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!
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?