Target also identified how valuable the omnichannel customer is, compared to a store-only or digital-only customer. The key then for omnichannel retailers is to make sure the investment pays off by ensuring that customers come back more frequently, to buy more. Without a deliberate, holistic approach to the investments like BOPIS to tie to overall marketing and customer experience, it will erode the margins.

Online profitability has improved, especially as it has become more connected to physical stores. I believe it will improve further as volume grows and more investments are made, particularly in technologies that automate processes.

That said, online fulfillment is – for the most part – more expensive than having people come and shop in the store. Picking, packing, last-mile delivery, and returns, all come with costs attached. But that is simply the price of doing business! If retailers don’t play online, they will lose both sales and, ultimately, profits.

The way to look at this, therefore, is holistically. Online may have pushed up costs, but there are ways of rebalancing that, such as reducing overheads by shrinking down stores that do not need to be as large as they once were. We look at sales in a multichannel way, costs should be looked at similarly.

I’m surprised that in a discussion about omnichannel profitability the subject of returns is not mentioned. I understand the needed efficiencies in supply chain and fulfillment, but surely returns, and the way “free” delivery and returns affects the whole equation, is a big part of the discussion.

The unplanned boom of e-commerce last year left retailers scrambling to get in on the bandwagon with scant regards to cost. As the dust settles, they need to step back and redesign their end-to-end business process to cater to the new normal profitably. They will also need to develop their owned-media programs and membership programs to augment their bottom line.

Of course it can! It is going to require some adjustments to current models. For example, same-day shipping would have to go away; returns cannot be free. If the retailer has to pay for both, return shipping and restocking, the consumer has to pay also. It is not unfair. If retailers cannot make a profit, they will find a way to either do away with parts of it or will find a way to charge the customer elsewhere.

Target have it right. It is not just about margins and if retailers back off from omnichannel activity to protect margins, they will end up with a good margin of nothing. It is about understanding the mix and making sure that each element of the operation is as profitable as it can be. Yes, online delivered to the home is less profitable than selling in-store and BOPIS is somewhere in the middle with curbside just behind.

Retailers can look at how they use the various channels and promote them to their customers accordingly. Is same-day or next-day delivery free of charge necessary? Can they cross promote to drive slightly more traffic in one direction or the other without losing sales? Quite possibly. Do they need to run the same promotions online and in-store? These are all parts of the retail strategy that will need to be considered but do not use margin as a reason for not fully engaging in omnichannel activities. That is the short road to going out of business.

It’s about conversion. Unless someone buys something, you failed. Online returns are huge, costs of acquisition are huge and conversions are 1 percent to 2 percent. The main channel – still – is the store. Yet stores are being starved of associates and those who are there are unable to add value making the whole experience worse and worse. Many retailers are killing themselves with a myopic view of digital only.

Succeeding with profitable omnichannel transactions depends on a lot of factors that all need to be executed flawlessly. It starts with a solid order management system (OMS) that enables enterprise visibility of real-time inventory to make more inventory available for online orders and facilitates profitable inventory fulfillment decisions. Demand forecasting and allocation systems need to integrate demand from all channels for a full picture of consumer demand. Another key ingredient for profitable omnichannel transactions is an extremely efficient process design for BOPIS, BOPAC and ship-from-store.

The path to omnichannel profitability really hasn’t been changed by the pandemic at all. We see it all the time with our clients: profitability requires a careful analysis of both the product lifecycle and the customer lifecycle. First, fulfillment options must be prioritized against the desires and expectations of each unique customer base, and then logistics, inventory and allocation can be aligned to those priorities. The customers must come first, and when we really understand their expectations, then we can optimize our logistics to match.

The focus on e-commerce is driven by the fact that it has been an underdeveloped piece of retail for years, and that neglect came home to roost when the pandemic hit. Retailers have swung the pendulum all the way over to e-commerce to make up for lost time. But remember that 80% of 2020 retail sales still happened inside of brick and mortar, so this pendulum swing to digital came at the cost of profit margins. Finding balance is going to be the next frontier for retail – making e-commerce the transactional center of the business, but leveraging physical stores as the experiential and operational support system, and the prime connector between the business and the community. An important strategy (and tactic) will be to increase physical presence, but in smaller ways that are more affordable to the retailer and more personalized to the consumer. Pop-ups, shop-in-shops, vending machines, temporary storefronts, kiosks and partnerships will all help maintain control over brand experience, offer local placement for BOPIS and micro-fulfillment, and build customer loyalty and engagement… Read more »

Omnichannel can be profitable for retailers as fast as CFOs are willing to look at the business with a view of “total cost to customer.” While cost allocations between online and in-store are often being logically allocated to the origin of the sale or the location/method of fulfillment, the reality is that the customer uses all of the retailer’s touch points. I know that a view of DPP (direct product profitability) is logical and somewhat easy to account for, but the other reality is that selling and delivering to the customer requires efficiency across all retail processes.

