usually) IS the goal. IMHO, far too many modern metrics have been developed for no other reason than to make performance look good … true or not.
Craig, you are spot on. I’ve been designing and measuring the efficacy of in-store experiences for years and there is always one clear truth — “Did we sell stuff?” This is the one key pragmatic metric that I use. It IS the one KPI that everyone understands, agrees and accepts. I created my own software tool, CEEclear, that references everything back to one fundamental KPI: revenue (PoS sales). From that we can determine if there is a meaningful and/or acceptable ROI.
One of my favorite “new” metrics is ROO: return on objectives. Really? I’m sure as CFO you would support a multi-million dollar project if it was substantiated by a positive ROO! NOT!
Adrian, really love that you created a product that allows retailers to bring it all back around to what they really care about (Revenue). If an investor is calculating the intrinsic value of a business, it makes the most sense to look at not only look at your traditional metrics, but to evaluate the ROI. Things like loyalty and churn are equally crucial and it is important for Deloitte to make that distinction.
It’s always a great approach to measure profitability over revenue as a metric for health for any business (I’ll support my point with the latest flaming example of WeWork), but where are the metrics around the extensibility of Customer Lifetime Value? Is a customer only worth what they spend with a retailer? My loyalty (and corresponding revenue) is only 1-to-1, but do you measure advocacy as an indicator of performance on how well the brand engages with the loyal shopper but then also how they convert their close circle of friends and family and turn them into loyal shoppers? That’s worth far more than 1-to-1 and Sales Per Customer!
The “missing” metric is simply SECONDS PER DOLLAR. This along with all the other metrics could be a GOLDMINE!
(Items-transactions-brands-categories-full store.)
I’d be interested in a discussion around this topic with some of the top sell-side analysts that cover the retailers. What do they think about traditional metrics? Would they punish a management team with a downgrade if they trotted out some new metrics?