RSR Research: Omni-Channel Retail Performance Measures – Déjà Vu
Through a special arrangement, what follows is a summary of an article from Retail Paradox, RSR Research’s weekly analysis on emerging issues facing retailers, presented here for discussion.
I’ve long been against using same store sales as a comparative measure for tracking retail performance because online growth was making it more and more irrelevant.
So what does that leave? How do you measure retail performance?
The original idea of SSS was that retailers should be able to grow sales, not just buy them. SSS made it difficult for retailers to hide sluggish sales in their existing stores by rapidly opening or acquiring new stores — that’s why you don’t look just at top-line sales growth in retail. If retailers are growing their sales at existing stores that have been open for more than a year, and doing so at a rate that exceeds inflation, then those retailers are "winning" in the market.
In an omni-channel world, that no longer works, especially when no one has definitively decided how to account for omni-channel sales. You could do what a lot of retailers have done — just roll digital channel sales into stores based on geography of the purchase — but I think it loses a lot of the finesse that SSS captured when there were only physical stores. And it could hide a lot of store cannibalization behind very rosy online numbers.
Given how much omni-channel is opening up the way retailers think about inventory, I wonder if the solution is to look not at stores, but at total square feet — retail and distribution in particular — and look not just at sales, but at the inventory levels required to generate those sales. I’m still thinking about it, but it seems to me that inventory leverage is going to become more and more important. Those retailers who can sell inventory from anywhere in the chain, and not just primarily from expensive retail square footage, are the ones that stand poised for success in an omni-channel world.
If that’s true, Wall Street should be looking to reward retailers who grow sales faster than square footage growth, whether retail or distribution. And they should be looking to retailers to grow those sales without growing the inventory required to support those sales.
I’m still pondering, but I have a feeling there’s an answer in there somewhere. It just must be an answer that 1) is easy to calculate, 2) provides a "real" assessment of growth, and 3) is easily comparable among retailers. And takes into account omni-channel sales and fulfillment. A piece of cake!
Discussion Questions
Should inventory discipline ultimately be the measure of retail performance in an increasingly omni-channel world? If so, what should and shouldn’t the formula include?
The metrics that Nikki brings to light to measure success in the ever-increasing landscape of retailers implementing omni-channel solutions, are spot on. The retailers that know what and where their inventory lives will be able to deliver that inventory to their customer, regardless of where, and through what channel the purchase is made. Both Inventory and supply-chain management systems need to be not only aligned, but integrated with all shopper channels.
Given the historic adversarial business relationship that typically exists between retailers and their brand vendors, I would add the amount of time that inventory sits within the retailer’s ecosystem as part of the retailer’s success criteria in the omni-channel landscape.
Keep in mind that both retailers and their brand vendors have direct access to global customers in the connected digital world. A retailer’s degree of success could include the speed at which inventory is sold to their customer.
What is so hard about retailers and Wall Street accepting this concept? Who cares where the product is sold? If no more stores are added, and same store sales go down, but overall (omni-channel) sales go up, isn’t that good?
Unfortunately, many retailers still fight that idea. They wring their hands over loss of in-store sales, but fight the idea of increasing online sales. They bristle at the idea that a customer will see their product in the store and go home and buy it on the internet. Folks, it doesn’t matter. Sales are sales.
Nikki, as usual, makes some great points. I also remember that in the not-to-distant past, we were concerned about online cannibalizing offline sales. Well, if that concern had no merit, why shouldn’t we continue to measure brick store sales in a traditional way? I know of companies that have had overall growth, both online and offline. When the online strategy compliments and augments the offline execution, why can we not challenge ourselves to ensure the brick stores remain competitive and demonstrate continued profitable growth? Let’s not be too hasty to throw in the towel on good, old-fashioned same store sales. 😉
Wall Street aside, most retailers are acutely aware of their inventory status. Metrics like days of supply and more complex measures such as gross margin return on inventory invested (GMROI) are recognized as key indicators of cash flow and other business performance diagnostics. As online sales impact the overall performance of the business, I see measures like these becoming more mainstream and perhaps eventually becoming as common as same store sales.