As an example, on average each Target store employs between 150 and 200 associates. On average each distribution center services about 40 stores.

Can I run a 24-hour distribution center with as much labor as I can run a single store? Or even 10 stores? Can I automate the distribution center more efficiently than I can a single store? Am I avoiding the cost of the store labor, rent, heating, and taxes with a straight online business?

Most analysis I have seen for brick-and-mortar sales versus online seems to apply total costs to online from distribution center to delivery to customer, but seem to forget the actual cost of store labor and operations. There is a certain rationale to that thinking in that the store costs are sunk costs. That is, one must have a store in any case. But when a company determines future investment, there is no such thing as sunk costs.

Online can be very profitable – just ask Jeff Bezos. As mentioned in this article, pricing and promotions will be critical. I’ve personally witnessed the enormous value that can be derived by upgrading these practices to support online growth. The time is now for most retailers to re-evaluate their online pricing practices – are the right items priced competitively? Which promotions are being offered? Are the right competitive strategies in place against the right competitors? How fast can prices be adjusted to remain relevant in an increasingly dynamic landscape? With the right practices, analytics and pricing platforms, the best retailers can grow both share and profitability.

The increase in volume of online orders has driven up delivery fees significantly, so omnichannel is definitely more expensive today than it was pre-pandemic. Online orders also make up a larger percentage of total retail sales than they had in the past, so even if sales stayed the same, margins are lower as online orders are less profitable than in-store purchases. To remedy this, retailers need to find ways of minimizing last mile costs. From a fulfillment perspective, promoting click and collect vs. home delivery, order routing and consolidation to reduce multiple shipments per order and micro-fulfillment to fulfill closer to the customer are strategies retailers can implement today with the right order management system.

Not only is online profitability growing, but we also know that omnichannel shoppers tend to spend more both in A.) transaction size and B.) lifetime value. So the balancing act is not only critical to channel profitability but overall customer retention. Some key aspects of getting this right that we have seen with customers 1.) Cross-channel inventory visibility *and* being able to expose that to consumers. 2.) The ability to allocate inventory percentages to different channels, and adjust quickly (sans customization) as needed to meet demand.3.) Access to raw data and analytics to make strategic decisions that drive merchandising, purchasing, allocation, and SKUs by channel and inventory levels. 4.) The ability to configure business-based logic and best practices to routing to eliminate fulfillment complexities and automation as many orders as possible, while not risking disappointing customers with a poor experience. We’ve seen several brands we work with nail this. One in particular is Build-a-Bear. With a HEAVY in-store experience focus, they were able to pivot their stores to micro-distribution centers in less than a month… Read more »

Profitability of omnichannel can be achieved. One of the great benefits of the pandemic was the realization that delivery of omnichannel was possible, even if much of it was by brute force (throwing labor hours at it) with some getting it better than others but all realizing it’s possible. A key to profitability is actual implementations that can be used as reference in driving the optimization required to get to profitability. Retailers as different as Walgreens, Tractor Supply, The Container Store, Wawa, Total Wine & More, and several others are using new store associate technologies to drive that optimization and profitability today!

Target is a great case study. Early in the pandemic they became laser-focused on improving their capabilities to support digital commerce. They had the already built the infrastructure, but prior to March/April execution was still a bit of a work-in-progress. Customer service in particular was a bit dodgy. Target knew that it was critical for them to improve their customer experience and make this strategy work, and they invested heavily in human capital and technology. As a result they incurred a significant hit to their operating expenses and margin. As the year rolled along, by the third and fourth quarter they had made significant headway in streamlining operations and their expense line improved.

They haven’t completely recovered, there is no way around the fact that these capabilities are more expensive to execute. But, like every challenge, if the value is there, and in this case it certainly is, innovation and scale will go a long way to solving the issue with expenses.

Interesting topic. Yesterday I ordered two deck chairs on Target.com with a two-hour pickup time. Upon arrival, I was told the chairs had already been sold before they could be pulled for my paid order. (The email notifying me of this arrived while I was in the store.) Wasted trip. Frustrating. While initiatives such as in-store or curbside pick sound excellent and easy, personally I have found that it is not easy. The great “unknown” exists — will my order really be ready for pickup? Yesterday was the third time Target failed to deliver on in-store pick up. Small details sting when the mask of promised convenience is undercut by the frustration of a failed shopping experience. Moving DCs closer to the customer is a good idea. The challenge will be stocking the DCs with the right mix of products with real-time holds for online shoppers.

Two direct costs make fulfilling e-commerce orders at the store unprofitable: the labor to pick, pack and deliver to orders to car and the last-mile delivery to home costs.

Labor costs can be reduced dramatically through automation. As a bonus, customer service improves due to the trackable “closed” inventory of an automated system that eliminates out-of-stocks and substitutions. Automation also lets retailers exceed the natural maximum orders of manual picking and fulfill many more e-commerce orders. Automation eliminates the costs to hire and re-hire 80 or so employees a year. And you can become a more attractive employer by offering associates the opportunity to pick up robotics skills.

The cost of last-mile delivery is addressed, as Target has mentioned, through pickup at store. As stores have put the labor cost of shopping and in many cases checking out onto their shoppers, pickup at store transfers last-mile delivery costs to shoppers.

Even before the pandemic, consumers expected seamless omnichannel shopping experiences. Omnichannel strategy has to be all-inclusive and across-the-board. You need a strong basis, supported by integrated marketing and advertising, operations, and shipping and fulfillment. Omnichannel execution is the only way for a brand to address the shopping complexity before and after the pandemic era, which is likely to come and go in years ahead.

This topic has been hashed for years now, and clearly there is still so much lack of clarity (pun intended). Each retailer tackling operational changes will have different issues to reach their omnichannel Nirvana. The thread has already looked at key factors — inventory, supply chain, last mile, store and DC labor, margin integrity, returns, data, and so on. At its root however is the channel distribution question — and by definition, allocation of investment and resources. Is the retailer set up for omnichannel and doing business the way customers wants?

Ecommerce continues to become more popular, but it is a linear growth cycle (with a pandemic bump). The issue is unique by retailer, and no single methodology will be a silver bullet. However, the more the retailer can move towards function that serves all channels (e.g. logistics or data accuracy) the more efficient they’ll be.

Retailers had to go online and deliver regardless of cost during COVID shutdown as store traffic plummeted. As we recover, retailers have a decision on how much it costs maintain the stores if customers don’t return enough (close or convert to pickup and return fulfillment point if possible), and invest in e-commerce for ordering. The shipping costs and return costs need to be accounted for in the move to e-commerce. I personally like the Costco model which is “items maybe available for lower cost in store” for e-commerce. Shoppers have the visibility to decide whether to visit the store or pay more for shipping.

Organizations with agile, scalable technology and omnichannel fulfillment capabilities are best positioned to meet demand, improve customer service, and leverage every sale to maximize omnichannel profitability.

The key to a profitable omnichannel strategy is a smart supply chain. In the past, retailers could skimp on the latest innovation but in todays environment, it’s going to be hard to succeed if your supply chain is only as smart as you are. This is the time to lean into artificial intelligence and machine learning to drive out cost and improve operating efficiencies. Take small steps but take steps nonetheless because we are not going back to pre-pandemic shopping behaviors. The inter-connectedness of in-store and online shopping is here to stay.

It’s impossible to say who will come out on top given the rate of digital growth but some indicators of success are retailers with a relentless priority on supply chain optimization and operating efficiencies. Others with loyalty data that can help drive predictive analytics and inform supply chain and merchandising may also find some tailwinds. Still, one thing will not work alone. Success will require end-to-end planning and organizational commitment to winning the long game.

Customers with the highest lifetime value have been identified as omnichannel shoppers. Therefore, successful retailers need to meet the expectations of those shoppers even when there are negative impacts on margin.

It will be important to continue to make investments in digital. Over the last year, digital investments mostly focused on customer-facing products. But as we move back to in-store shopping, improving store operations with digital products to empower store associates will help the profitability of omnichannel transactions.