Back to Wall Street. Metrics like “same store sales” will not die quickly, but there are a number of additional measurement options that could be considered. Instead of blending online sales with in-store sales, I would advocate reporting each separately and in a year-over-year fashion. This would provide the context needed to assess the growth of both channels.
As online sales grow, Wall Street will want to know the health and vitality of each channel, individually. It will be more than interesting to see which metrics emerge as new standards of performance.
Inventory is not a good measurement tool short term due to significant variations, especially for non-food retailers. Loading Christmas inventory starts in August so the third quarter would look depressed. Allocating alternative sales back to stores will never be accurate. How do you allocate sales from states where you have no stores?
A better approach is to report stores open more than a year, new store and alternative channel sales. If a customer picks up merchandise at the store, these sales could be credited to the store. By reporting the amount of sales, one can easily identify if the alternative channel increase is greater than the store loss.
I’ve long been critical of the validity of same-store sales as a reliable performance metric. In the era of rapid chain expansion, breakneck growth could mask insipid existing store performance. I argued 12 years ago in an article that there was a “second-year effect” which distorted the year-ago sales metric, making it essentially useless unless you were gaming gullible analysts and shareholders.
Now that the retail world has gone omni-channel and slow-growth, same-store sales is far less useful as a proxy for business health. I’d focus on share of trips, share of wallet, and conversion trends, if I were handicapping retailers. On the operational side it is indeed about inventory transparency and accuracy.
Apologies to our short-cut obsessed friends on Wall Street and the one-dimensional retail CEOs who aim to please them. Real winners sell better.
As long as there are stores, SSS will be important. But I’m with Nikki — is this how we measure ‘growth’ in an omnichannel world?
If we are shipping online orders from any store across the brand, does that tell us that store is growing? Nope!
My thinking on this right now is that we need to continue to measure growth for each channel interdependently. I know this muddies the omnichannel idea but don’t we need to see the success of each channel in order to make decisions?
As far as Wall Street is concerned, I totally agree with Nikki that inventory and square footage are key factors, but I don’t know the equation either.
OK, brainiacs out there, put pencil to paper!
A great number of the brick & mortar (B/M) companies are finding it difficult to push e-commerce sales past 15% of sales without acquisition. The e-commerce companies being bought by B/M companies are, for a plethora of reasons, falling short of the financial expectations of ownership. Omni-Channel retail is still in the beginning stages of formal creation and measurable practice. Substituting a strategic measuring method which is a proven reliable practice for a means which is in no way observant of the total costs of goods sold (COGS) for a B/M company is not a good idea.
When the company attributes more than 10% of total net profit to a B/M sales method, much is at risk when same store sales slip without close observation. When the core business is B/M, abandoning a same store sales report would be madness for all concerned, as in the company and investors.
Here’s a little sad but true case in point… When the automotive industry was king, each company had a number of subsidiaries and company-run car stores that were allowed to run unchallenged and in the red for the sake of attaining financial planned sales goals. As the inventories of vehicles were forced to change for whatever reasons, such as government regulation and consumer demand, this loss of same store/facility observation weighed heavily into their demise as an industry. Off shore competition put the finishing touches on it to the extent that there are really only one and one half American car companies of any significance left.
In the next few years, retail sales in US are predicted to be more or less flat , so the double digit growth that we see online is coming at the expense of physical stores. So if both online and same store sales are stated, it’s difficult to compare.
I agree with Frank Dell on the inventory loading fact; many vendors also load inventory at beginning/end of month and might not be a correct measure.
Simply, overall sales and margin dollars would be a good measure. Another idea would be to break it into number of trips and basket size per trip, giving it a customer-centric perspective.